<PAGE>


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

                                    FORM 10-K

[ ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934

                                       OR

[X]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      FOR THE TRANSITION PERIOD FROM JULY 1, 2005 TO DECEMBER 31, 2005

      COMMISSION FILE NUMBER:  0-12957

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

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

       685 ROUTE 202/206, BRIDGEWATER, NEW JERSEY                                 08807
         (Address of principal executive offices)                               (Zip Code)

</TABLE>

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. [ ] Yes [X] No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [ ]



                                       1


<PAGE>

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):

[ ] Large accelerated filer   [X] Accelerated filer   [ ] Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

The aggregate market value of the Common Stock, par value $.01 per share, held
by non-affiliates of the registrant was approximately $283,014,000 as of June
30, 2005, based upon the closing sale price on the $6.48 reported for such date.
Shares of common stock held by each officer and director and by each person who
owns 10% or more of the outstanding common stock have been excluded in that such
shares may be deemed to be affiliate shares. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.

There were 43,791,854 shares of the registrant's common stock issued and
outstanding as of March 1, 2006.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 18, 2006, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year, have been incorporated by reference, in whole or in part, into Part III,
Items 10, 11, 12, 13 and 14 of this Transition Report on Form 10-K.


                                       2
<PAGE>


                           ENZON PHARMACEUTICALS, INC.

                         TRANSITION REPORT ON FORM 10-K

                                TABLE OF CONTENTS

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<CAPTION>

                                                                                                      Page
                                                                                                      ----
<S>        <C>                                                                                        <C>
                                     PART I
Item 1.    Business                                                                                     5
Item 1A.   Risk Factors                                                                                30
Item 1B.   Unresolved Staff Comments                                                                   44
Item 2.    Properties                                                                                  44
Item 3.    Legal Proceedings                                                                           44
Item 4.    Submission of Matters to a Vote of Security Holders                                         45

                                     PART II

Item 5.    Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer
           Purchases of Equity Securities                                                              46
Item 6.    Selected Financial Data                                                                     48
Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations       49
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk                                  70
Item 8.    Financial Statements and Supplementary Data                                                 71
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure        71
Item 9A.   Controls and Procedures                                                                     71
Item 9B.   Other Information                                                                           74

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant                                          75
Item 11.   Executive Compensation                                                                      75
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related
           Stockholder Matters                                                                         75
Item 13.   Certain Relationships and Related Transactions                                              75
Item 14.   Principal Accountant Fees and Services                                                      75

                                     PART IV

Item 15.   Exhibits, Financial Statement Schedules                                                     76

</TABLE>


                                       3
<PAGE>


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

         This Transition Report contains forward-looking statements, which can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should", "potential" 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 Item 1A. Risk Factors 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-looking statements. All information in this
Transition Report on Form 10-K is as of March 3, 2006. The Company undertakes no
obligation to update this information to reflect events after the date of this
report.

         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 and Transition Reports on Form 10-K, our Quarterly Reports on Form 10-Q
and our other reports filed with the Securities and Exchange Commission, or the
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
to investor@enzon.com, through the SEC's website by clicking the SEC Filings
link from the Investors' Info page on our website at www.enzon.com 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
Transition Report on Form 10-K.



                                       4
<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

         We are a technology-based, product-driven biopharmaceutical company
that is dedicated to the development, manufacture, and commercialization of
pharmaceutical products for patients with cancer and other life-threatening
diseases. Our primary clinical development and commercial focus is on internally
developed or acquired products for oncology and adjacent therapeutic areas where
there are serious unmet medical needs. We currently sell ABELCET(R), ADAGEN(R),
ONCASPAR(R), and DEPOCYT(R) in the United States and Canada in our Products
segment. We also leverage our scientific expertise in designing improved
versions of pharmaceuticals to obtain commercialization rights to products
discovered by others. We currently receive royalties in our Royalties segment on
sales of a number of products that utilize our proprietary PEGylation platform,
including PEG-INTRON(R), marketed by Schering-Plough Corporation, and
MACUGEN(R), marketed by OSI Pharmaceuticals, Inc. and Pfizer Inc. In addition,
we utilize contract manufacturing opportunities to broaden our revenue base and
enhance our organizational productivity. Presently, we manufacture three
injectable pharmaceutical products for our partners in our Contract
Manufacturing segment.

STRATEGY

         Since December 2004, a new executive management team has been formed
and a number of new board members have been appointed. During 2005, our new
leadership developed a comprehensive long-term plan designed to strengthen our
business, build sustainable value, and attain our goal of becoming a premier,
growth-oriented, fully-integrated biopharmaceutical company with a high-quality
franchise in cancer and adjacent diseases. To this end, we are executing a
strategy that focuses on the following three phases of corporate priorities for
the next several years: (i) investing in our extensive infrastructure that spans
research, development, manufacturing, and sales and marketing, (ii) improving
our organizational efficiencies, and (iii) generating growth on a sustainable
basis as a recognized leader in oncology and adjacent therapeutic areas.

         Our strategy revolves around the following key imperatives:

         Growing our top line and investing in our commercial operations. We are
         placing a significant effort behind improving our top line performance.
         We are investing in new growth opportunities to optimize our marketed
         brands and broaden their commercial potential. These initiatives
         include effective market research, lifecycle management plans,
         post-marketing clinical programs, and other new programs to
         differentiate and extend the utility of our products.

         Focusing on innovation. We are cultivating a renewed organizational
         commitment to innovation by (i) investing in our technological base,
         (ii) growing our intellectual property estate, and (iii) building a
         novel research and development pipeline of projects that are
         strategically focused with promising pathways to regulatory approval.
         Our approach is straightforward; we are committed to making targeted
         disciplined investments in areas where we believe we can make a unique
         contribution and achieve differentiation. For instance, we have
         extensive know-how and a demonstrated track record in PEGylation,
         including our next-generation releasable linker platform. PEG is a
         proven means of enabling or enhancing the performance of
         pharmaceuticals with delivery limitations. We are committed to further
         evolving the potential of this technology and bringing new PEG product
         development opportunities forward, both through proprietary and
         externally-sourced programs.

         Maximizing the return on our asset base. Over the past year, we have
         added significant experience and talent throughout our business and
         strengthened our comprehensive infrastructure. Our management team has
         extensive experience in the pharmaceutical industry, particularly in
         the development and commercialization of oncology products. In
         addition, our PEGylation platform has broad clinical utility in a wide
         array of therapeutic areas and our manufacturing facility has the
         capability of formulating complex injectable pharmaceutical products.
         We are focused on leveraging these internal resources and
         infrastructure as a means of broadening our revenue base, improving our
         operational efficiencies, and generating sustained growth.


                                       5
<PAGE>

         Maintaining a high-performance, value-focused corporate culture. We
         recognize that the successful execution of our long-term plan begins
         with ensuring that our employees understand the stated goals of the
         organization and are held accountable for making meaningful
         contributions to our corporate results. We are cultivating a
         performance-driven culture and placing an increased emphasis on
         measuring and rewarding performance against individual, department, and
         corporate goals.

         During 2005, we put a number of key initiatives in place to advance
these priorities, including:

               o  To further our goal of establishing a successful franchise of
                  cancer therapeutics, we are designing a number of new programs
                  to optimize the value of our currently marketed cancer
                  products, ONCASPAR and DEPOCYT. Several recent achievements
                  for ONCASPAR include: (i) the reduction of the royalty we pay
                  to Sanofi-Aventis, (ii) the expansion of the label to include
                  intravenous administration, and (iii) the filing of a
                  supplemental biologics license application seeking approval to
                  expand ONCASPAR's label to include the first-line treatment of
                  patients with acute lymphoblastic leukemia (ALL).

               o  We designed a number of new sales and marketing programs to
                  begin addressing the competitive challenges that are facing
                  our intravenous antifungal product ABELCET, including: (i)
                  redefining core markets where we believe there is a strong
                  clinical rationale for ABELCET, (ii) targeting institutions
                  that offer the opportunity for sales growth, and (iii)
                  retraining, refocusing, and realigning our sales force. We are
                  also enhancing our field force support systems by, for
                  example, improving our methods of data management and
                  distribution, and supporting investigator-sponsored clinical
                  trials.

               o  We have implemented a more stringent review process for our
                  research and development programs in order to redirect our
                  investments to only those projects that are strategically
                  aligned with our business objectives. During 2005, we
                  conducted a rigorous review of our research and development
                  programs and discontinued a number of projects that we
                  concluded did not meet our criteria for continued development.

               o  We began rebuilding our research and development pipeline with
                  our September 2005 acquisition of the exclusive worldwide
                  rights, excluding the Nordic countries, to recombinant human
                  Mannose-Binding Lectin (rhMBL) from NatImmune A/S, a Danish
                  biotechnology company. Mannose-Binding Lectin is a naturally
                  occurring human plasma protein that plays a key role in the
                  immune system's first-line defense against infections. This
                  program represents a promising clinical development
                  opportunity for MBL-deficient patients who are susceptible to
                  serious infections, such as patients with cancer undergoing
                  chemotherapy.

               o  Lifecycle management is being deployed as a critical
                  organizational practice with plans underway for all of our
                  marketed brands. We believe lifecycle management is an
                  essential tool for building sustainability and maximizing
                  value for our products. For instance, beginning in 2005 we
                  began evaluating several new means of driving sustainable
                  commercial success for our marketed products, including new
                  therapeutic areas, modes of administration, and delivery
                  mechanisms. Our management has aligned all of our core
                  functions, from research through commercialization, on
                  maximizing the value of our products through integrated
                  lifecycle management programs.

               o  We are reviewing our contract manufacturing business to
                  identify opportunities to (i) foster new contract
                  manufacturing partnerships, (ii) enhance our current
                  processes, (iii) broaden our manufacturing expertise and
                  infrastructure, and (iv) expand the utilization of our finish
                  and fill capabilities for our currently marketed brands.


                                       6
<PAGE>

OVERVIEW OF BUSINESS AND SEGMENT INFORMATION

         Through the quarter ended September 30, 2005, we managed our business
as one single reporting unit. During the quarter ended December 31, 2005, we
began managing our operations through the following three business segments:
Products, Royalties, and Contract Manufacturing.

     PRODUCTS

         Our Products segment manufactures, markets and sells pharmaceutical
products for patients with cancer and other life-threatening diseases. We have
developed or acquired four therapeutic products that we currently market. We
market these products through our specialized U.S. sales force that calls upon
specialists in oncology, hematology, and other critical care disciplines. Our
four proprietary marketed brands are ABELCET, ADAGEN, ONCASPAR, and DEPOCYT.

         ABELCET (amphotericin B lipid complex injection), is a lipid complex
formulation of amphotericin B used primarily in the hospital to treat
immuno-compromised patients, such as patients undergoing cancer treatment or
receiving bone marrow transplantation, with invasive fungal infections. ABELCET
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. ADAGEN
(pegademase bovine injection), our first internally developed PEG-enhanced
product, 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).
ONCASPAR (pegaspargase), which we also developed, is a PEGylated version of a
naturally occurring enzyme called L-asparaginase. ONCASPAR is currently approved
in a number of countries, including the U.S., Russia and Germany, and is used in
conjunction with other chemotherapeutics to treat patients with ALL who are
hypersensitive or allergic to native or unmodified forms of L-asparaginase.
DEPOCYT (cytarabine liposome injection) is an injectable chemotherapeutic
approved for the treatment of patients with lymphomatous meningitis.

         We manufacture ABELCET, ADAGEN, and ONCASPAR in our two U.S.
facilities. DEPOCYT is manufactured by SkyePharma PLC.

     ROYALTIES

         An important source of our revenue is derived from royalties that we
receive on sales of marketed products that utilize our proprietary technology.
Currently, we are receiving royalties from a number of marketed products that
are successfully utilizing our proprietary PEGylation platform, namely
PEG-INTRON, PEGASYS, and MACUGEN, with PEG-INTRON being the largest source of
our royalty income. PEG-INTRON (peginterferon alfa-2b) is a PEG-enhanced version
of Schering-Plough's alpha interferon product, INTRON(R) A, which is used both
as a monotherapy and in combination with REBETOL(R) (ribavirin) capsules for the
treatment of chronic hepatitis C. Under our license agreement with
Schering-Plough, Schering-Plough holds an exclusive worldwide license to
PEG-INTRON. We have received milestone payments, and we continue to 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. We designed PEG-INTRON to allow for less frequent dosing and to
yield greater efficacy, as compared to INTRON A. PEG-INTRON is marketed
worldwide by Schering-Plough and its affiliates. In December 2004,
Schering-Plough's subsidiary, Schering-Plough K.K., launched PEG-INTRON and
REBETOL combination therapy in Japan. Currently, PEG-INTRON and REBETOL is the
only PEGylated interferon-based combination therapy available in Japan, where an
estimated one to two million persons are chronically infected with hepatitis C.
In September 2005, Hoffman-La Roche reported that it received fast-track review
in Japan for its competing PEGylated interferon-based combination therapy with
approval expected in the third quarter of calendar 2006. PEG-INTRON is being
evaluated for use as long-term maintenance monotherapy in cirrhotic patients who
have failed previous treatment (COPILOT study). Schering-Plough is also
evaluating PEG-INTRON in combination with REBETOL as a treatment for hepatitis C
patients who did not respond to or had relapsed following previous
interferon-based therapy. In January 2006, Schering-Plough announced that it was
initiating a large multinational clinical trial, the ENDURE study, to evaluate
the use of low-dose PEG-INTRON maintenance monotherapy in preventing or delaying
hepatitis disease progression. Finally, PEG-INTRON is being evaluated in several
investigator-sponsored trials as a potential treatment for various cancers,
including a Phase 3 study for high risk malignant melanoma and several earlier
stage clinical trials for other oncology indications.


                                       7
<PAGE>

         We out-license our proprietary PEG and single chain antibody or SCA,
technologies on our own and through partnerships with Nektar Therapeutics, Inc.
(Nektar) and Micromet AG (Micromet). Under our 2002 agreement with Nektar,
Nektar has the lead role in granting sublicenses for certain of our PEG patents
and we receive a share of revenues or profits on sales of any approved product
for which a sublicense has been granted. We have the right to use or grant
licenses to all of our PEG technology for our own proprietary products or those
we may develop with co-commercialization partners. Nektar has notified us of
four third-party products for which it has granted sublicenses to our PEG
technology, Hoffmann-La Roche's PEGASYS, OSI Pharmaceuticals' (OSI) MACUGEN(R)
(pegaptanib sodium injection), CIMZIA (formerly CDP870), owned by UCB, a
Belgium-based biopharmaceutical company, and an undisclosed product of Pfizer's
that is in early-stage clinical development. PEGASYS is currently being marketed
for the treatment of hepatitis C and MACUGEN is currently being marketed through
a collaboration between OSI and Pfizer for the treatment of neovascular (wet)
age-related macular degeneration, an eye disease associated with aging that
destroys central vision. CIMZIA, an anti-TNF-alphaPEGylated antibody fragment,
has been submitted to the FDA for regulatory approval for Crohn's disease, and
is currently in Phase 3 clinical trials for the treatment of rheumatoid
arthritis.

     We receive a royalty from Medac, a private company based in Germany, on
sales of ONCASPAR KH recorded by Medac.

     CONTRACT MANUFACTURING

         We utilize a portion of our excess manufacturing capacity to provide
contract manufacturing services for a number of injectable products. Currently,
we manufacture ABELCET for export and MYOCET for Zeneus Pharma Ltd. (Zeneus),
which in December 2005 became a subsidiary of Cephalon, Inc., and the injectable
multivitamin MVI(R) for Mayne Group Limited (Mayne) at our facility in
Indianapolis, Indiana. In the manufacture of these products, we utilize complex
manufacturing processes, such as single- and dual-chamber vial filling and lipid
complex formulations.

         We are currently focusing on our contract manufacturing business as a
means of further leveraging our manufacturing expertise and improving our
overall profit margins.

         Additional information regarding our measurement of segment revenues,
profits or losses, segment assets, factors used to identify reportable segments,
and other information required by Item 1 of Form 10-K are included in Note 21,
Business and Geographical Segments, in the Notes to the Consolidated Financial
Statements.

PRODUCTS

         We have developed or acquired four pharmaceutical products (ABELCET,
ADAGEN, ONCASPAR and DEPOCYT) that we currently sell in the United States and
Canada through our specialized sales team. Since December 2004, our new
executive management team has been placing a significant focus on attempting to
improve our revenues by supporting our four marketed brands and enhancing their
market potential through new initiatives, including investing in new sales and
marketing activities such as lifecycle management programs to optimize the
commercial value of our products.




                                       8
<PAGE>

     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 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 U.S. and Canadian rights to ABELCET from Elan
Pharmaceuticals PLC (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
the U.S. and Canada, including a 56,000 square foot manufacturing facility in
Indianapolis, Indiana. In addition to U.S. and Canada distribution rights, we
also acquired the rights to develop and commercialize the product in Japan.

         Invasive fungal infections are life-threatening complications often
affecting patients with compromised immune systems, such as those undergoing
treatment for cancer, recipients of organ or bone marrow transplants or patients
infected with the Human Immunodeficiency Virus (HIV). Invasive fungal infections
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.

         Over the past 20 years, there has been an increase in severe fungal
infections largely as a result of advances in medical treatment, such as
increasingly aggressive chemotherapy procedures, advances in organ and bone
marrow transplantation procedures, and an increase in the population of
immuno-compromised patients, namely organ transplant patients, patients with
cancer undergoing chemotherapy, and patients with HIV/AIDS. Immuno-compromised
patients are at risk from a variety of fungal infections that 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 antifungal 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 of the drug 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.

         Since 2004, we have been experiencing increasingly competitive market
conditions for ABELCET, primarily due to the introduction of newer antifungal
agents. In 2005, our new leadership team began placing a significant effort
behind better supporting this product and addressing the competitive challenges
we are facing through numerous data-driven initiatives designed to stabilize
sales of ABELCET and ultimately establish a foundation for growth. Key examples
include: (i) identifying new ways to take advantage of ABELCET's strong product
attributes and differentiating it from the competition, such as driving new data
by supporting investigator-sponsored trials; (ii) redefining core market
segments where there is a strong clinical rationale for ABECLET; (iii)
retraining and refocusing our field force with new support systems, including
new resources demonstrating the clinical advantages of ABELCET; (iv) identifying
and focusing on target institutions that offer opportunities for sales growth;
and (v) investing in activities designed to optimize the lifecycle management of
ABELCET.

     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 ADA. We received U.S.
marketing approval from the U.S. Food and Drug Administration (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.


                                       9
<PAGE>

         We are required to maintain a permit from the U.S. Department of
Agriculture (USDA) in order to import ADA. This permit must be renewed on an
annual basis. As of October 4, 2005, the USDA issued a permit to us to import
ADA through October 4, 2006.

         We are marketing ADAGEN on a worldwide basis. We utilize independent
distributors in certain territories including the U.S., Europe and Australia.
Currently, approximately 90 patients in 16 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.

    ONCASPAR

         ONCASPAR is a PEG-enhanced version of a naturally occurring enzyme
called L-asparaginase derived from E. coli. It is currently approved in a number
of countries, including the U.S., Russia, and Germany. ONCASPAR 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 developed ONCASPAR internally and
received U.S. marketing approval from the FDA for ONCASPAR in February 1994. We
licensed rights to ONCASPAR for North America and most of the Asia/Pacific
region to Rhone Poulenc Rorer, now part of Sanofi-Aventis. In June 2002, we
licensed back those rights from Sanofi-Aventis.

         L-asparaginase is an enzyme that 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 the treatment of 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, namely a
significantly increased half-life in blood, allowing every-other-week
administration, and fewer allergic reactions.

         In October 2005, we amended our license agreement with Sanofi-Aventis
for ONCASPAR. The amendment became effective in January 2006 and includes a
significant reduction in our royalty rate, with a single-digit royalty
percentage now payable by us only on those aggregate annual sales of ONCASPAR in
the U.S. and Canada that are in excess of $25.0 million. Previously, we were
obligated to pay a 25% royalty on all sales of ONCASPAR in the U.S. and Canada.
Under the amended agreement we made an upfront cash payment of $35.0 million to
Sanofi-Aventis in January 2006. We are obligated to make royalty payments
through June 30, 2014, at which time all of our royalty obligations will cease.

         Since December 2004, we have been focusing on a number of new clinical
initiatives designed to potentially expand the ONCASPAR label beyond its current
indications. Several key initiatives are summarized below.

         In November 2005, we received approval from the FDA for a labeling
change for ONCASPAR allowing for administration via the intravenous route.
Intravenous administration provides clinicians with a treatment option that will
potentially reduce the number of injections for pediatric cancer patients who
require ONCASPAR in their treatment regimen. Previously, ONCASPAR's
administration was limited to intramuscular administration, which involves
injecting the drug directly into the muscle and is often painful to patients.



                                       10
<PAGE>

         In November 2005, the FDA also accepted our supplemental biologics
license application (sBLA) seeking approval for ONCASPAR as a first-line therapy
for the treatment of patients with acute lymphoblastic leukemia. We are
supporting the sBLA based on data from two randomized studies conducted by the
Children's Cancer Group (CCG), CCG-1962 and CCG-1991.

         CCG-1962 is a randomized controlled study comparing ONCASPAR to native
L-asparaginase (Elspar(R)) for the first-line treatment of pediatric acute
lymphoblastic leukemia patients. The observed advantages of ONCASPAR versus
native L-asparaginase in CCG-1962 included a lower incidence of neutralizing
antibodies, more rapid clearance of lymphoblasts from the bone marrow, and a
more convenient dosing schedule. We are using the data from CCG-1962 to support
our sBLA for ONCASPAR with efficacy data from 118 patients. The CCG-1962 study
was published in the March 2002 issue of Blood, a publication of the American
Society of Hematology.

         The observed advantages of ONCASPAR in the CCG-1962 study led to the
use of ONCASPAR in a subsequent study, CCG-1991. CCG-1991 is a multi-arm study
using ONCASPAR in the first-line setting. We are using the interim results from
CCG-1991 to support our sBLA for ONCASPAR with safety data from over 2,000
patients. We anticipate that the FDA will take action on our sBLA for ONCASPAR
during the third quarter of 2006.

    DEPOCYT

         DEPOCYT is an injectable chemotherapeutic agent 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 U.S. and Canadian 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; however, there are no controlled trials that
demonstrate a clinical benefit resulting from this treatment, such as
improvement in disease-related symptoms, increased time to disease progression
or increased survival.

         We are currently designing new sales and marketing programs to enhance
the commercial value of DEPOCYT by expanding awareness of the symptoms and
benefits of treating lymphomatous meningitis, and marketing programs that focus
on the positive product attributes of DEPOCYT as compared to unencapsulated
cytarabine. We are also examining the potential role of DEPOCYT in other cancers
that can spread to the central nervous system.


                                       11
<PAGE>

         DEPOCYT was approved under the Accelerated Approval regulations of
Subpart H of the Federal Food, Drug and Cosmetic Act. These 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. Approvals granted under Subpart H are provisional and require a
written commitment to complete post-approval clinical studies that formally
demonstrated patient benefit. Our licensor, SkyePharma, is responsible for
conducting such a post-approval study for DEPOCYT. If the FDA determines that
the study fails to demonstrate patient benefit, the registration for DEPOCYT may
be subject to withdrawal.

SALES AND MARKETING

         We have a sales and marketing team that includes a hospital-based sales
force that markets ABELCET and a specialty oncology sales force that markets
ONCASPAR and DEPOCYT in the United States. We have provided exclusive marketing
rights to Schering-Plough for PEG-INTRON worldwide and to Medac for ONCASPAR in
most of Europe and parts of Asia. Our marketing strategies do not incorporate
the use of any significant direct-to-consumer advertising.

         ABELCET is utilized in the U.S. and Canada by hospitals, clinics and
alternate care sites that treat patients with invasive fungal infections, and is
sold primarily to drug wholesalers who, in turn, sell the product to hospitals
and certain other third parties. We maintain contracts with a majority of our
customers which allows those customers to purchase product directly from
wholesalers and receive the contracted price generally based on annual purchase
volumes.

         We market ONCASPAR and DEPOCYT in United States through our specialty
oncology sales force to hospital oncology centers, oncology clinics, and
oncology physicians.

         We market ADAGEN on a worldwide basis. We utilize independent
distributors or specialty pharmacies in certain territories, including the U.S.,
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 amphotericin B, however our
primary supplier has notified us that it is terminating its supply agreement
with us as of March 1, 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 of amphotericin B and lipid materials that we
maintain, coupled with having an alternative supplier of each material, should
provide us with sufficient time to find alternative suppliers if necessary.

         In the manufacture of ADAGEN and ONCASPAR, we combine activated forms
of PEG with unmodified proteins (ADA for ADAGEN and L-asparaginase for
ONCASPAR.) We have supply agreements for the unmodified protein (L-asparaginase)
used in the manufacture of ONCASPAR. 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 or the unmodified protein used in ADAGEN. We believe we maintain a
level of inventory that should provide us sufficient time to find an alternate
supplier, in the event it becomes necessary, without materially disrupting our
business.

         In September 2003, Roche Diagnostics notified us that it had elected to
terminate our ADA supply agreement as of June 12, 2004. 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. We are currently seeking to develop
recombinant ADA as an alternative to the bovine derived product. This is a
difficult and expensive undertaking and success cannot be assured. 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.
Further, it could potentially result in significant reputational harm and
regulatory difficulties.


                                       12
<PAGE>

         We have historically purchased unmodified L-asparaginase for the
manufacture of ONCASPAR for the U.S. and Canada market from Merck. Currently, we
have a supply agreement with Merck which, absent an amendment, will conclude on
December 31, 2006. In January 2006, Merck informed us that it had sold certain
assets to Ovation Pharmaceuticals, Inc., including the supply agreement. It is
our understanding that, under that transaction, Merck will continue to
manufacture L-asparaginase on a contract basis for Ovation.

         ADAGEN and ONCASPAR use our early PEG technology, which is not as
advanced as the PEG technology used in PEG-INTRON or 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, September 2004, and March 2005.

         The FDA and the Medicines and Healthcare products Regulatory Agency or
MHRA, the government agency responsible for medicines and medical devices in the
United Kingdom, have, in the past, 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. We received the most recent Form 483
reports in January 2006 for our New Jersey facility and in August 2005 for our
Indianapolis facility. We have or are in the process of responding to such
reports with corrective action plans.

RESEARCH AND DEVELOPMENT

         Our internal pharmaceutical drug development programs focus on the
development of novel compounds for the treatment of cancer and adjacent
therapeutic areas where there is an unmet medical need. We are building a
proprietary research and development pipeline both through the application of
our proprietary technologies and through strategic agreements that provide
access to promising product development opportunities within our therapeutic
focus. We offer potential partners substantial know-how in the area of
PEGylation and an experienced management team with extensive experience in
researching, developing, marketing and selling pharmaceutical products,
particularly for the treatment of cancer.

         Our PEGylation technology, particularly our next-generation PEGylation
platform that utilizes releasable linkers, may also be applied to therapeutic
areas outside of oncology, and our research and development activities may yield
data that is supportive of developing our proprietary compounds in certain
non-oncology applications. Our strategy is to be opportunistic in exploring
these therapeutic areas in a disciplined manner as a means of forming strategic
alliances and enhancing the potential commercial value of our product pipeline.

         We believe by complementing our internal research and development
efforts with a disciplined strategy of entering into collaborative relationships
we will build a valuable pipeline of diversified pharmaceuticals to drive
sustainable revenue growth.

         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. Our internal research and development activities focus on
applying our proprietary technologies, namely our PEGylation expertise, to
internal product candidates, and developing products accessed through the
execution of agreements, such as our agreement with NatImmune A/S, a Danish
biotech company, for the exclusive worldwide rights, excluding the Nordic
countries, to develop, manufacture, market and sell recombinant human
Mannose-binding Lectin (rhMBL). Mannose-binding Lectin (MBL) is a naturally
occurring human plasma protein that plays a key role in the immune system's
first-line defense against infections.



                                       13
<PAGE>

         Our research and development organization is investigating a number of
new clinical programs to better support our marketed brands and advance our
objectives of building sustainability and maximizing the value of our assets.
For instance, we are currently planning a number of new clinical development
programs to expand the ONCASPAR labeling beyond its currently approved
indication, ALL. Similarly, we are also evaluating new clinical programs to
support our other marketed products. To date, our research and development
activities and related spending in support of our existing products has been
limited.

         Research and development expenses for the six months ended December 31,
2005 and the fiscal years ended June 30, 2005, 2004, and 2003 were approximately
$14.0 million, $37.0 million, $34.8 million, and $21.0 million, respectively. In
addition, we recognized charges of $10.0 million and $12.0 million for acquired
in-process research and development associated with acquisition of rights to
rhMBL (see below) and MARQIBO in the six months ended December 31, 2005 and the
year ended June 30, 2004, respectively. Our research and development activities
during the six months ended December 31, 2005 concentrated primarily on various
preclinical and clinical activities, including increased costs related to a
research collaboration with Micromet AG and decreased costs related to
discontinuance of further development of MARQIBO. In October 2005, we
discontinued our research collaboration with Micromet AG for antibody-based
therapeutics for the treatment of inflammatory and autoimmune diseases, and in
January 2006 we returned our rights to ATG-Fresenius S, a polyclonal antibody
preparation used in solid organ transplantation, to Fresenius Biotech GmbH, a
subsidiary of the health care company Fresenius AG. We discontinued these
programs as a result of our ongoing efforts to redirect our research and
development investments to projects strategically aligned with our business
objectives, including an increasing focus on cancer and adjacent therapeutic
areas.

PROPRIETARY PRODUCTS IN DEVELOPMENT

     RECOMBINANT HUMAN MANNOSE-BINDING LECTIN

         In September 2005 we acquired the exclusive worldwide rights, excluding
the Nordic countries, to rhMBL, a protein therapeutic being developed for the
prevention and treatment of severe infections in individuals with deficient
levels of MBL. MBL binds to a wide range of invading organisms including
bacteria, fungi, viruses, and parasites and activates the lectin pathway of the
complement system, an important defense mechanism of the immune system. Numerous
studies have found a strong correlation between MBL deficiency and an increased
susceptibility to infections in patients with a suppressed immune system, such
as cancer patients undergoing treatment with chemotherapy. A number of
publications have highlighted a strong correlation between MBL levels and the
morbidity associated with severe infections. These studies were in a broad
spectrum of diseases, including cancer and immuno-compromised disorders in both
adult and pediatric populations.

         In December 2004, NatImmune completed Phase 1 clinical trials that
evaluated the safety and pharmacokinetic profile of single- and multi-dose
intravenous administration of rhMBL in 28 MBL-deficient volunteers. Results from
the Phase 1 trials demonstrated that rhMBL replacement therapy is safe and has
an attractive pharmacokinetic profile. NatImmune has also completed a
prospective correlation study of 255 hematological cancer patients that
documented that MBL-deficient patients have a significantly higher risk of
severe infections following chemotherapy compared to patients with sufficient
MBL levels.

         Given the broad therapeutic potential of rhMBL, we are evaluating
several potential lead indications for this compound and are currently
developing a plan for clinical development and hope to file an Investigational
New Drug Application (IND) with the FDA during 2006.

     ONCASPAR

         We are currently exploring the potential expansion of ONCASPAR within
the acute lymphoblastic leukemia setting, as well as in additional cancers where
the L-asparaginase enzyme may play a role. For instance, there are a number of
preclinical studies indicating that asparagine depletion may play an important
role in treating other cancers, including pancreatic, ovarian, head and neck,
and certain sub-types of non-Hodgkin's lymphoma. A number of new clinical
initiatives exploring asparagine's role in these additional cancers are being
evaluated.



                                       14
<PAGE>

     OTHER RESEARCH AND DEVELOPMENT PROGRAMS

         We are conducting preclinical studies with respect to a number of
PEG-enhanced compounds while simultaneously seeking new opportunities to apply
our PEG technology to develop and commercialize improved versions of
therapeutics of known efficacy that lack the features of a useful or effective
therapeutic. Our proprietary PEG platform has broad applicability to a variety
of macromolecules or biologic therapeutics, including proteins, peptides,
enzymes, and oligonucleotides, as well as small molecules.

     DISCONTINUED RESEARCH AND DEVELOPMENT PROGRAMS

         During 2005, our new management conducted a detailed strategic analysis
of our research and development programs in order to redirect our research and
development investments to programs that were strategically aligned with the
objectives of our business, including an increasing focus on cancer and adjacent
therapeutic areas. Accordingly, we have implemented more stringent internal
review criteria and since July 1, 2005, we discontinued a number of research and
development programs that did not meet our standard for continued investment.

         In January 2006, we returned our rights to ATG-Fresenius S to Fresenius
Biotech GmbH, a subsidiary of the health care company Fresenius AG.
ATG-Fresenius S is a polyclonal antibody preparation used for T-lymphocyte
suppression to prevent organ graft rejection in organ transplant patients.

         In November 2005, we agreed with Micromet to end our collaboration to
identify and develop antibody-based therapeutics for the treatment of
inflammatory and autoimmune diseases. The termination of our research
collaboration with Micromet did not affect our other agreements with Micromet
including a cross-license agreement and a marketing agreement under which
Micromet is the exclusive marketer of the two companies' combined intellectual
property estate in the field of single-chain antibody technology.

         We discontinued our product development collaboration with the National
Institutes of Health for the recombinant immunotoxin SS1P in September 2005 and
our joint product development with Nektar, under which we were jointly
developing inhaled leuprolide acetate and evaluating other potential projects
for development using Nektar's pulmonary delivery technologies in August 2005.

ROYALTY-BASED PRODUCTS IN DEVELOPMENT

     PEG PRODUCTS IN DEVELOPMENT

         In January 2002, we entered into a PEG technology licensing agreement
with Nektar under which we granted Nektar the right to grant sub-licenses for a
portion of our PEG technology to third parties for which we receive or will
receive a royalty or a share of Nektar's profits for any products that utilize
our patented PEG technology. We retain all rights to use and sub-license all of
our PEG technology for our own proprietary products and/or those we may develop
with co-commercialization partners.

     CIMZIA(TM) (CERTOLIZUMAB PEGOL, CDP870)

         Nektar currently has a licensing agreement for CIMZIA(TM) (certolizumab
pegol, CDP870), a PEGylated anti-TNF alpha antibody fragment, with UCB Pharma.
On March 2, 2006, UCB announced that it submitted a request for regulatory
approval for CIMZIA for the treatment of Crohn's disease, a chronic digestive
disorder of the intestines that is sometimes referred to as inflammatory bowel
disease, to the FDA, and that it plans to request authorization for marketing of
the drug from the European Union regulatory authorities in a matter of weeks.
CIMZIA is also in Phase 3 clinical testing for rheumatoid arthritis. In July
2005, UCB announced positive results for two pivotal Phase 3 trials (PRECISE 1
and 2) of CIMZIA in the induction and maintenance of clinical response in
moderate to severe active Crohn's disease. Under our agreement with Nektar, we
will share a portion of Nektar's royalties on CIMZIA if the product is
commercialized.

                                       15
<PAGE>

     SCA PRODUCTS IN DEVELOPMENT

         We have a marketing agreement with Micromet under which Micromet is the
exclusive marketer of the two companies' combined intellectual property estate
in the field of single-chain antibody, or SCA, technology. Under the marketing
agreement, we share equally in any revenues resulting from Micromet's licensing
activities. Since the start of this agreement in 2002, Micromet has granted
numerous non-exclusive research licenses on behalf of the partnership. There are
currently eleven active licenses, and any resulting revenues from those licenses
will be shared between Enzon and Micromet.

         In addition, prior to our collaboration with Micromet, we granted SCA
licenses to several companies, including Alexion Pharmaceuticals (Alexion).
Alexion's pexelizumab is an SCA directed against complement protein C5, which is
a component of the body's normal defense against foreign pathogens. Alexion
conducted two Phase 3 clinical trials investigating pexelizumab for the
reduction of myocardial infarction (heart attack) and death following
cardiopulmonary bypass graft surgery (CABG). In November 2005, Alexion reported
results from its second Phase 3 clinical trial examining the effect of
pexelizumab in approximately 4,250 patients undergoing CABG surgery with or
without concomitant valve surgery during cardiopulmonary bypass (PRIMO-CABG2).
The results showed that while pexelizumab reduced the primary endpoint, it did
not meet the pre-specified threshold for statistical significance. The primary
endpoint for the PRIMO-CABG2 trial was the combined incidence of nonfatal
myocardial infarction (heart attack) or death through 30 days following CABG
surgery in moderate-to-high risk patients. Alexion reported that the results of
PRIMO-CABG2 do not support the further investment and evaluation of pexelizumab
in CABG patients and are unlikely to support marketing approval for this
indication by the FDA.

         On February 3, 2006, Alexion reported that it is finalizing its second
international pivotal Phase 3 study of pexelizumab, the APEX-AMI trial, which is
investigating the benefits of using pexelizumab in patients experiencing a heart
attack who are treated with primary percutaneous coronary intervention or
angioplasty. The APEX-AMI trial is expected to enroll approximately 5,000
patients. The trial is expected to complete enrollment near the beginning of
March 2006.

PROPRIETARY TECHNOLOGIES

    PEG TECHNOLOGY

         Since our inception in 1981, our core expertise has been in engineering
improved versions of injectable therapeutics through the chemical attachment of
polyethylene glycol or PEG. In some cases, PEGylation can render a compound
therapeutically effective, where the unmodified form had only limited clinical
utility. Currently, there are five marketed biologic products that utilize our
proprietary PEG platform, two of which we market, ADAGEN and ONCASPAR, and three
for which we receive royalties, PEG-INTRON, PEGASYS, and MACUGEN.

         Specific advantages of PEG include: (i) increased efficacy, (ii)
reduced dosing frequency, (iii) reduced toxicity and immunogenicity, (iv)
increased drug stability, and (v) enhanced drug solubility. In addition, our PEG
platform is further distinguished by (i) demonstrated safety and tolerability,
(ii) established clinical and commercial benefits, (iii) broad applicability to
a variety of macromolecules or biologic therapeutics, including proteins,
peptides, enzymes, and oligonucleotides, as well as small molecules, and (iv)
proven commercial scale-up capability.

         Over the past 25 years, we have accumulated significant expertise and
intellectual property in the methods by which we attach PEG to a compound, such
as the selection of the appropriate site on the compound to attach PEG and the
type of PEG linker to produce the desired result for the particular therapeutic
we are modifying. Our proprietary PEGylation expertise includes linker
chemistries that are designed to incorporate a stable chemical bond between the
native molecule and the PEG. For many years, our stable linker chemistries have
been successfully utilized to enhance the therapeutic utility of the five
marketed products that incorporate our PEG platform, ADAGEN, ONCASPAR,
PEG-INTRON, PEGASYS, and MACUGEN.



                                       16
<PAGE>

         We have also developed an intellectual property estate for a
next-generation PEG platform that utilizes releasable linkers designed to
release the native molecule at a controlled rate. We believe we are at the
forefront of this area of PEGylation research. This platform may play an
important role in enhancing the long-standing benefits of PEG to include
additional classes of compounds where traditional stable linkers are not
feasible. We are also combining our PEGylation platform with complementary drug
delivery technologies. For instance, we can combine our proprietary single-chain
antibody platform (discussed below) with novel PEG chemistries to engineer
targeted therapeutics with multiple domains, such as a targeting function (e.g.
antibody) and a therapeutic function (e.g. chemotherapy). The novel attributes
of releasable PEG linkers may offer superior therapeutic advantages, including
increased activity and substantially reduced side effects, when compared to
traditional stable linkers.

         Through the customized attachment of PEG, that covers the spectrum of
stable and controlled releasable linkers, we can potentially overcome the
pharmacologic limitations for a broad universe of molecules and generate
compounds with substantially enhanced therapeutic value over their unmodified
forms.

         We are currently investigating numerous proprietary clinical
development opportunities for PEG-enhanced compounds. In addition, we are
simultaneously augmenting our internal initiatives through the evaluation of PEG
product development collaborations.

                               [GRAPHIC OMITTED]

                      DEPICTION OF A PEG-ENHANCED PROTEIN.

     ANTIBODY ENGINEERING

         Our research and development activities also include utilizing our
single-chain antibody, or SCA, expertise as a tool for developing targeted
therapeutics. Antibodies are proteins produced by the body's immune system in
response to the presence 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. Our technological expertise
includes antibody engineering utilizing our proprietary SCA technology. SCAs are
genetically engineered antibodies that incorporate only the antigen binding
domains of an antibody. Thus, SCAs have the binding specificity and affinity of
monoclonal antibodies; however, in their native form they are only one-fifth to
one-sixth the size of a monoclonal. The small size of SCAs typically gives them
shorter half-lives than monoclonal antibodies, making them better suited for use
in acute indications or in other indications where the large size of a
monoclonal antibody would inhibit the compound from reaching the area of
potential therapeutic activity. In addition, SCAs are a well established
discovery format-of-choice in generating antibodies from phage or yeast display
libraries.


                                       17
<PAGE>


            [GRAPHIC OMITTED]                     [GRAPHIC OMITTED]
           Menoclonal Antibody                  Single-Chain Antibody

    COMPARISON OF A STANDARD MONOCLONAL ANTIBODY AND A SINGLE-CHAIN ANTIBODY.


DEVELOPMENT AND COMMERCIALIZATION AGREEMENTS

    SCHERING-PLOUGH AGREEMENT

         As a result of a November 1990 agreement with Schering-Plough our PEG
technology was used to develop an improved version of Schering-Plough's product
INTRON A. Schering-Plough is responsible for marketing and manufacturing the
product, PEG-INTRON, worldwide on an exclusive basis and we receive royalties on
worldwide sales of PEG-INTRON for all indications. 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 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. 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. 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.

         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.

    SANOFI-AVENTIS LICENSE AGREEMENTS

         During 2002, we amended our license agreement with Sanofi-Aventis to
reacquire the rights to market and distribute ONCASPAR in the U.S., Mexico,
Canada and most of the Asia/Pacific region. In return for the marketing and
distribution rights, we paid Sanofi-Aventis $15.0 million and were also
obligated to pay a 25% royalty on net sales of ONCASPAR in the U.S. and Canada
through June 30, 2014. The license agreement may be terminated earlier by
Sanofi-Aventis upon 60 days' notice if we fail to make the required royalty
payments or decide to cease selling ONCASPAR. Following the expiration of the
royalty obligations in 2014, all rights to ONCASPAR will revert back to us,
unless the agreement is terminated earlier because we fail to make royalty
payments or cease to sell ONCASPAR.


                                       18
<PAGE>

         The amended license agreement prohibits Sanofi-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, Sanofi-Aventis has the option to distribute the
product in the territories.

         In October 2005, we further amended our license agreement with
Sanofi-Aventis for ONCASPAR. The amendment became effective in January 2006 and
includes a significant reduction in our royalty rate, with a single-digit
royalty percentage now payable by us only on those aggregate annual sales of
ONCASPAR in the United States and Canada that are in excess of $25.0 million. In
consideration for the amendment, we made an upfront cash payment of $35.0
million to Sanofi-Aventis in January 2006. We are obligated to make royalty
payments, if any, through June 30, 2014, at which time all of our royalty
obligations will cease.

    MEDAC LICENSE AGREEMENT

         In January 2003, we renewed an exclusive license to Medac, to sell
ONCASPAR and any PEG-asparaginase product developed by us or Medac during the
term of the agreement in most of Europe and parts of Asia. Our supply agreement
with Medac provides for Medac to purchase ONCASPAR from us at certain
established prices and meet certain minimum purchase requirements. Medac is
responsible for obtaining additional approvals and indications in the licensed
territories beyond the currently approved indication in Germany. 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. 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
us.

    MICROMET ALLIANCE

         The termination of our research and development collaboration with
Micromet does not affect our other agreements with Micromet, including a
cross-license agreement between the parties and a marketing agreement under
which Micromet, as the exclusive marketer of the two companies' combined
intellectual property estate in the field of SCA technology, has instituted a
comprehensive licensing program. Any resulting revenues from the license
agreements executed by Micromet will be shared equally by the two companies.
During the six months ended December 31, 2005, we recognized $1.5 million
related to our share of revenues from Micromet's licensing activities associated
with this agreement. In January 2006, Micromet announced that it had entered
into a definitive Merger Agreement with CancerVax, Inc., a publicly-traded U.S.
company. The terms of our agreement with Micromet require that the agreement be
assumed by the surviving entity in the merger. The merger is not expected to
have any effect on any of our agreements with Micromet.

    NEKTAR ALLIANCE

         In January 2002, we entered into a PEG technology licensing agreement
with Nektar under which we granted Nektar the right to grant sub-licenses for a
portion of our PEG technology to third parties. Nektar continues to have the
right to sub-license our patents that were defined in the January 2002 agreement
and we will receive a royalty or a share of Nektar's profits for any products
that utilize our patented PEG technology. Currently, Nektar has notified us of
four third-party products for which it has granted sublicenses to our PEG
technology, Hoffmann-La Roche's PEGASYS (peginterferon alfa-2a), OSI's MACUGEN
(pegaptanib sodium injection), UCB's CIMZIA(TM) (certolizumab pegol, CDP870),
and an undisclosed product of Pfizer's. PEGASYS is currently being marketed for
the treatment of hepatitis C and MACUGEN is currently being marketed through a
partnership between OSI and Pfizer for the treatment of neovascular (wet)
age-related macular degeneration, an eye disease associated with aging that
destroys central vision. CIMZIA, a PEGylated anti-TNF-alpha antibody fragment,
is currently in Phase 3 development for the treatment of rheumatoid arthritis
and Crohn's disease.


                                       19
<PAGE>

         We retain all rights to use or sub-license all of our PEG technology
for our own proprietary products or those we may develop with
co-commercialization partners. Since 2002, we have continued to broaden our
intellectual property estate by filing additional PEG patents that are exclusive
to us, including a number that pertain to our next-generation releasable PEG
linker platform that utilizes proprietary linker chemistries that can be
designed to release PEG from the native molecule at a controlled rate.

         In January 2002, as part of a patent infringement lawsuit settlement
agreement, we purchased $40.0 million of newly issued Nektar convertible
preferred stock. During the year ended June 30, 2004, we converted certain of
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. In January and February 2006, the
remainder of our Nektar preferred stock automatically converted and we sold
1,023,292 shares of Nektar common stock, which resulted in a net gain $13.8
million and cash proceeds of $20.2 million.

    SKYEPHARMA AGREEMENTS

         In December 2002, we entered into a strategic alliance with SkyePharma
PLC (SkyePharma), under which we licensed the U.S. and Canadian rights to
SkyePharma's DEPOCYT, 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 product at a price equal to 35% of our net sales, which
percentage can be reduced should a defined sales target be exceeded. We recorded
the $12.0 million license fee as an intangible asset that is being amortized
over a ten year period.

         This alliance also included a broad technology access agreement, under
which the two companies may draw upon 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.

         Under this alliance, we are required to purchase minimum levels of
DEPOCYT finished goods equal to $5.0 million in net sales for each 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 our markets 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, 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.


                                       20
<PAGE>

    ZENEUS MANUFACTURING AGREEMENT

         Zeneus Pharma, Ltd. (Zeneus) owns the right to market ABELCET in any
markets outside of the U.S., Canada and Japan. Our supply agreement with Zeneus
requires that we supply Zeneus 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 that would subsequently be adjusted
to Enzon's actual manufacturing cost. Beginning on July 1, 2004 through the
termination of the agreement, we supply these products at our manufacturing cost
plus fifteen percent for ABELCET and plus twenty percent for MYOCET. In December
2005, Zeneus became a wholly owned subsidiary of Cephalon, Inc.

PATENTS AND INTELLECTUAL PROPERTY RIGHTS

         Patents are very important to us in establishing the proprietary rights
to the products we have developed or licensed. Our new executive management team
has been reinforcing our organizational commitment to intellectual property. The
patent position of pharmaceutical or biotechnology companies 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 currently hold 129 issued U.S. patents many of which
have foreign counterparts. These patents, without extensions, are expected to
expire beginning in 2006 through 2022. We have also filed and currently have
pending 30 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, and 3 relate to DEPOCYT.
Although we believe that our patents provide adequate protection for the conduct
of our business, we cannot assure you that such patents:

         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 U.S. 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;



                                       21
<PAGE>

         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 U.S. 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 that 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 we will be able 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 U.S. 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, 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 the net income
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 gained the right to sublicense
certain of our PEG patents to third parties and we receive or will receive a
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 U.S. 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, 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.


                                       22
<PAGE>

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

         We have obtained licenses from various parties that we deem to be
necessary or desirable for the manufacture, use, or sale of our products. These
licenses generally require us 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 us. There can be no assurance that any licenses
required under such patents will be available to us on acceptable terms or at
all.

         We 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 inspection, testing, manufacture, quality
assurance, safety, effectiveness, labeling, packaging, 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 post-approval requirements, could
adversely affect the marketing and sale of products that we are 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 U.S. 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, 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, distribution,
                        metabolism and excretion,


                                       23
<PAGE>

                        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
non-clinical laboratory and clinical studies which demonstrate that the product
meets prescribed standards of safety, purity and potency, and a full description
of manufacturing methods. Biological or drug products may not be marketed in the
U.S. until approval by the FDA of an NDA or BLA is received.

         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 serious or life-threatening illnesses that provide
meaningful therapeutic benefit to patients over existing therapies. If
applicable, this procedure may shorten the traditional product development
process in the U.S. Similarly, products that represent a significant 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 U.S. 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 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.


                                       24
<PAGE>

         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, quality assurance, 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 deviations
from 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 or testing processes,
manufacturing facility or labeling, an NDA or BLA supplement may be required to
be submitted to the FDA.

         Products manufactured in the U.S. 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 cannot predict the extent of government regulation that might result
from future legislation or administrative action. 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 U.S. 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.


                                       25
<PAGE>

         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 U.S. for the
treatment of hepatitis C in May 2000 and January 2001, respectively. ABELCET was
approved in the U.S. in November 1995 and in Canada in September 1997. ONCASPAR
was approved for marketing in the U.S. in February 1994 in Germany in November
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 U.S. 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.

         Our operations are also subject to federal, state and local
environmental laws and regulations concerning, among other things, the
generation, handling, storage, transportation, treatment and disposal of
hazardous, toxic and radioactive substances and the discharge of pollutants into
the air and water. Environmental permits and controls are required for some of
our operations and these permits are subject to modification, renewal and
revocation by the issuing authorities. We believe that our facilities are in
substantial compliance with our permits and environmental laws and regulations
and do not believe that future compliance with current environmental laws will
have a material adverse effect on our business, financial condition or results
of operations. If, however, we were to become liable for an accident, or if we
were to suffer an extended facility shutdown as a result of such contamination,
we could incur significant costs, damages and penalties that could harm our
business.

COMPETITION

    General

         Competition in the biopharmaceutical industry is intense and based to a
significant degree on scientific and technological factors. These factors
include but are not limited to the availability of patent and other protection
of technology and products, the ability to commercialize products and
technological developments, the ability to obtain governmental approval for
testing, manufacturing and marketing of products, and the ability to enter into
licensing and similar arrangements to facilitate the development of products and
meet other business objectives. We and our marketing partners compete with
specialized biopharmaceutical firms and large pharmaceutical companies in North
America, Europe and elsewhere, with respect to the licensing of and research and
development of product candidates, as well as the 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. Many of the
companies we compete with 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.

    Products

    ABELCET

         The intravenous or IV antifungal market in which ABELCET competes has
been facing increasingly competitive market conditions. The products used to
treat fungal infections are classified into four classes of drugs: Conventional
Amphotericin B or (CAB), lipid-based CAB formulations, triazoles, and
echinocandins. While we compete with all of these drugs, ABELCET is
predominately used in more severely ill patients.


                                       26
<PAGE>

         CAB is a broad-spectrum polyene antifungal agent that is believed to
act by penetrating the cell wall of a fungus, thereby killing it. CAB 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 CAB include ABELCET, amphotericin B
liposome for injection, which is marketed by Astellas Pharma US, Inc. (Astellas)
and Gilead Sciences (Gilead) in the U.S., and amphotericin B cholesteryl sulfate
complex for injection, which is marketed by Three Rivers Pharmaceuticals, LLC.
These formulations provide the efficacy of CAB while limiting the toxicities
that are inherent in its usage. Astellas' and Gilead's amphotericin B liposome
for injection has proven to be a significant competitor to ABELCET. Astellas and
Gilead have reduced the price of this lipid-based product in certain geographic
markets, which has increased the competitive pressure on ABELCET. In addition,
in May 2005, Astellas strengthened its antifungal franchise with the launch of a
new systemic antifungal agent, micafungin sodium for injection, which is a
member of the echinocandin class of antifungal agents, discussed below. 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, our market share, revenues or both could decrease, which
could have a material adverse effect on our business, financial condition and
results of operations.

         The triazoles, which include fluconazole (marketed generically and
under its brand name by Pfizer), itraconazole (marketed by Janssen
Pharmaceuticals) and voriconazole (also marketed by Pfizer) have the least
reported incidence of side effects as compared to other classes of 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 fluconazole.
Fluconazole in particular is often used in "less compromised" patients as
prophylaxis or first-line empirical therapy. Fluconazole patients are often
switched to an amphotericin B product once a clinician is convinced that a
patient has a fungal infection. Voriconazole is a second-generation triazole
approved in May 2002 and is available in intravenous and oral formulations.
Voriconazole carries a broader spectrum of activity than first generation
triazoles; 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 acquired resistance as the first
generation triazoles. Voriconazole is indicated for the treatment of invasive
aspergillosis, candidemia in nonneutropenic patients, esophageal candidiasis,
and scedosporium apiospermum and fusariosis in patients intolerant of, or
refractory to, other therapy. Additional triazole products are in late-stage
clinical development by pharmaceutical companies, including posiconazole, which
is being developed by Schering-Plough. Posiconazole is currently under NDA
review at the FDA.

         The echinocandins are the newest class of products to enter the IV
antifungal market. 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. Caspofungin
(marketed by Merck) was approved in the U.S. in January 2001 and was the first
echinocandin to receive FDA approval. In March 2005, the FDA approved the second
echinocandin, micafungin sodium for injection and in May 2005, Astellas launched
this product in the U.S. Caspofungin is indicated for the treatment of invasive
aspergillosis in patients who are refractory to or intolerant of other
therapies, esophageal candidiasis and candidemia. Micafungin is indicated for
the treatment of esophageal candidiasis and prophylaxis of candida infections in
patients undergoing hematopoietic stem cell transplantation. In February 2006,
the FDA approved the third echinocandin, anidulafungin, which was acquired by
Pfizer by virtue of its September 2005 acquisition of Vicuron Pharmaceuticals.
Anidulafungin is indicated for the treatment of esophageal candidiasis,
candidemia and other candida infections.




                                       27
<PAGE>

    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 ADA-deficient SCID patients with gene
therapy, which if successfully 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 available in the U.S. 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.

    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.

    Royalties

    PEG-INTRON

         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 alfa interferon market since the approval of
their unmodified alpha interferon products, INTRON A and ROFERON-A,
respectively. Due to the December 2004 launch of PEG-INTRON combination therapy
in Japan, our PEG-INTRON royalties have increased over prior year levels in
recent quarters. In September 2005, Hoffmann-LaRoche reported that PEGASYS
combination therapy would receive a fast-track review in Japan and it expects
approval in the third quarter of calendar 2006. Currently in markets outside of
Japan, the PEGylated interferon-based combination therapy is a highly
competitive market. Further, Schering-Plough has reported that the overall
hepatitis C market has been contracting. We cannot assure you that this market
contraction and competitive conditions will not offset the near-term positive
impact of PEG-INTRON sales in Japan, which could result in lower PEG-INTRON
royalties to us.


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<PAGE>

    MACUGEN

         MACUGEN, marketed by OSI Pharmaceuticals, Inc. and Pfizer Inc.,
currently competes against two therapies for the treatment of neovascular (wet)
age-related macular degeneration (AMD): photodynamic therapy with verteporfin,
which was developed by QLT, Inc. and is marketed by Novartis AG, and thermal
laser treatment. Additional treatments for AMD are in various stages of
preclinical or clinical testing. If approved, these treatments would also
compete with MACUGEN. For example, Genentech Inc. and Novartis AG are jointly
developing LUCENTIS, an anti-VEGF humanized antibody fragment for intravitreal
injection. Genentech submitted a biologics license application to the FDA on
December 30, 2005 for the use of LUCENTIS in the treatment of neovascular wet
AMD. On February 28, 2006, Genentech was granted Priority Review which means
that the FDA has until the end of June 2006 to take action on the application.
If Lucentis is approved by the FDA, it could result in lower MACUGEN royalties
to us.

    Technology

    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 proteins or aptamers,
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, Pfizer's SOMAVERT, and
OSI's MACUGEN, we are not aware of any PEG-modified therapeutic proteins or
aptamers 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 that treat the same diseases as those that our
products are designed to treat may compete with our products.

      SCAs

         There are several technologies that 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 December 31, 2005, we employed 306 persons, including 21 persons
with Ph.D. or M.D. degrees. At that date, 49 employees were engaged in research
and development activities, 146 were engaged in manufacturing, 111 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.


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<PAGE>

ITEM 1A. RISK FACTORS

         Throughout this Transition Report on Form 10-K, we have made
forward-looking statements in an attempt to better enable the reader to
understand our future prospects and make informed judgments. By their nature,
forward-looking statements are subject to numerous factors that may influence
outcomes or even prevent their eventual realization. Such factors may be
external to Enzon and entirely outside our control.

         We cannot guarantee that our assumptions and expectations will be
correct. Failure of events to be achieved or of certain underlying assumptions
to prove accurate could cause actual results to vary materially from past
results and those anticipated or projected. We undertake no obligation or
intention to update forward-looking statements.

         Certain risks and uncertainties are discussed below. It is not possible
to predict or identify all such factors, however. Accordingly, you should not
consider this recitation to be complete.

WE INCURRED A LOSS FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2005 AND THE
FISCAL YEAR ENDED JUNE 30, 2005, AND WE EXPECT TO INCUR LOSSES OVER THE NEXT
SEVERAL YEARS.

         As of December 31, 2005, we had an accumulated deficit of approximately
$403.9 million. During the six-month period ended December 31, 2005 and the
fiscal year ended June 30, 2005 we incurred net losses of $291.3 million and
$89.6 million, respectively. Our net loss in the most recent six-month period
was primarily attributable to a write-down of goodwill and a write-down of
intangible assets associated with ABELCET. Our net loss in the fiscal year ended
June 30, 2005 was primarily the result of lower sales of ABELCET and a $78.0
million charge we incurred to increase our valuation allowance associated with
our deferred tax assets based upon our assessment that it was not more likely
than not that we would benefit from these assets. The lower ABELCET sales were
caused by increasingly competitive conditions in the intravenous antifungal
market. We are currently investing in new programs to better support ABELCET and
our other marketed brands; however, we cannot predict the ultimate success of
such programs or when our business will return to profitability, if ever.

         Our ability to return to profitability 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 revenues and on the level of our expenses. Our ability to achieve
long-term profitability will depend upon our and our licensees' ability to
develop and 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 marketed successfully or
that our operations will sustain profitability.

OUR BUSINESS IS HEAVILY DEPENDENT ON THE CONTINUED SALES OF PEG-INTRON AND
ABELCET. IF REVENUES FROM EITHER OF THESE PRODUCTS FAIL TO INCREASE 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 applied our PEG technology to
develop a modified form of Schering-Plough's INTRON A, we are receiving
royalties on worldwide sales of PEG-INTRON. In December 2005, we made the
decision to delay recognition of royalty revenues until actual amounts are
known, resulting in no PEG-INTRON royalties being recorded in the quarter ended
December 31, 2005. However, during October 2004 through September 2005, the most
recent twelve-month period for which we have actual royalty revenue information,
total royalties comprised approximately 32% of our total revenues. During 2002,
Hoffmann-LaRoche received FDA and European Union approval for PEGASYS, a
competing PEGylated interferon-based combination therapy that competes with
PEG-INTRON in the United States and all international markets. Hoffman-LaRoche's
marketing and sales efforts in support of PEGASYS have



                                       30
<PAGE>

resulted in significant competitive pressure on PEG-INTRON sales. PEGASYS has
continued to take market share away from PEG INTRON and the overall market for
PEGylated alpha-interferon for the treatment of hepatitis C has been
contracting. As a result, sales of PEG-INTRON in certain markets where it
competes with PEGASYS and the royalties we receive on those sales have declined.
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.

         In the quarter ended December 2004, Schering-Plough received approval
for, and launched, PEG-INTRON in combination with REBETOL in Japan. In September
2005, Hoffmann-LaRoche reported that PEGASYS combination therapy would receive a
fast-track review in Japan and approval is expected during the third quarter of
calendar year 2006. Hoffmann-La Roche's subsidiary (Chugai Pharmaceutical Co.
LTD) currently markets other pharmaceutical products in Japan. Even if
Schering-Plough is able to successfully market PEG-INTRON in Japan prior to the
approval and launch of PEGASYS in Japan, it is likely that the launch in Japan
of PEGASYS will have a negative impact on PEG-INTRON's Japanese market share and
sales.

         We cannot assure you that Schering-Plough will be successful in
marketing PEG-INTRON. 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 sale of
PEG-INTRON could be slowed or blocked completely. Our revenues will be
negatively affected if Schering-Plough cannot meet the manufacturing demands of
the market.

         During the six-month period ended December 31, 2005, ABELCET sales in
the U.S. and Canada accounted for $21.1 million, or approximately 29% of our
total revenue. For the year ended June 30, 2005, ABELCET sales were $51.2
million, or approximately 31% of our total revenues. ABELCET sales for the
fiscal year ended June 30, 2004 were $67.7 million, or 40% of our total
revenues. We expect that ABELCET will account for a significant portion of our
future total revenues. The continued sale of newer products from Merck and
Pfizer in the antifungal market, as well as the entry of a new product from
Astellas Pharma (formerly Fujisawa Healthcare, Inc.), have negatively impacted
ABELCET sales, as clinicians utilize these other therapeutic agents. Pfizer and
Schering-Plough are each expected to obtain approval for and introduce an
additional new product in the antifungal market within the next year. In
addition, Astellas Pharma and Gilead Pharmaceuticals are currently marketing
AMBISOME, and Three Rivers Pharmaceuticals, Inc. is marketing AMPHOTEC, each of
which is a lipid-based version of amphotericin B, for the treatment of fungal
infections. AMBISOME and AMPHOTEC compete with ABELCET which has resulted in
greater competitive pressure on ABELCET sales. During the fiscal year ended June
30, 2005 and the six months ended December 31, 2005, we experienced increasing
pricing pressure with respect to ABELCET. In particular, Astellas Pharma and
Gilead Sciences, Inc., have aggressively lowered the price of their product in
certain regions and for certain customers in the U.S. This has resulted in the
shrinkage or loss of certain of our customer accounts. During the six months
ended December 31, 2005, U.S. and Canadian ABELCET sales decreased to $21.1
million or 32% as compared to the same period in 2004. This follows a $16.5
million or 24% decrease in the fiscal year ended June 30, 2005 compared to the
fiscal year ended June 30, 2004. While we are developing and implementing
strategies to address the competitive threats facing ABELCET, we cannot assure
you that we will be able to increase sales of ABELCET or prevent further
decreases in ABELCET sales.

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 collaborative 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.


                                       31
<PAGE>

         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.

         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 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 WILL NEED TO OBTAIN ADDITIONAL FINANCING TO MEET OUR FUTURE CAPITAL NEEDS AND
REPAY OUR OUTSTANDING DEBT, AND THIS FINANCING MAY NOT BE AVAILABLE WHEN WE NEED
IT.

         Our current development projects and marketing initiatives require
substantial capital. We believe that our current cash, cash equivalents and
investments and our anticipated cash flow from operations will be adequate to
satisfy our capital needs for the near future, but we will likely need to
increase our cash flow from operations or obtain financing to meet our future
capital needs, which we expect will be substantial. We will 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. The
competitive pressures impacting PEG-INTRON and ABELCET may cause our cash flow
from operations to decrease rather than increase in the future and we cannot be
sure that additional funds from other sources will be available on commercially
reasonable 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.

         As of December 31, 2005, we had $394.0 million of Convertible
Subordinated Notes outstanding that bear interest at an annual rate of 4.5%. 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 default by us or
fundamental change, each as described in the indenture for the notes. To date we
have been able to pay the interest due on these notes from our cash flow from
operations or our cash reserves. Our current cash reserves are insufficient to
repay the principal amount of this debt in full and we do not anticipate that we
will be able to generate sufficient cash from operations to repay this debt in
full by the maturity date. We will be required to repay the notes at maturity
unless we can refinance the debt or the noteholders convert their notes into
common stock before the maturity date. Our notes are convertible into common
stock at a price of $70.98 per share. Noteholders will be unlikely to convert
their notes unless our stock price rises above the conversion price of the
notes. On March 1, 2006 the closing price of our common stock on the Nasdaq
National Market was $6.84 per share. We expect that we will need to refinance
or obtain new financing to pay at least a significant portion of this principal
amount of these notes. We currently are considering financing alternatives;
however, we cannot be certain that any of such financing alternatives will be
consummated on commercially reasonable terms, or at all.

         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 commercially reasonable
terms, if at all.



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<PAGE>

WE HAVE A SIGNIFICANT AMOUNT OF INDEBTEDNESS.

         At December 31, 2005, our long-term debt was $394.0 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.

         We may not generate sufficient cash flow from operations to satisfy the
annual debt service payments that will be required under our 4.5% subordinated
convertible 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.

WE HAVE LIMITED MARKETING AND DISTRIBUTION CAPABILITIES.

         We have an approximately 70-person U.S. pharmaceutical sales and
marketing organization to support our products and we generally compete with
organizations that have significantly greater resources devoted to the marketing
and sales of their products. Our marketing and sales efforts may be unable to
compete successfully against such other companies. We may be required to seek
one or more corporate partners to augment our marketing and sales efforts with
respect to future products. Any delay in developing these resources or obtaining
corporate partners could substantially delay or curtail the marketing of such
products. In addition, we have agreements with third-party distributors to
distribute our products. If our distributors do not perform their obligations,
our ability to distribute our products may be severely restricted.

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.

         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 agreements with Ovation
Pharmaceutical, Inc., by assignment from Merck & Co., Inc., and Kyowa Hakko to
produce the unmodified forms of L-asparaginase used in the manufacture of
ONCASPAR. We purchase the unmodified adenosine deaminase enzyme used in the
manufacturing of ADAGEN from Roche Diagnostics; however, we no longer have a
supply agreement with Roche Diagnostics. We have two suppliers that produce the
amphotericin B 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 on reasonable terms, 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, 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.


                                       33
<PAGE>

         The period covered by our supply agreement with Ovation Pharmaceuticals
for L-asparaginase for the manufacture of ONCASPAR for the U.S. and Canadian
markets will conclude on December 31, 2006. If we are unable to successfully
renew our supply agreement for L-asparaginase for these markets, it will have a
potentially negative impact on our business and results of operations.

         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 its cattle are bovine spongiform encephalopathy (BSE or mad cow disease)
free. Beginning in September 2002, the U.S. Department of Agriculture (USDA)
required all animal-sourced materials shipped to the U.S. 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. 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 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 have received a notice from Bristol-Myers Squibb Company (BMS)
terminating our amphotericin B supply agreement with BMS effective March 1,
2006. We currently have an alternative source of supply of amphotericin B and
are seeking to qualify at least one additional source of supply. The termination
by BMS may give rise to future increased costs for the acquisition of
amphotericin B, as well as increased capital expenditures related to readying a
new supplier's facilities for cGMP production and regulatory approval of ABELCET
incorporating the alternative amphotericin B. Although there can be no assurance
as to the timing of these increased costs and additional capital expenditures,
we anticipate that these may be incurred beginning in calendar 2007.

         The FDA recently conducted an inspection of the manufacturing facility
of Merck, and that inspection resulted in the issuance, on July 22, 2005, of a
warning letter regarding applicable FDA current good manufacturing practice
(cGMP) regulations. Despite the assignment of our supply agreement from Merck to
Ovation Pharmaceuticals, Merck will continue to supply L-asparaginase to Ovation
Pharmaceuticals during a transition period. If Merck is unable to satisfactorily
resolve its current or future manufacturing problems, the FDA could require
Merck to discontinue the manufacture and distribution of the unmodified form of
L-asparaginase used in the manufacture of ONCASPAR, which could require us to
discontinue the manufacture and distribution of ONCASPAR. In addition, if we
cannot market and distribute ONCASPAR for an extended period, sales of the
product and customer relationships will suffer, which would adversely affect our
financial results.

THERE IS A HIGH RISK THAT EARLY-STAGE RESEARCH AND DEVELOPMENT MIGHT NOT
GENERATE SUCCESSFUL PRODUCT CANDIDATES.

         In the past year we have terminated our clinical development efforts
for, or relinquished our rights to, four clinical stage compounds, and we
currently have no products in clinical trials. At the present time the vast
majority of our research and development operations are focused on the early
stages of product research and development. The research and development of
pharmaceutical products is subject to high risk of failure. Most product
development candidates fail to reach the market. Our success depends on the
identification of new drugs or modified forms of existing drugs that we can
successfully develop and commercialize. We do not expect any of the drugs
resulting from our current research and development efforts to be commercially
available for several years, if at all. In order to fill our pipeline of product
candidates under development, we may attempt to acquire right to products under
development by other companies. The competition for the acquisition of rights to
products that are viewed as viable candidates for successful development and
commercialization is intense and we will be competing for such opportunities
with many companies with resources that are substantially greater than ours. Our
potential products are subject to risks of failure inherent in the development
of new pharmaceutical products. These risks include, but are not limited to,
risks that the drug might prove ineffective or may cause harmful side-effects
during pre-clinical testing or clinical trials, fails to receive necessary
regulatory approvals, cannot be manufactured on a commercial scale basis and
therefore may not be economical to produce, may fail to achieve market
acceptance, or that we may be precluded from commercialization by proprietary
rights of third parties.


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<PAGE>

OUR CLINICAL TRIALS COULD TAKE LONGER TO COMPLETE AND COST MORE THAN WE EXPECT.

         We will need to conduct significant clinical studies of all of our
product candidates that have not yet been approved for sale. These studies are
costly, time consuming and unpredictable. Moreover, 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, and might even result in discontinuation of clinical
development of a particular product candidate.

         The rate of completion of clinical trials depends upon many factors,
including the rate of enrollment of patients. Costly delays in the conduct and
completion of key clinical studies could result from insufficient timely patient
enrollment or from intervention by FDA, drug and safety monitoring boards, or
institutional review boards.

WE DEPEND ON THIRD PARTIES IN THE CONDUCT OF CLINICAL TRIALS AND ANY FAILURE OF
THOSE PARTIES TO FULFILL THEIR OBLIGATIONS COULD ADVERSELY AFFECT OUR
DEVELOPMENT AND COMMERCIALIZATION PLANS.

         We depend on independent clinical investigators, corporate
collaborators, academic institutions, contract research organizations, and other
third party service providers in the conduct of clinical trials. We rely heavily
on these parties for successful execution of our clinical trials, but do not
control many aspects of their activities. For example, the clinical
investigators are not our employees. However, we are responsible for ensuring
that each of our clinical trials is conducted in accordance with the general
investigational plan and protocols for the trial. Third parties may not complete
activities on schedule, or may not conduct our clinical trials in accordance
with regulatory requirements or our stated protocols. The failure of these third
parties to carry out their obligations could delay or prevent the development
and commercialization of future product candidates.

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. THE U.S. AND FOREIGN PATENTS UPON WHICH OUR ORIGINAL
PEG TECHNOLOGY WAS BASED HAVE EXPIRED.

         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 U.S. and in other
countries. We currently hold 129 issued U.S. patents many of which have foreign
counterparts. These patents, if extensions are not granted, are expected to
expire beginning in 2006 through 2022. We have also filed and currently have
pending 30 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, seven relate to PEG-INTRON, seventeen relate to ABELCET, and three relate
to DEPOCYT. Although we believe that our patents provide certain protection from
competition for ABELCET and DEPOCYT, 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 U.S. 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.


                                       35
<PAGE>

         We may become 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 or prevent our product development or commercialization
activities and could have a material adverse effect on our business, financial
condition and results of operations.

         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 U.S. 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 U.S. 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 and the issuance of 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.

WE OR OUR SUPPLIERS COULD EXPERIENCE DELAYS OR DIFFICULTIES IN MANUFACTURING,
INCLUDING PROBLEMS COMPLYING WITH THE FDA'S REGULATIONS FOR MANUFACTURING OUR
PRODUCTS. THESE PROBLEMS COULD MATERIALLY HARM OUR BUSINESS.

         Manufacturers of drugs must comply with current Good Manufacturing
Practices (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 of our commercial manufacturing facilities. We or our present or
future suppliers may be unable to comply with the applicable cGMP regulations
and other FDA regulatory requirements.

         ADAGEN and ONCASPAR, which we manufacture, 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 certain batches of ONCASPAR in June 2002, July 2004,
September 2004, and March 2005. To date, we have been unable to identify the
cause of the manufacturing and stability problems related to these batches. 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.


                                       36
<PAGE>

         During 1998, we began to experience 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 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 only to patients 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 November 2002, the FDA and the MHRA, the British equivalent of
the FDA, have 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 of which were issued in January 2006 for
our New Jersey facility and August 2005 for our Indianapolis facility. 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 partners, 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 clinical trials.

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. If we are
unsuccessful in integrating any such company or product 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.

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
including our Chief Executive Officer. 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 our Chief Executive
Officer, Chief Financial Officer, Chief Scientific Officer, Senior Vice
President responsible for our sales and marketing operations, and certain other
executive officers, our ability to continue to retain such officers, as well as
other senior executives or key managers is not assured. The loss of the services
of one or a combination of our senior executives or key managers, particularly
our Chief Executive Officer, Chief Financial Officer, Chief Scientific Officer,
and Senior Vice President responsible for our sales and marketing operations, as
well as the failure to recruit additional key scientific, technical and
managerial personnel in a timely manner, would have an adverse effect on our
business.


                                       37
<PAGE>

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, in addition to increased competition from Hoffman
LaRoche's PEGASYS, referred to above, Astellas Pharma and Gilead Pharmaceuticals
are currently marketing AMBISOME, and Three Rivers Pharmaceuticals is marketing
AMPHOTEC, each of which is a lipid-based version of amphotericin, for the
treatment of fungal infections. PEGASYS competes with PEG-INTRON and AMBISOME
and AMPHOTEC compete with ABELCET. 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 ELSPAR(R) (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.

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 NEW PRODUCTS.

         The marketing of pharmaceutical products in the U.S. and abroad is
subject to stringent governmental regulation. The sale of any of our products
for use in humans in the U.S. 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 and marketing of pharmaceutical products. Obtaining FDA
approval for a new therapeutic product may take several years and involve
substantial expenditures.

         We cannot assure you that we or our licensees will be able to obtain or
maintain 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
penalties, fines, recalls or other injunctive or oversight remedies.


                                       38
<PAGE>

         DEPOCYT was approved under the Accelerated Approval regulations of
Subpart H of the Food, Drug and Cosmetic Act. These 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. Approvals granted under Subpart H are provisional and require a written
commitment to complete post-approval clinical studies that formally demonstrate
patient benefit. Our licensor, SkyePharma, is responsible for conducting the
required study. If the FDA determines that such post-approval clinical study
fails to demonstrate patient benefit, the registration for DEPOCYT may be
subject to withdrawal.

         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.

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.

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,

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


                                       39
<PAGE>

         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
demonstrate adequately 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.

OUR OPERATIONS ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL LAWS AND REGULATIONS.

         Our operations are subject to federal, state and local environmental
laws and regulations concerning, among other things, the generation, handling,
storage, transportation, treatment and disposal of hazardous, toxic and
radioactive substances and the discharge of pollutants into the air and water.
Environmental permits and controls are required for some of our operations and
these permits are subject to modification, renewal and revocation by the issuing
authorities. We believe that our facilities are in substantial compliance with
our permits and environmental laws and regulations and do not believe that
future compliance with current environmental law will have a material adverse
effect on our business, financial condition or results of operations. If,
however, we were to become liable for an accident, or if we were to suffer an
extended facility shutdown as a result of such contamination, we could incur
significant costs, damages and penalties that could harm our business.

WE MAY BE SUBJECT TO A VARIETY OF TYPES OF PRODUCT LIABILITY OR OTHER CLAIMS
BASED ON ALLEGATIONS THAT THE USE OF OUR PRODUCTS HAS RESULTED IN ADVERSE
EFFECTS, WHETHER BY PARTICIPANTS IN OUR CLINICAL TRIALS OR BY PATIENTS USING OUR
PRODUCTS.

         Although we maintain product liability insurance 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 at levels that we
believe are appropriate, we cannot assure you that we will be able to maintain
our existing insurance coverage or obtain additional coverage on commercially
reasonable terms for the use of our other products in the future. Also, our
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 U.S.

          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
U.S. 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. For example, under the Medicare Prescription
Drug Improvement and Modernization Act of 2003 (the Act), Medicare benefits are
provided primarily through private entities that attempt to negotiate price
concessions from pharmaceutical manufacturers. This may increase pressure to
lower prescription drug prices. The Act also includes other cost containment
measures for Medicare in the event Medicare cost increases exceed a certain
level, which measures may impose limitations on prescription drug prices. These
changes in Medicare reimbursement could have a negative impact on our revenues
derived from sales of our products. Moreover, 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 U.S. or elsewhere could have a material adverse effect
on our business and financial performance.


                                       40
<PAGE>

THE LAW OR FDA POLICY COULD CHANGE AND EXPOSE US TO COMPETITION FROM "GENERIC"
OR "FOLLOW-ON" VERSIONS OF OUR PRODUCTS, WHICH COULD ADVERSELY IMPACT OUR
BUSINESS.

         Under current U.S. law and FDA policy, generic versions of conventional
chemical drug compounds, sometimes referred to as small molecule compounds, may
be approved through an abbreviated approval process.

         There is no abbreviated approval process under current law for
biological products approved under the Public Health Service Act through a BLA,
such as monoclonal antibodies, cytokines, growth factors, enzymes, interferons
and certain other proteins. However, various proposals have been made to
establish an abbreviated approval process to permit approval of generic or
follow-on versions of these types of biological products under U.S. law, and the
FDA's counterpart in the European Union has recently approved the first such
follow-on biological. For example, some have proposed that the FDA allow a
generic or follow-on copy of certain therapeutic biologics to be approved under
an existing mechanism known as a 505(b)(2) application. A 505(b)(2) application
is a form of an NDA, where the applicant does not have a right to reference some
of the data being relied upon for approval. Under current regulations, 505(b)(2)
applications can be used where the applicant is relying in part on published
literature or on findings of safety or effectiveness in another company's NDA.
505(b)(2) applications have not been used to date for therapeutic biologic
products. In addition, the use of 505(b)(2) applications even for conventional
chemical drug products is the subject of ongoing legal challenge. It is thus not
clear what the permitted use of a 505(b)(2) application might be in the future
for biologics products, or whether any other proposals on generic or follow-on
biologics will be adopted. However, if the law is changed or if the FDA somehow
extends its existing authority in new ways, and third parties are permitted to
obtain approvals of versions of our products through an abbreviated approval
mechanism, and without conducting full clinical studies of their own, it could
adversely affect our business.

RISKS RELATED TO OUR COMMON STOCK, PREFERRED STOCK AND SUBORDINATED NOTES

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, in addition to global and industry-wide events:

         o   the level of revenues we generate from our sale of products and
             royalties we receive,

         o   the losses we incur or the profits we generate,

         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,


                                       41
<PAGE>

         o   developments in patent or other proprietary rights,

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

         o   litigation.

         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.

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 December 31, 2005. The following securities that
may be exercised for, or are convertible into, shares of our common stock were
issued and outstanding as of December 31, 2005:

         o   Options. Stock options to purchase 6.1 million shares of our common
             stock at a weighted average exercise price of approximately $14.17
             per share; and

         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.

         o   Restricted stock units. 0.8 million shares of our common stock
             issuable in respect of outstanding restricted stock units held by
             officers, employees and directors.

         The shares of our common stock that may be issued under the options 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.


                                       42
<PAGE>

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 December 31,
2005, 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 4.5% subordinated convertible notes in
the event of a fundamental change (defined below). 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 U.S. 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 U.S. 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.

THE MARKET FOR UNRATED DEBT IS SUBJECT TO DISRUPTIONS THAT COULD HAVE AN ADVERSE
EFFECT ON THE MARKET PRICE OF THE NOTES, OR A MARKET FOR OUR NOTES MAY FAIL TO
DEVELOP OR BE SUSTAINED.

         Our 4.5% subordinated convertible 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 or that any market for our notes will develop
or be sustained. Any such disruptions may have an adverse effect on the holders
of the notes.


                                       43
<PAGE>

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

         None.

ITEM 2.  PROPERTIES

         As part of the ABELCET transaction, we assumed ownership of a 56,000
square foot manufacturing facility in Indianapolis, Indiana at which we produce
ABELCET for the Products segment and products we manufacture for others on a
contract basis (Contract Manufacturing segment). Our Indianapolis facility is
not subject to any mortgage.

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

<TABLE>
<CAPTION>

                                                                  Approx.
                                                                  Square       Approx.
               Location                 Principal Operations      Footage   Annual Rent   Lease Expiration
               --------                 --------------------      -------   -----------   ----------------
<S>                                     <C>                       <C>       <C>           <C>
20 Kingsbridge Road Piscataway, NJ      Research & Development     56,000    $581,000(1)  July 31, 2021
300 Corporate Ct. S. Plainfield, NJ     Manufacturing              24,000    $183,000(2)  October 31, 2012
685 Route 202/206 Bridgewater, NJ       Administrative             32,000    $833,000(3)  January 31, 2008

</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.
(3)  Under the terms of the lease, annual rent increases over the remaining term
     of the lease from $833,000 to $857,000.

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

         The research and development activities at the Piscataway facility
support the Products and Royalties segments. The manufacturing facility in South
Plainfield supports the Products segment. The administrative functions in
Bridgewater support all segments.

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.

         In addition, there is a new tax reporting requirement that applies to
all public reporting companies:

         o   New Section 6707A(e) of the Internal Revenue Code provides that a
             company, or any entity required to be consolidated with the company
             for purposes of the Annual Report or Transition Report, must
             disclose in its Annual Report or Transition Report whether it has
             been required to pay a penalty to the IRS for failing to make
             disclosures required with respect to certain transactions that have
             been identified by the IRS as abusive or that have a significant
             tax avoidance purpose. The disclosure should be made in Item 3,
             Legal Proceedings.


                                       44
<PAGE>

         We have not been required to pay any penalty to the IRS for failing to
make such disclosures.

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

None.




                                       45
<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND 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 during the six months ended December 31, 2005 and for the years
ended June 30, 2005 and 2004, 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.

                                                         High          Low
                                                        -------       ------

SIX MONTHS ENDED DECEMBER 31, 2005
First Quarter (ended September 30, 2005)                  $8.35        $6.36
Second Quarter (ended December 31, 2005)                   7.73         6.59

YEAR ENDED JUNE 30, 2005
First Quarter                                            $16.10       $11.01
Second Quarter                                            16.81        12.69
Third Quarter                                             14.07        10.02
Fourth Quarter                                            10.21         5.70

YEAR ENDED JUNE 30, 2004
First Quarter                                            $13.90       $10.51
Second Quarter                                            12.52        10.28
Third Quarter                                             18.40        11.97
Fourth Quarter                                            16.20        10.86

         As of March 1, 2006, there were 1,499 holders of record of our common
stock.

DIVIDENDS

         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.



                                       46
<PAGE>


EQUITY COMPENSATION PLAN INFORMATION

         The following table sets forth information regarding outstanding
options and shares reserved for future issuance under our equity compensation
plans as of December 31, 2005 (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                                                                    Remaining
Plan Category                                                  To be issued     Exercise price      available
-------------                                                  --------------  -----------------  ---------------
<S>                                                            <C>             <C>                <C>
                                                                     (a)               (b)               (c)
Equity compensation plans approved by security holders              6,114            $14.17             2,318
Equity compensation plans not approved by security holders              -                 -                 -
                                                               --------------  -----------------  ---------------

Total                                                               6,114            $14.17             2,318
                                                               ==============  =================  ===============

</TABLE>


(a)  Number of securities to be issued upon exercise of outstanding options.

(b)  Weighted-average exercise price of outstanding options.

(c)  Number of securities remaining available for future issuance under equity
     compensation plans of which 817,000 were reserved for issuance upon vesting
     of outstanding restricted stock unit awards.



                                       47

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

         Set forth below is our selected financial data for the six-month period
ended December 31, 2005 and the five fiscal years ended June 30, 2005 (in
thousands, except per-share data):

<TABLE>
<CAPTION>
                                             Six Months
                                                Ended                         Year Ended June 30,
                                             December 31,  ---------------------------------------------------------
                                              2005 (1)         2005      2004        2003 (3)      2002     2001
                                             ------------  ----------  ----------  ----------- ---------  ----------
<S>                                          <C>           <C>         <C>         <C>         <C>        <C>
Consolidated Statement of Operations Data:
 Total revenues                              $   73,699     $166,250   $169,571     $146,406     $75,805    $31,588
 Cost of sales                                   23,216       46,023     46,986       28,521       6,078      3,864
 Research and development                        13,985       36,957     34,769       20,969      18,427     13,052
 Write-down of carrying value of
    investment                                        -            -      8,341       27,237           -          -
 Acquired in-process research
    and development                              10,000            -     12,000            -           -          -
 Restructuring charge                                 -        2,053          -            -           -          -
 Write-down of goodwill and
    long-lived assets (2)                       284,101
 Other operating expenses                        35,312       70,642     60,433       39,782      16,687     11,796
                                             ------------  ----------  ----------  ----------- ---------  ----------
     Operating (loss) income                   (292,915)      10,575      7,042       29,897      34,613      2,876
 Investment income, net                           3,248        4,360     13,396        8,942      18,681      8,401
 Interest expense                                (9,841)     (19,829)   (19,829)     (19,828)    (19,829)      (275)
 Other, net                                      (2,776)      (6,768)     6,776       26,938       3,218         11
 Income tax benefit (provision)                  10,947      (77,944)    (3,177)        (223)      9,123        512
                                             ------------  ----------  ----------  ----------- ---------  ----------
    Net (loss) earnings available for
       common stockholders                   $ (291,337)    $(89,606)  $  4,208     $ 45,726    $ 45,806   $ 11,525
                                             ============  ==========  ==========  =========== =========  ==========
 Net (loss) earnings per common share
    Basic                                    $    (6.69)    $ (2.06)   $   0.10     $   1.06    $   1.07   $   0.28
    Diluted                                  $    (6.69)    $ (2.06)   $   0.10     $   1.05    $   1.04   $   0.26

No dividends have been declared

                                                                                   June 30,
                                             December 31,  ---------------------------------------------------------
                                                2005          2005        2004      2003 (3)     2002        2001
                                             ------------  ----------  ----------  ----------- ---------  ----------
Consolidated Balance Sheet Data:
 Current assets                               $ 207,215     $213,882   $179,291     $154,676    $223,291   $457,350
 Current liabilities                             31,146       37,854     31,664       34,345      19,701      9,410
 Total assets (2)                               341,345      650,861    722,410      728,566     610,748    549,675
 Long-term debt                                 394,000      399,000    400,000      400,000     400,000    400,000
 Total stockholders' (deficit)
    equity (2)                                  (83,970)     203,502    289,091      291,584     190,495    138,989
   (2)

</TABLE>

(1)   The Company adopted the provisions of Statement of Financial Accounting
      Standards No. 123R, "Share-Based Payment", effective July 1, 2005.

(2)   The Company recognized an impairment of goodwill and certain long-lived
      assets in the quarter ended December 31, 2005. Refer to Note 7 of the
      accompanying consolidated financial statements.

(3)   The Company acquired the U.S. and Canadian rights to ABELCET in November
      2002. As part of the acquisition, the Company acquired the operating
      assets associated with the development, manufacture, sales and marketing
      of ABELCET.


                                       48
<PAGE>


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

OVERVIEW

         We are a technology-based, product-driven biopharmaceutical company
that is dedicated to the development, manufacture, and commercialization of
pharmaceutical products for patients with cancer and other life-threatening
diseases. Our primary clinical development and commercial focus is on internally
developed or acquired products for oncology and adjacent therapeutic areas where
there are serious unmet medical needs. We also leverage our scientific expertise
in designing improved versions of pharmaceuticals to obtain commercialization
rights in products discovered by others. We operate in three business segments:
Products, Royalties and Contract Manufacturing. Products revenues are comprised
of sales of four FDA approved products, ABELCET, ADAGEN, ONCASPAR, and DEPOCYT.
We receive royalties and license fees on sales of a number of products by other
firms that utilize our proprietary PEGylation platform, including PEG-INTRON(R),
marketed by Schering-Plough Corporation, and MACUGEN(R), marketed by OSI
Pharmaceuticals, Inc. and Pfizer Inc. In addition, we utilize contract
manufacturing opportunities to broaden our revenue base and enhance our
organizational productivity. Presently, we manufacture three injectable
pharmaceutical products for our partners.

         The following significant events occurred during the six months ended
December 31, 2005:

o        We changed our fiscal year-end from June 30 to December 31 - this may
         make period-to-period comparisons and analysis of growth rates more
         difficult.

o        We changed the definition of and basis of reporting for operating
         segments from one reportable segment to three as a result of a number
         of changes in operations, management and performance measures - prior
         year data have been recast to conform to the current presentation.

o        We recognized impairment in, and wrote-down the carrying amount of,
         certain intangible assets related to the product ABELCET.

o        We recognized an impairment in, and wrote off the carrying value of,
         goodwill.

o        We determined that we were unable to continue to reliably estimate
         royalty revenues based on preliminary data. As a result, we will now
         recognize royalty revenue when actual amounts are more reliably known
         rather than recognizing it on the basis of estimates. In most cases
         this will be upon receipt of notification from the third-party licensee
         of royalties earned under the license agreement which is typically in
         the quarter following the quarter in which the sales occur. This change
         has no cash flow effect, but did result in reporting substantially
         lower royalty income during the quarter ended December 31, 2005.

o        We adopted, in July 2005, new accounting rules related to expense
         recognition of share-based compensation. Instead of the disclosure of
         pro forma earnings effects of awarded stock options, beginning in July,
         the fair value of such awards is being charged to expense as earned.
         Prior accounting for restricted stock and restricted stock unit awards
         has not been affected significantly, although estimated forfeitures are
         now factored into current expense recognition rather than when the
         forfeiture occurs.

         As indicated above, effective December 31, 2005, we have changed our
fiscal year end from June 30 to December 31. Accordingly, this Transition Report
on Form 10-K and the discussion that follows relate to the six months ended
December 31, 2005 and the three years ended June 30, 2005. Throughout the
following discussion and analysis, comparisons are made to results of operations
for the six months ended December 31, 2004 and balance sheet amounts that
existed as of December 31, 2004. This 2004 information was derived from our
financial information reported on Form 10-Q and was not audited.

                                       49
<PAGE>

         Also as indicated above, during the six months ended December 31, 2005,
the Company changed a number of its internal operations, including its operating
structure and performance measures, which resulted in a change in its reportable
segments. We are now managing our business in three segments rather than one.
These segments are Products, Royalties, and Contract Manufacturing. Commencing
with the quarter ended December 31, 2005 and going forward, we will report
revenues and certain expenses by segment. The discussion that follows is focused
on the results of operations by segment, to the extent applicable.

RESULTS OF OPERATIONS

SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND FISCAL YEARS ENDED JUNE 30,
2005, 2004, AND 2003

         Following are reconciliations of the respective segments' profitability
to consolidated (loss) income before income tax on a comparative basis for the
periods shown (millions of dollars):

<TABLE>
<CAPTION>
                                 Six Months Ended                              Fiscal Year Ended
                         ----------------------------------    --------------------------------------------------
                          December       %        December      June        %        June         %        June
                            2005       Change      2004         2005      Change     2004       Change     2003
                         ----------    ------    ----------    -------    ------    --------    ------    -------
<S>                      <C>           <C>       <C>           <C>        <C>       <C>         <C>       <C>
Products Segment
   (loss) profit           $(267.5)      n.m.       $11.8       $13.6        (50)     $27.0        165     $10.2
Royalty Segment
   profit                     17.8       (15)        20.9        51.4          5       48.8        (38)     78.4
Contract Manufacturing
   (loss) profit              (5.6)      n.m.         2.1         4.4         52        2.9        (19)      3.6
Corporate and other
   expenses                  (47.0)       30        (36.2)      (81.1)        14      (71.3)        54     (46.3)
                         ----------              ----------    -------              --------              -------
(Loss) income
   before income tax       $(302.3)     n.m.        $(1.4)     $(11.7)      n.m.       $7.4       n.m.     $45.9
                         ==========              ==========    =======              ========              =======
</TABLE>

         n.m. - not meaningful

        The Company does not allocate certain corporate income and expenses not
directly identifiable with the respective segments, including general and
administrative expenses, exploratory and preclinical research and development
expenses, depreciation, interest income, interest expense and income taxes.

         The consolidated results of operations for the six months ended
December 31, 2005 were significantly affected by non-cash write-downs of
intangible assets associated with ABELCET and goodwill totaling $284.1 million.
The goodwill write-down also had the effect of generating a tax benefit in the
amount of $12.0 million.

         The fiscal year ended June 30, 2005 was affected by a large non-cash
income tax charge of $77.9 million representing a reserve against the existing
deferred tax assets.

         These and other fluctuations from year to year are discussed at greater
length in the analyses that follow.


                                       50
<PAGE>

PRODUCTS SEGMENT

Segment profitability (millions of dollars):

<TABLE>
<CAPTION>
                                  Six Months Ended                             Fiscal Year Ended
                         ----------------------------------    --------------------------------------------------
                          December        %       December       June        %       June          %      June
                            2005       Change       2004         2005     Change     2004       Change    2003
                         ----------    ------    ----------    -------    ------    --------    ------    -------
<S>                      <C>           <C>       <C>           <C>        <C>       <C>         <C>      <C>
Revenues                 $   49.4        (9)      $  54.5      $ 99.2        (8)      $107.9         82    $ 59.2
Cost of sales                18.1         4          17.4        34.8        (6)        37.0         59      23.3
Selling & marketing          15.0       (19)         18.5        37.3        22         30.5         85      16.5
Amortization                  6.7        (1)          6.8        13.5         1         13.4         46       9.2
Write-down of goodwill                                              -
and intangibles             277.1      n.m.             -           -         -            -          -         -
                         ----------              ----------    -------              --------              -------
Segment (loss) profit     $(267.5)     n.m.         $11.8       $13.6       (50)     $  27.0        165     $10.2
                         ==========              ==========    =======              ========              =======
</TABLE>

            n.m. - not meaningful

         Revenues

         Performance of individual products is provided below (millions of
dollars):

<TABLE>
<CAPTION>
                                 Six Months Ended                              Fiscal Year Ended
                         ----------------------------------    --------------------------------------------------
                          December        %       December      June          %      June         %        June
   Product                  2005       Change      2004         2005      Change     2004       Change     2003
--------------           ----------    ------    ----------    -------    ------    --------    ------    -------
<S>                      <C>           <C>       <C>           <C>        <C>       <C>         <C>       <C>
ABELCET                     $21.1        (31)      $30.8       $51.2       (24)       $67.7       139       $28.3
ADAGEN                       10.9         10         9.9        19.3        13         17.1         7        16.0
ONCASPAR                     13.0         33         9.8        21.2        17         18.1        46        12.4
DEPOCYT                       4.4         10         4.0         7.5        50          5.0       100         2.5
                         ----------              ----------    -------              --------              -------
Totals                      $49.4         (9)      $54.5       $99.2        (8)      $107.9        82       $59.2
                         ==========              ==========    =======              ========              =======
</TABLE>

         Net product sales for the six months ended December 31, 2005 decreased
by 9% to $49.4 million over the same period of 2004 as growth in the other
products could not overcome the decline in U.S. and Canadian sales of our
intravenous antifungal product, ABELCET. The ABELCET sales decline is due to
competitive market conditions from both other lipid amphotericin B products and
other classes of antifungal products. During the six months ended December 31,
2005, U.S. and Canadian ABELCET sales were down $9.7 million or 31% as compared
to the six months ended December 31, 2004 driven mainly by a reduction in
volume. The 10% growth in ADAGEN sales for the six months ended December 31,
2005 as compared to the year-earlier period was primarily driven by an increase
in the number of patients over the prior year, as well as a higher weighted
average price. The $3.2 million or 33% increase in revenue for ONCASPAR was
related to the adoption of ONCASPAR in certain protocols by hospitals and
cooperative groups resulting in an increase in demand for the product as well as
the effect of a price increase in December 2004. DEPOCYT net sales were slightly
higher in the most recent six-month period compared to the same prior-year
period due primarily to increased use by neuro-oncologists because of its more
convenient dosing schedule.

         Net product sales for the fiscal year ended June 30, 2005 decreased by
8% to $99.2 million from the year earlier. The decrease in net product sales was
attributable to a decline in U.S. and Canadian sales of our intravenous
antifungal product, ABELCET, due to increasingly competitive market conditions.
During the year ended June 30, 2005, U.S. and Canadian ABELCET sales declined
24% from the prior year to $51.2 million. ADAGEN net sales were $19.3 million,
up 13% over the year ended June 30, 2004. The growth in ADAGEN sales for the
year ended June 30, 2005 was primarily driven by an increase in the number of
patients over the prior year, as well as a higher weighted-average price.
ONCASPAR net sales increased 17% to $21.2 million for the year ended June 30,
2005, from $18.1 million in the twelve-month period ended June 30, 2004 due
primarily to a higher weighted average price. DEPOCYT net sales were $7.5
million for the year ended June 30, 2005, as compared to $5.0 million for the
year ended June 30, 2004 due primarily to increased demand, which reflects more
focused sales and marketing efforts, and to a lesser extent a higher weighted
average price.

                                       51
<PAGE>

         Net product sales for the year ended June 30, 2004 increased by 82% to
$107.9 million, as compared to the year ended June 30, 2003 due to the
acquisitions of the U.S. and Canadian commercialization rights to ABELCET and
DEPOCYT during the year ended June 30, 2003, as well as higher sales of ONCASPAR
and ADAGEN. During the year ended June 30, 2004, U.S. and Canadian ABELCET sales
were $67.7 million, as compared to $28.3 million for the year ended June 30,
2003. In November 2002, we acquired the North American ABELCET business from
Elan Plc. Net sales of ADAGEN were $17.1 million for the year ended June 30,
2004, as compared to $16.0 million for the year ended June 30, 2003. ADAGEN's
growth reflects an increase in the number of patients receiving ADAGEN therapy.
ONCASPAR net sales increased to $18.1 million for the year ended June 30, 2004
compared to $12.4 million for the year ended June 30, 2003. ONCASPAR growth was
primarily driven by increased demand, which reflects additional sales and
marketing efforts to support the product. In June 2002, we reacquired the North
American rights to ONCASPAR from the Sanofi-Aventis. DEPOCYT net sales were $5.0
million for the year ended June 30, 2004, as compared to $2.5 million for the
year ended June 30, 2003 primarily due to our December 2002 acquisition of the
U.S. and Canadian commercialization rights to DEPOCYT from SkyePharma.

         Since December 2004, a new executive management team has been named and
a significant focus is being placed on improving our revenues by supporting our
four marketed brands, ABELCET, ADAGEN, ONCASPAR, and DEPOCYT, and expanding
their market potential through new initiatives. Despite our efforts, U.S. and
Canadian sales of ABELCET may continue to be negatively impacted by the
increasingly competitive conditions in the intravenous antifungal market due to
the introduction of newer agents from Pfizer, Merck, and Astellas, as well as
increased pricing pressure in the lipid-based amphotericin B market. We cannot
assure you that our efforts to support our products will be successful or that
any particular sales levels of ABELCET, ADAGEN, ONCASPAR, and DEPOCYT will be
achieved or maintained.

         Cost of sales

         Cost of sales of marketed products for the six months ended December
31, 2005 was $18.1 million or 37% of sales. This compared to $17.4 million or
32% of sales for the comparable six-month period of 2004. The lower margin
earned in the period ended December 31, 2005 was due mainly to an increase in
ABELCET inventory costs as a result of negative absorption variances arising
from low production volumes. As a result of the quarter ended December 2005
impairment write-down of ABELCET-related intangible assets (see below),
amortization being charged to cost of sales will be lower by $0.5 million per
year having a modest favorable effect on product costs.

         For the year ended June 30, 2005, cost of sales was $34.8 million or
35% of sales. This was slightly higher than the 34% of sales or $37.0 million
experienced for the year ended June 30, 2004. The percentage increase was
attributable to inventory write-offs as well as increased capacity costs.

         Cost of sales as a percent of net product sales, improved to 34% for
the year ended June 30, 2004 as compared to 39% for the year ended June 30,
2003. The decrease was principally due to the higher 2003 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.

         Selling and marketing expenses

         Selling and marketing expenses consist primarily of salaries and
benefits for our sales and marketing personnel, as well as other commercial
expenses and marketing programs to support our sales force.

                                       52
<PAGE>

         Selling and marketing expenses for the six months ended December 31,
2005 decreased to $15.0 million, as compared to $18.5 million for the six months
ended December 31, 2004. The decrease was primarily due to the timing of our
investments in sales and marketing programs, the absence of spending related to
the cancelled MARQIBO project and the elimination of our Canadian sales force.

         Selling and marketing expenses for the year ended June 30, 2005
increased to $37.3 million, as compared to $30.5 million the year earlier. The
increase in sales and marketing costs was attributable to our oncology sales
operations, premarketing expenses regarding MARQIBO and our hospital-based sales
operations.

         Selling and marketing expenses for the year ended June 30, 2004
increased to $30.5 million, as compared to $16.5 million for the year ended June
30, 2003. The increase was primarily due to increased sales and marketing
expenses related to the addition of our U.S. sales force in connection with our
acquisition of ABELCET and the continued build out of a sales and marketing
presence in oncology for ONCASPAR and DEPOCYT.

         Amortization of acquired intangibles

         Amortization expense was $6.7 million for the six months ended December
31, 2005, as compared to $6.8 million for the six months ended December 31,
2004. Amortization expense was $13.5 million for the year ended June 30, 2005,
as compared to $13.4 million for the year ended June 30, 2004 and $9.2 million
for the year ended June 30, 2003. Amortization expense is related to the
intangible assets acquired in connection with the ABELCET acquisition during
November 2002. Amortization of intangible assets has been provided over their
estimated lives ranging from 3-15 years on a straight-line basis.

         As a result of the December 2005 impairment write-down of
ABELCET-related intangible assets (see below), amortization expense will be
approximately $0.7 million per year through 2014.

         Research and development expenses

         There has been minimal research and development spending directly
related to currently marketed products. Also, the research projects that had
been in progress have been terminated and replaced with preclinical programs. At
some point in the future, spending necessary to maintain or expand marketed
products may be charged to the Products segment.

         Write-down of goodwill and intangible assets

         The majority of our intangible assets were acquired in November 2002
with the acquisition of ABELCET. Beginning in late 2004 and continuing through
2005, we experienced a decline in sales of ABELCET primarily attributable to
increased competition in the antifungal market. ABELCET sales have historically
averaged approximately $15.0 million to $16.0 million per quarter, however in
late 2004 and into 2005, ABELCET sales have declined to approximately $11.0
million per quarter. In November 2005, we completed a long-term strategic plan
that indicates the revenues from sales of ABELCET may not recover to historical
levels. In light of this impairment indicator, we engaged an independent
valuation specialist to determine the fair value of the ABELCET assets and test
for impairment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets".

         Initial testing disclosed that the future undiscounted net cash flows
to be generated by the assets were insufficient to cover the carrying value of
the ABELCET-related intangibles. The fair value of these intangible assets was
then calculated and a non-cash impairment charge was recognized in the Products
segment for the excess of carrying amount over fair value in the aggregate
amount of $133.1 million during the six months ended December 31, 2005.

                                       53
<PAGE>

         Effective in the quarter ended December 31, 2005, we changed the manner
in which we manage and evaluate the performance of our operations, which
resulted in a change to our business segmentation and the identification of our
related reporting units. This new segmentation necessitated the allocation of
our existing goodwill to the newly identified reporting units on a relative fair
value basis. Further, we considered the historical declining performance of
ABELCET and the impairment recognized to the related intangible assets to be
indicators that our Products segment goodwill may be impaired. We engaged an
independent valuation firm to perform a valuation of our reporting units, to
assist us with the allocation of our goodwill and estimate the fair value of
assets using a discounted cash flow analysis. The allocation process resulted in
the Products segment being assigned $144.0 million of goodwill. The ensuing
testing to estimate the implied fair value of this goodwill disclosed that it
was impaired in its entirety. Accordingly, a non-cash impairment loss related to
goodwill was recorded in the amount of $144.0 million in the Products segment
during the six months ended December 31, 2005.

ROYALTIES SEGMENT

(millions of dollars)

<TABLE>
<CAPTION>
                              Six Months Ended                               Fiscal Year Ended
                     ----------------------------------     -----------------------------------------------------
                      December        %        December     June         %        June         %         June
                       2005         Change      2004        2005       Change     2004       Change      2003
                     ----------     -----     ---------     ------     -----     -------     -----     ----------
<S>                  <C>            <C>       <C>          <C>         <C>       <C>         <C>       <C>
Royalty revenue         $15.3         (24)       $20.2       $49.8        4        $47.8     (39)        $77.6
Contract revenue          2.5         257          0.7         1.6       60          1.0      25           0.8
                     ----------               ---------     ------               -------               ----------
Total royalties         $17.8         (15)       $20.9       $51.4        5        $48.8     (38)        $78.4
                     ==========               =========     ======               =======               ==========
</TABLE>

         Total royalties for the six months ended December 31, 2005 decreased
15% to $17.8 million as compared to $20.9 million during the comparable
six-month period ended December 31, 2004, due primarily to a one-quarter
deferral of royalty revenue recognition. The majority of total royalties is
comprised of royalty revenue we receive on sales of PEG-INTRON, but also
includes other royalty revenue, certain license revenues and contract revenues
related to the application of our technology to other firms' products. No
operating expenses are allocated to the Royalties segment.

         We have historically been able to reasonably estimate our royalty
revenue under our license arrangements principally using historical trends.
However, during recent periods, we have observed greater fluctuations in royalty
income estimates under these arrangements. Our ability to estimate third-party
licensee global net sales and the future royalty payments to be received has
become more difficult due to the volatility that has arisen as a result of the
expansion in the number of products sold by licensees, the entry of licensees
into new geographic territories and the effects of competition on the licensees'
net sales. Royalties are a material component of total revenues and as the
timeline for reporting of financial information shortens, the need for improved
estimating procedures has been heightened. We believe we can no longer
reasonably estimate royalty income that we have earned but that has not yet been
communicated by the third party licensee. We recognize royalty revenue when it
can reasonably be estimated and collection is reasonably assured, which
beginning with the quarter ended December 31, 2005, is the notification from the
third party licensee of the royalties earned under the license agreement. This
information is generally received from the licensees in the quarter subsequent
to the period in which the sales occur. This change resulted in a one-time
reduction in royalty revenue for the quarter ended December 31, 2005. Royalty
revenue that previously would have been recognized in the quarter ended December
31, 2005 will now be recognized upon notification from the third-party licensee,
which will be in the quarter ending March 31, 2006. This change has no effect on
our cash flow.

         Because of this change, the six-month period ended December 31, 2005
represents essentially just one-quarter's royalty revenues. This is principally
the royalty received on the sales that occurred during the quarter ended
September 30, 2005 of PEG-INTRON. The amount of total royalties reported in the
quarter ended September 30, 2005 was $15.5 million. The additional total
royalties reported for the six months ended December 31, 2005 of $2.3 million
includes fees associated with the discontinuation of the research collaboration
with Micromet. In subsequent fiscal years, four full quarters' royalty revenue
will be reported.

                                       54
<PAGE>

         Total royalties for the year ended June 30, 2005 increased to $51.4
million, as compared to $48.8 million for the year ended June 30, 2004. The
improvement in total royalties over the prior year was due to the January 2005
launch of MACUGEN in the U.S. for the treatment of neovascular (wet) age-related
macular degeneration (AMD), an eye disease associated with aging that destroys
central vision, and to a lesser extent the December 2004 launch of PEG-INTRON
combination therapy in Japan. Under a strategic alliance we formed in 2002 with
Nektar, Nektar provides OSI Pharmaceuticals with PEGylation technology for use
in MACUGEN and we receive a share of the royalties Nektar receives from OSI
Pharmaceuticals.

         Total royalties for the year ended June 30, 2004 decreased to $48.8
million compared to $78.4 million for the year ended June 30, 2003. The decrease
was primarily due to increased competition, as well as contracting market
conditions. In December 2002, Hoffmann-La Roche launched a PEGylated
interferon-based combination therapy for hepatitis C that competes directly with
Schering-Plough's PEG-INTRON combination therapy. Prior to December 2002,
PEG-INTRON was the only approved PEGylated interferon.

         Due to the December 2004 launch of PEG-INTRON combination therapy in
Japan, we believe royalties from sales of PEG-INTRON may continue to be
positively impacted in the near term. In September 2005, Hoffmann-LaRoche
reported that it received fast-track review in Japan for its PEGylated
interferon-based combination therapy with approval expected in the third quarter
of calendar 2006. In markets outside of Japan, PEG-INTRON competes in a highly
competitive market that Schering-Plough has reported is contracting. We cannot
assure you that the positive impact of sales of PEG-INTRON in Japan will offset
this market contraction and competitive conditions or that any particular sales
levels of PEG-INTRON will be achieved or maintained.

         Costs and expenses

         Current royalty revenues do not require any material specific
maintenance costs. At some point in the future, costs associated with initiation
of new outlicensing agreements that could result in our receipt of a royalty
stream and, if necessary, costs necessary to maintain the underlying technology
may be charged to the Royalties segment.

CONTRACT MANUFACTURING SEGMENT

         Contract manufacturing revenues are comprised of revenues from the
manufacture of MYOCET and ABELCET for the European market, and to a lesser
extent, the manufacture of an injectable multivitamin, MVI, for Mayne. Our
contract manufacturing revenue commenced in November 2002, when we entered into
a long-term manufacturing and supply agreement with Elan for the manufacture of
MYOCET and ABELCET for the European market in connection with our acquisition of
the U.S. and Canadian ABELCET business. Corporate costs and expenses are not
allocated to the segment reporting level.

(millions of dollars)

<TABLE>
<CAPTION>
                                    Six Months Ended                             Fiscal Year Ended
                            ----------------------------------    -------------------------------------------------
                             December        %       December      June        %        June        %        June
   Product                     2005       Change      2004         2005      Change     2004      Change     2003
--------------              ----------    ------    ----------    -------    ------    -------    ------    -------
<S>                         <C>           <C>       <C>           <C>        <C>       <C>        <C>       <C>
Revenues                      $ 6.5        (19)        $8.0       $15.6        21       $12.9       48         $8.7
Cost of sales                   5.1        (14)         5.9        11.2        12        10.0      n.m.         5.1
Write-down of goodwill          7.0        n.m.           -           -           -         -        -            -
                            ----------              ----------    -------              -------              -------
Segment (loss) profit         $(5.6)       n.m.        $2.1       $ 4.4        52       $ 2.9      (19)        $3.6
                            ==========              ==========    =======              =======              =======
</TABLE>

         n.m. - not meaningful

                                       55
<PAGE>

         Revenues

         Contract manufacturing revenue for the six months ended December 31,
2005 was $6.5 million. This compares to $8.0 million for the comparable period
of 2004. The decrease in contract manufacturing revenue was attributable to the
timing of sales of MVI offset partially by an increase in our sales of our
intravenous antifungal product, ABELCET, to the European market.

         Contract manufacturing revenue for the year ended June 30, 2005 was
$15.6 million compared to $12.9 million for the year ended June 30, 2004 and
$8.7 million for the year ended June 30, 2003. During February 2004, Elan sold
its European sales and marketing business to Zeneus Pharma, Ltd. (Zeneus).
Transfer of our manufacturing and supply agreement was part of this transaction.
Approximately $1.7 million of the $12.9 million of contract manufacturing
revenue recorded during the year ended June 30, 2004 related to a payment that
had not previously been recognized as revenue due to uncertainty about the
contractual amount due. The increase in contract manufacturing revenue in 2005
was due to an increase in volume.

         Cost of sales

         Cost of sales for contract manufacturing for the six months ended
December 31, 2005 was $5.1 million or 78% of sales. This compared to $5.9
million or 74% of sales for the comparable six-month period of 2004. The
increase in cost as a percent of sales was attributable to lower production
volumes in 2005 which resulted in a proportionate increase in fixed costs being
allocated to the units produced.

         Cost of sales for the contract manufacturing segment, as a percentage
of net contract manufacturing revenue, decreased to 72% for the year ended June
30, 2005 as compared to 78% for the year ended June 30, 2004. The decrease was
attributable to reduced capacity costs.

         Cost of sales for contract manufacturing was $10.0 million or 78% of
sales for the year ended June 30, 2004. A favorable effect for the year ended
June 30, 2004 of $1.7 million of contract manufacturing revenue which related to
the above-referenced payment from Elan Plc for invoices that had no related cost
of sales for the period was more than offset by $2.1 million of costs related to
failed manufacturing batches.

         Cost of sales for the year ended June 30, 2003 was not reflective of
subsequent periods due in part to the fact that the operations began in November
2002 with the acquisition of ABELCET.

         Write-down of goodwill

         The Contract Manufacturing segment was allocated $7.0 million of
goodwill in connection with the redefinition of segments described above in the
Products segment. A similar test, as described above, for impairment disclosed
that the full amount of goodwill allocated to Contract Manufacturing was
impaired and, accordingly, was written off.

NON-U.S. REVENUE

          We had export sales and royalties recognized on export sales of $21.0
million for the six months ended December 31, 2005; $52.3 million for the year
ended June 30, 2005; $44.3 million for the year ended June 30, 2004 and $40.2
million for the year ended June 30, 2003. Of these amounts, sales in Europe and
royalties recognized on sales in Europe, were $14.1 million, $36.7 million,
$34.7 million and $35.6 million, for the six months ended December 31, 2005 and
the years ended June 30, 2005, 2004 and 2003, respectively. Enzon non-U.S.
product sales and royalties are denominated in U.S. dollars and are included in
total revenues.

                                       56
<PAGE>

CORPORATE AND OTHER EXPENSE

(millions of dollars)

<TABLE>
<CAPTION>
                                 Six Months Ended                              Fiscal Year Ended
                         ----------------------------------    --------------------------------------------------
                          December        %       December      June        %        June         %        June
   Product                  2005       Change      2004         2005      Change     2004       Change     2003
--------------           ----------    ------    ----------    -------    ------    --------    ------    -------
<S>                      <C>          <C>        <C>           <C>        <C>       <C>         <C>       <C>
Research and
Development                 $14.0       (25)        $18.7        $37.0        6      $34.8        66       $21.0
                         ----------              ----------    -------              --------              -------
General and
administrative               13.6        81           7.5         19.8       20       16.5        17        14.1
                         ----------              ----------    -------              --------              -------
Write-down of carrying
value of investments            -         -             -            -      n.m.       8.3      n.m.        27.2
                         ----------              ----------    -------              --------              -------
Acquired in-process
research and
development                  10.0       n.m.            -            -      n.m.      12.0      n.m.           -
                         ----------              ----------    -------              --------              -------
Restructuring charge            -         -             -          2.1      n.m.         -                     -
                         ----------              ----------    -------              --------              -------
Other income (expense):
   Interest expense           9.8        (1)          9.9         19.8        -       19.8        -         19.8
   Investment income         (3.2)       88          (1.7)        (4.4)     (67)     (13.4)      51         (8.9)
   Merger
   termination fee              -                       -            -                   -      n.m.       (26.9)
   Other, net                 2.8        40           1.8          6.8      n.m.      (6.7)                    -
                         ----------              ----------    -------              --------              -------
                              9.4        (6)         10.0         22.2                (0.3)                (16.0)
                         ----------              ----------    -------              --------              -------
    Corporate Costs         $47.0        30         $36.2        $81.1       14      $71.3       54        $46.3
                         ==========              ==========    =======              ========              =======
</TABLE>

         n.m. - not meaningful

         Research and development expense

         Research and development expenses consist primarily of salaries and
benefits; patent filing fees; contractor and consulting fees, principally
related to clinical and regulatory projects; costs related to research and
development partnerships or licenses; drug supplies for clinical and preclinical
activities; as well as other research supplies and allocated facilities charges.

         Research and development expenses decreased to $14.0 million for the
six months ended December 31, 2005, as compared to $18.7 million for the six
months ended December 31, 2004. The decrease was attributable to decreased costs
related to termination of further development of MARQIBO of approximately $2.9
million, as well as decreased spending of $2.1 million related to clinical and
preclinical development programs, which was primarily attributable to the
termination of our clinical development programs and $2.2 million related to
personnel - related expenses. Offsetting these declines, in part, were increased
costs of $2.5 million related to the Micromet termination agreement.

         Research and development expenses increased to $37.0 million for the
year ended June 30, 2005, as compared to $34.8 million for the year ended June
30, 2004. The increase was attributable to increased costs related to MARQIBO,
which included the impact of a $5.0 million payment related to the termination
of our partnership with Inex, as well as increased personnel-related expenses.
These increases were offset in part by decreased spending related to clinical
and preclinical development programs, which was primarily attributable to the
termination of our clinical development program for Pegamotecan.

          Research and development expenses increased to $34.8 million for the
year ended June 30, 2004, as compared to $21.0 million for the year ended June
30, 2003. The increase was primarily due to increased spending related to our
antibody collaboration with Micromet; our clinical development programs for
Pegamotecan and a U.S. formulation of ATG Fresenius S; a partnership with Inex
for MARQIBO; preclinical programs; and personnel-related expenses.

                                       57
<PAGE>

         General and administrative expense

         General and administrative expenses consist primarily of salaries and
benefits for the support functions; outside professional services for
accounting, audit, tax, legal, and investor activities; and allocations of
facilities costs.

         For the six months ended December 31, 2005, general and administrative
expenses amounted to $13.6 million compared to $7.5 million for the six months
ended December 31, 2004. The increase in general and administrative costs was
primarily attributable to increased accounting and related fees associated with
our Sarbanes-Oxley Act compliance activities related in part to the change in
fiscal year. In addition, there was an increase in personnel-related costs,
including employee search fees and relocation expenses.

         General and administrative expenses for the year ended June 30, 2005
increased to $19.8 million, as compared to $16.5 million for the year ended June
30, 2004. The increase in general and administrative costs was primarily
attributable to increased accounting and related fees associated with our
Sarbanes-Oxley Act compliance activities, as well as an increase in
personnel-related costs, including executive-level search fees and relocation
expenses.

         General and administrative expenses for the year ended June 30, 2004
increased to $16.5 million, as compared to $14.1 million in 2003. The increase
was primarily due to increased salaries, insurance and executive search
expenses.

         Write-down of  carrying value of  investment

         During the year ended June 30, 2004, we recorded a write-down of the
carrying value of our investment in Micromet that resulted in a non-cash charge
of $8.3 million. In April 2002, we entered into an agreement with Micromet,
which was amended in June 2004, related to antibody-based therapeutics. In
connection with the April 2002 agreement, we made an $8.3 million investment in
Micromet in the form of a convertible note that was payable to us in March 2007
and bore interest at an annual rate of 3%. This note was convertible into
Micromet common stock at the election of either party. Our decision to
write-down the note was based on a decline in the estimated fair value of this
investment that was deemed to be other-than-temporary. Subsequently, in November
2005, we terminated the research collaboration and converted the note into
common shares of Micromet. We continue to carry the shares at the written-down
zero basis of the note.

         During the year ended June 30, 2003, we recorded a write-down of the
carrying value of our investment in Nektar that resulted in a non-cash charge of
$27.2 million. As part of our January 2002 agreement with Nektar, we purchased
$40.0 million of newly issued Nektar convertible preferred stock that was
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 that was determined to be other-than-temporary, we recorded a write-down
of the carrying value of our investment in Nektar. The adjustment was calculated
based on an assessment of the fair value of the investment at the time of the
write-down. Subsequently, the preferred shares were converted into Nektar common
stock and all of this common stock has been sold in January and February 2006.
See discussion of other income (expense) below.

         Acquired in-process research and development

         Acquired in-process research and development for the six months ended
December 31, 2005, of $10.0 million was attributable to the execution of a
license agreement with NatImmune in September 2005 for the clinical development
of recombinant human Mannose-binding Lectin. Mannose-binding Lectin is a
naturally occurring human plasma protein that plays a key role in the immune
system's first-line defense against infection.

                                       58
<PAGE>

         Acquired in-process research and development for the year ended June
30, 2004 was $12.0 million. This expense was attributable to an up-front payment
that we made to Inex related to the execution of a partnership for the clinical
development of MARQIBO.

         Restructuring charge

         During the year ended June 30, 2005, we incurred charges totaling $2.1
million pertaining to a realignment of our costs through a restructuring. This
decision was based on the aforementioned increasingly competitive conditions in
the intravenous antifungal market, as well as the discontinuation of certain
research and development projects. The charges were primarily attributable to
employee termination benefits.

         Other income (expense)

         Other income (expense) for the six months ended December 31, 2005, the
six months ended December 31, 2004, and the year ended June 30, 2005 was an
expense of $9.4 million, $10.0 million and $22.2 million, respectively, as
compared to income of $0.3 million for the year ended June 30, 2004 and income
of $16.0 million for the year end June 30, 2003. Other income (expense)
includes: net investment income, interest expense, and other, net. Other income
(expense) for the year ended June 30, 2003 also included income related to a
merger termination fee.

         Interest expense was $9.8 million for the six months ended December 31,
2005, $9.9 million for the six months ended December 31, 2004 and $19.8 million
for each of the years ended June 30, 2005, 2004, and 2003. Interest expense is
related to the 4.5% convertible subordinated notes, which were outstanding for
each of the periods.

         Net investment income for the six months ended December 31, 2005
increased by $1.5 million to $3.2 million, as compared to $1.7 million for the
six months ended December 31, 2004. This increase was principally due to the
increase in interest income in our interest-bearing investments.

         Net investment income for the year ended June 30, 2005 decreased by
$9.0 million to $4.4 million, as compared to $13.4 million for the year ended
June 30, 2004. This decrease was principally due to the prior year's sale of
880,075 shares of Nektar Therapeutics common stock that resulted in the net gain
of approximately $11.0 million, recorded during the year ended June 30, 2004.
This decrease in investment income was partially offset by a $2.0 million
increase in interest income for the year ended June 30, 2005, as compared to the
year ended June 30, 2004.

         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 our investment in Nektar. The increase was partially offset
by a decrease in our interest-bearing investments as a result of the previous
year's purchase of the U.S. and Canadian 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.

         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 from NPS in the form of NPS common stock related to
the termination of our proposed merger with NPS 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).

                                       59
<PAGE>

         Other, net is primarily related to the 1.5 million shares of NPS common
stock we received under a June 2003 merger termination agreement and a financial
instrument we entered into to reduce our exposure to the change in fair value
associated with such shares, specifically a zero cost protective collar
arrangement (the Collar). For the six months ended December 31, 2005, other, net
was an expense of $2.8 million compared to an expense of $1.8 million for the
comparable prior-year period. For the year ended June 30, 2005, other, net was
an expense of $6.8 million, as compared to income of $6.7 million for the year
ended June 30, 2004. During each of the six-month periods ended December 31,
2005 and 2004, the Company sold 375,000 shares of NPS common stock it held and
375,000 shares of the Collar instrument matured. This resulted in the
recognition of losses of $3.5 million and $1.3 million as components of other
income (expense) for the six-month periods ended December 31, 2005 and 2004,
respectively. The Company received cash proceeds from the settlement of the
collar totaling $7.5 million in each of the six-month periods.

         During the year ended June 30, 2005, we realized a loss of $0.6 million
related to the sale and repurchase of 375,000 shares of NPS common stock, an
unrealized gain of $1.5 million related to change in the fair value of the
Collar, and a realized loss of $8.4 million related to the maturation of a
portion of the Collar and the sale of the underlying shares. These amounts were
partially offset by other miscellaneous non-operating income of $0.7 million for
the year ended June 30, 2005.

         For the year ended June 30, 2004, other income was $6.7 million. During
the year ended June 30, 2004, we recognized an unrealized gain of $2.3 million
related to the change in the fair value of our NPS common stock a realized gain
of $2.4 million related to the sale and repurchase of 1.1 million shares of NPS
common stock, and an unrealized gain of $1.7 million related to change in the
fair value of the Collar. There was $0.3 million of other miscellaneous
non-operating income for the year ended June 30, 2004.

         For a more detailed description of our Merger Termination Agreement
with NPS and the Collar see Note 13 to the Notes to the accompanying
Consolidated Financial Statements - Merger Termination Agreement.

         Income taxes

         For the six months ended December 31, 2005, we recognized a non-cash
net tax benefit of approximately $10.9 million for federal and state purposes,
as compared to a net tax benefit of $0.5 million for the six months ended
December 31, 2004. Income tax benefit for the six months ended December 31, 2005
is primarily the result of the Company's write-off of goodwill. A deferred tax
liability had been accreting due to goodwill being amortized for tax purposes
but not for books. This deferred tax liability is now converted into a deferred
tax asset against which a valuation allowance was established. Also, during the
six months ended December 31, 2005, we sold approximately $3.1 million of our
state net operating loss carryforwards not expected to be useable by us for
proceeds of $0.2 million (which was recorded as a tax benefit) and we recorded
state tax expense of $0.2 million and foreign tax expense of $0.1 million.

         During the year ended June 30, 2005, we recorded a non-cash charge of
$78.0 million, which represents a full reserve against our existing net deferred
tax assets of $68.2 million, a deferred tax liability charge of $10.6 million
associated with our goodwill, as well as a $0.8 million income tax provision for
the twelve months ended June 30, 2005. This charge was determined based on our
assessment of the likelihood that we will benefit from these assets. Realizing a
benefit is ultimately dependent on our ability to generate sufficient future
taxable income prior to the expiration of the tax benefits that are recognized
as deferred tax assets on our balance sheet. Based on an analysis of the
continued decline in our ABELCET revenues, coupled with projected continuing
funding of research and development, we determined that it was not more likely
than not that we would realize the tax benefits attributable to our deferred tax
assets.

         For the year ended June 30, 2004 we recognized a net tax expense of
approximately $3.2 million for federal and state purposes, as compared to net
tax expense of $0.2 million for the year ended June 30, 2003. 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
our valuation allowance for certain research and development tax credits and
capital losses based on our assessment that it was not more likely than not that
we would be able to utilize these assets. During the year ended June 30, 2004,
we sold approximately $3.2 million of our state net operating loss carryforwards
for proceeds of $0.3 million (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.

                                       60
<PAGE>

         For the year ended June 30, 2003, we recognized net tax expense of
approximately $0.2 million. 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 believed it was more likely than not that we would 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 $0.5 million (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.

LIQUIDITY AND CAPITAL RESOURCES

         Total cash reserves, including cash, cash equivalents short-term
investments, and marketable securities, as of December 31, 2005 were $226.6
million, as compared to $225.1 million as of June 30, 2005. The increase in cash
reserves is the result of net cash provided by operating activities and net
proceeds from the sale of equity securities, primarily related to the sale of
375,000 shares of NPS common stock which resulted in cash proceeds of $7.5
million offset by a $10.0 million payment to NatImmune for the execution of a
license agreement.

         During the six months ended December 31, 2005, net cash provided by
operating activities was $13.4 million compared to $17.9 million for the six
months ended December 31, 2004, down principally due to lower earnings. The
reported net loss for the six months ended December 31, 2005 of $291.3 million,
adjusted for non-cash items such as write-downs of goodwill and intangibles
impairments depreciation and amortization aggregating $300.3 million, indicates
a positive contribution to cash flows from operations of approximately $9.0
million. Net changes in operating assets and liabilities of $5.2 million and
excluding the loss of $3.5 million on the sale of an equity investment comprise
the balance. Net operating asset changes include a significant reduction in
accounts receivable due to the absence of royalty revenue in the quarter. The
$17.9 million of net cash provided by operating activities for the six months
ended December 31, 2004 was derived primarily from the reported net loss for the
period of $0.9 million adjusted for non-cash charges such as depreciation and
amortization totaling approximately $13.5 million. Net changes in operating
assets and liabilities and other items made up the remainder of cash provided by
operations.

         During the year ended June 30, 2005, net cash provided by operating
activities was $22.3 million, as compared to $37.1 million for the year ended
June 30, 2004. Cash provided by operating activities during the year ended June
30, 2005 consisted of our net loss of $89.6 million offset by a net increase in
our operating assets and liabilities of $9.6 million and non-cash reconciling
items related to (i) an increase in the valuation allowance associated with our
deferred tax assets of $79.4 million, (ii) depreciation and amortization charges
of $22.7 million, (iii) a gain recognized on the sale of equity investments of
$12.9 million, and (iv) other adjustments of $6.5 million.

         Cash provided by investing activities totaled $12.1 million for the six
months ended December 31, 2005 compared to cash used in investing activities of
$40.1 million for the six months ended December 31, 2004. During the six months
ended December 31, 2005, net activity in marketable securities was a $19.1
million cash inflow. In addition, $7.5 million was received on the sale of
375,000 shares of NPS common stock. Partially offsetting these net inflows were
expenditures for property and equipment purchases of $4.4 million and for
acquired in-process research and development of $10.0 million. Net cash used in
investing activities totaled $43.6 million for the year ended June 30, 2005, as
compared to $26.8 million for the year ended June 30, 2004. Cash used in
investing activities during the year ended June 30, 2005 consisted of net cash
used for purchases of marketable securities of $71.2 million and capital
expenditures of $3.1 million, offset in part by cash proceeds of $30.7 million
from the sale of equity securities, of which $22.5 million was related to the
sale of 1.1 million shares of NPS common stock.

                                       61
<PAGE>

         Net cash used in financing activities for the six months ended December
31, 2005 was $4.6 million, as compared to $0.3 million for the six months ended
December 31, 2004. Net cash used in financing activities for the year ended June
30, 2005 was $0.6 million, as compared to net cash provided by financing
activities of $0.5 million, for the year ended June 30, 2004. Net cash used in
financing activities for the six months ended December 31, 2005 consisted of
$4.6 million related to the redemption of a portion of our convertible notes,
offset in part by cash proceeds from common stock issued under our stock option
plans. Cash used in financing activities for the year ended June 30, 2005
consisted of $0.8 million related to the redemption of a portion of our
convertible notes, offset in part by cash proceeds of $0.2 million from common
stock issued under our stock option plans.

         As of December 31, 2005, we had $394.0 million of convertible
subordinated notes outstanding that 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 $8.9 million and $9.0 million, respectively as of December 31,
2005 and June 30, 2005. In October 2005, we redeemed approximately $5.0 million
in aggregate principal amount and accrued interest of the notes in exchange for
a cash payment of $4.7 million, which includes a principal payment of $4.6
million and accrued interest of $0.1 million. In May 2005, through a privately
negotiated transaction, we redeemed approximately $1.0 million of the notes in
exchange for a cash payment comprised of $0.8 million representing the aggregate
principal amount and $0.1 million representing accrued interest. Our Board of
Directors has authorized us to, and we may, make additional privately negotiated
repurchases of the notes from time to time at the discretion of our senior
management. For a more detailed description of the terms of our convertible
subordinated notes see "Contractual Obligations" below.

         Our current sources of liquidity are our cash reserves; interest earned
on such cash reserves; short-term investments; marketable and equity securities;
sales of ABELCET, ADAGEN, ONCASPAR and DEPOCYT; royalties earned, which are
primarily related to sales of PEG-INTRON; 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 and operational requirements for the near future; however we may
refinance or seek new financing to meet the payments due upon maturity of our
convertible subordinated notes in 2008. (See Risk Factors - "We will need to
obtain additional financing to meet our future capital needs and repay our
outstanding debt, and this financing may not be available when we need it.")

         While we believe that our current sources of liquidity will be adequate
to satisfy our capital and operational needs for the near future, we will likely
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.

                                       62
<PAGE>

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 December 31, 2005, 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 subordinated notes and
our license agreements with collaborative partners.

         As of December 31, 2005, we had $394.0 million of convertible
subordinated notes outstanding that 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 $8.9 million as of December 31, 2005 which was paid on January 3,
2006. 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. 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 November 2005, we terminated our collaboration agreement with
Micromet, various settlements were made and a note payable by Micromet to Enzon
was converted into shares of Micromet common stock. The settlements resulted in
a net cash payment by Enzon of $1.4 million, recognition of license fees of $0.8
million partially offsetting a charge to research and development expense of
$2.5 million. We had entered into the agreement with Micromet in April 2002 to
identify and develop antibody-based therapeutics. In June 2004 we amended this
agreement and extended the collaboration until September 2007. We had an
obligation to fund 50% of research and development expenses for certain
activities relating to SCA for the collaboration through September 2007.

         In August 2005, we entered into an agreement with Nektar to terminate
our joint development agreement formed in January 2003 for up to three products
using Nektar's pulmonary delivery technologies. As a result of the termination,
we have no further financial obligation to Nektar with respect to the product
development collaboration.

         Our strategic alliance with SkyePharma provides for the two companies
to combine their drug delivery technologies 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 2 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 of $5.0 million for each 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 our 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. To date, SkyePharma has not been entitled to any of the milestone payments
defined under the agreement.

                                       63
<PAGE>

         In September 2005, the Company entered into a license agreement with
NatImmune A/S (NatImmune) for NatImmune's lead development compound, recombinant
human Mannose-binding Lectin (rhMBL), a protein therapeutic under development
for the prevention of severe infections in MBL-deficient individuals undergoing
chemotherapy. Under the agreement, the Company received exclusive worldwide
rights, excluding the Nordic countries, and is responsible for the development,
manufacture, and marketing of rhMBL. The $10.0 million upfront cost of the
license agreement was charged to in-process research and development in the
three months ended September 30, 2005. The Company will be responsible for
making additional payments upon the successful completion of certain clinical
development, regulatory, and sales-based milestones. NatImmune is also eligible
to receive royalties from any future product sales of rhMBL by Enzon and retains
certain rights to develop a non-systemic formulation of rhMBL for topical
administration.

         In January 2006, we terminated our development and supply agreement
entered into in June 2003 with, and returned our rights to ATG-Fresenius S to,
Fresenius Biotech. The development and supply agreement with Fresenius Biotech
provided us with exclusive development and distribution rights in the U.S. and
Canada for a new formulation of the polyclonal antibody preparation,
ATG-Fresenius S. In September 2004, we made a milestone payment to Fresenius
Biotech of $1.0 million upon U.S. Food and Drug Administration (FDA) approval of
the first IND.

         For a transition period, we are continuing to fulfill our clinical and
regulatory obligations related to the current ongoing clinical trial for
ATG-Fresenius S and Fresenius Biotech is reimbursing us for certain costs
related to those obligations. Fresenius Biotech will be responsible for any
further clinical development activities for ATG-Fresenius S beyond the
transition period.

         In March 2005, we terminated the agreements we entered into with Inex
in January 2004 regarding the development and commercialization of Inex's
proprietary oncology product, MARQIBO. In connection with the termination, we
paid Inex a final payment of $5 million in satisfaction of all of our financial
obligations under the original agreement, including development expenses and
milestone payments.

         The Company leases three facilities in New Jersey. Future minimum lease
payments and commitments for operating leases total $14.2 million at December
31, 2005.

         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.

                                       64
<PAGE>

         The following chart represents our contractual cash obligations
aggregated by type as of December 31, 2005 (in millions):

<TABLE>
<CAPTION>
                                                                          Payments due by period
                                                           ------------------------------------------------------
                                                                        Less                             More
                                                                       than 1     1 - 3      4 - 5       than 5
Contractual Obligations and Commercial Commitments (1)      Total       Year      Years      Years       years
---------------------------------------------------        ---------  ---------  ---------  ---------  ----------
<S>                                                        <C>        <C>        <C>        <C>        <C>
Long-term debt including current portion (2)                $394.0    $    -      $394.0     $    -      $   -
Operating lease obligations                                   14.2       1.7         2.7        1.7        8.1
Inventory purchase obligations                                36.1       6.1        10.0       10.0       10.0
License fee (3)                                               35.0      35.0           -          -          -
Interest due on long-term debt                                44.3      17.7        26.6          -          -
                                                           ---------  ---------  ---------  ---------  ----------
Totals                                                      $523.6     $60.5      $433.3      $11.7      $18.1
                                                           =========  =========  =========  =========  ==========
</TABLE>

         (1) The table does not include milestone commitments of $94.0 million
that are only payable upon the occurrence of future events.

         (2) Our convertible notes are payable on July 1, 2008.

         (3) Amended agreement, effective January 1, 2006, with Sanofi-Aventis
regarding ONCASPAR.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         A critical accounting policy is one that is both important to the
portrayal of a 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 U.S. All professional
accounting standards effective as of December 31, 2005 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 and estimates have been highlighted as
significant because changes to certain judgments and assumptions inherent in
these policies could affect our consolidated financial statements.

         We base our estimates, to the extent possible, on historical
experience. Historical information is modified as appropriate based on current
business factors and various assumptions that we believe are necessary to form a
basis for making judgments about the carrying value of assets and liabilities.
We evaluate our estimates on an ongoing basis and make changes when necessary.
Actual results could differ from our estimates.

         During the six months ended December 31, 2005, accounting policies and
estimates related to revenue recognition, share-based payments, fair value of
long-lived assets and goodwill impairment had particular significance to our
financial statements and results of operations. Royalty revenue recognition will
no longer be estimated based on historical trends. New accounting policies
relating to share-based payments were adopted effective July 1, 2005, whereby
assumptions relating to the volatility of Enzon stock price and option
forfeiture rates, among others, will have an effect on compensation expense.
Independent valuations were performed of ABELCET-related intangible assets that
involved numerous assumptions and estimates including future cash flows and
discount rates. As a result of a change in segments, goodwill was allocated to
reporting units and tested for impairment which also involved an independent
valuation study. Each of these accounting policies and the estimates employed is
discussed below.

                                       65
<PAGE>

REVENUES

         Revenues from product sales and contract manufacturing revenue are
recognized when title passes to the customer, generally at the time of shipment.
For product sales we also recorded a provision at the time of shipment 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.

         The majority of our net product sales are to wholesale distributors who
resell the products to the end customers. We provide chargeback payments to
these distributors based on their sales to members of buying groups at prices
determined under a contract between Enzon and the member. Administrative fees
are paid to buying groups based on the total amount of purchases by their
members. We estimate the amount of the chargeback that will be paid using (a)
channel information obtained from certain of our wholesalers, which allows us to
determine the amount and expiry of inventory in the distribution channel, and
(b) historical trends; adjusted for current changes. The settlement of the
chargebacks generally occurs within three months after the sale to the
wholesaler. We regularly analyze the historical chargeback trends and make
adjustments to recorded reserves for changes in trends.

         In addition, state agencies that administer various programs, such as
the U.S. Medicaid programs, receive rebates. Medicaid rebates and administrative
fees are recorded as a liability and a reduction of gross sales when we record
the sale of the product. In determining the appropriate accrual amount, we use
(a) channel information obtained from certain of our wholesalers, which allows
us to determine the amount and expiry of inventory in the distribution channel,
(b) our historical Medicaid rebate and administrative fee payments by product as
a percentage of our historical sales, and (c) any significant changes in sales
trends. Current Medicaid rebate laws and interpretations, and the percentage of
our products that are sold to Medicaid patients are also evaluated. Factors that
complicate the rebate calculations are the timing of the average manufacturer
pricing computation, the lag time between sale and payment of a rebate, which
can range up to nine months, and the level of reimbursement by state agencies.

         The following is a summary of reductions of gross sales accrued as of
December 31, 2005 and June 30, 2005 (in thousands):

<TABLE>
<CAPTION>
                                           December 31, 2005         June 30, 2005
                                          --------------------     -----------------
<S>                                       <C>                      <C>
   Accounts Receivable Reductions
         Chargebacks                             $3,717                 $6,137
         Cash Discounts                             202                    265
         Other (including returns)                1,304                    840
                                          --------------------     -----------------
            Total                                $5,223                 $7,242
                                          ====================     =================
   Accrued Liabilities
         Medicaid Rebates                        $1,832                 $2,604
         Administrative Rebates                     286                    347
                                          --------------------     -----------------
            Total                                $2,118                 $2,951
                                          ====================     =================
</TABLE>


         We have inventory management agreements with three of our major
wholesalers. These agreements provide that the wholesalers maintain inventory
levels at no more than six selling weeks. During the six months ended December
31, 2005, we decreased our distribution channel estimate to reflect the
wholesaler inventory levels. This resulted in an $0.8 million reduction to our
chargeback estimates and a favorable effect on operating income for the six
months ended December 31, 2005.

                                       66
<PAGE>

         Royalties under our license agreements with third parties are
recognized when reasonably estimable and earned through the sale of the product
by the licensee net of future credits, chargebacks, sales discount rebates and
refunds and collection is reasonably assured. We have historically been able to
reasonably estimate our royalty revenue under our license arrangements
principally using historical trends. However, during recent periods, we have
observed greater fluctuations in royalty income estimates under these
arrangements. Our ability to estimate third-party licensee global net sales and
the future royalty payments to be received has become more difficult due to the
volatility that has arisen as a result of the expansion in the number of
products sold by licensees, the entry of licensees into new geographic
territories and the effects of competition on the licensees' net sales.
Royalties are a material component of our total revenues and as the timeline for
reporting of financial information shortens, the need for improved estimating
procedures has been heightened. We believe we can no longer reasonably estimate
royalty income that we have earned but that has not yet been communicated by the
third party licensee. Beginning with the quarter ended December 31, 2005,
notification from the third party licensee of the royalties earned under the
license agreement will be the basis for royalty revenue recognition. This
information is generally received from the licensees in the quarter subsequent
to the period in which the sales occur. This change resulted in a one-time
reduction in royalty revenue for the quarter ended December 31, 2005. Royalty
revenue that previously would have been recognized in the quarter ended December
31, 2005 will now be recognized upon notification from the third-party licensee,
which will be in the quarter ending March 31, 2006.

         Contract revenues, which include fees and royalties received from third
parties using our technology, 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.

INCOME TAXES

         Under the asset and liability method of 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 not more likely than not that some portion or all of the
deferred tax assets will be realized. We believe that it is not more likely than
not that our net deferred tax assets will be realized, including our net
operating losses from operating activities and stock option exercises, based on
future operations.

LONG-LIVED ASSET AND GOODWILL IMPAIRMENT ANALYSIS

         Long-lived assets, including amortizable intangible assets are tested
for impairment in accordance with the provisions of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". This testing is performed
when impairment indicators are present. We test for impairment of goodwill at
least annually in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets". More frequent analysis is performed whenever
impairment indicators suggest the need for it. Impairment indicators are events
or circumstances that may be indicative of possible impairment such as a
significant adverse change in legal factors or in business climate, a current
period operating loss combined with a history of operating losses or a
projection or forecast that demonstrates continuing losses associated with the
use of a long-lived asset, asset group or reporting unit.

         SFAS No. 144 testing for the recoverability of amortizable intangible
assets is performed initially by comparing the carrying amount of the asset to
the future undiscounted net cash flows to be generated by the assets. If the
undiscounted net cash flow stream exceeds the carrying amount, no further
analysis is required. However, if this test shows a negative relationship, the
fair value of the intangible assets must be estimated and we would record an
impairment charge for any excess of the carrying amount over the fair value.
These evaluations involve amounts that are based on management's best estimates
and judgment. Actual results may differ from these estimates.

                                       67
<PAGE>

         We determined in the December quarter of 2005, while effecting the
change in reporting segments and as the current management team was completing
its long-term strategic planning process, that an impairment indicator existed
regarding the product ABELCET. An independent valuation firm was engaged to
perform undiscounted and discounted cash flow analyses to assess whether or not
there was an impairment and, if so, the measure of the write-down. This process
required a number of estimates and assumptions including future revenues and
expenses, growth rates and discount rates. An impairment write-down was recorded
in connection with the testing outlined above. See Note 7 to the accompanying
financial statements.

         In accordance with the provisions of SFAS No. 142, goodwill and
intangible assets determined to have an indefinite useful life are not subject
to amortization but must be tested at least annually for impairment. The
impairment test involves first determining the fair value of the reporting unit
and comparing that to its carrying amount. If the carrying amount exceeds the
fair value, an impairment loss is recognized for any excess of the carrying
amount the reporting unit's goodwill over the implied fair value of that
goodwill. The implied value of the goodwill is determined in the same manner as
would occur in a purchase transaction treating the fair value of the reporting
unit as the equivalent of the purchase price and deducting from that the fair
values of tangible and intangible assets assigned to the reporting unit. This
process requires a number of estimates and assumptions including future revenues
and expenses, growth rates and discount rates.

         Effective in the quarter ended December 31, 2005, we changed the basis
upon which we report our business segments. This necessitated the allocation of
goodwill on a relative fair value basis to the newly identified reporting units
and the performance of impairment tests at that level. An independent valuation
firm was engaged to perform valuations of the reporting units, allocate goodwill
and estimate the fair value of assets using discounted cash flow analyses.
Goodwill was allocated to the Products and Contract Manufacturing segments. No
goodwill was allocated to the Royalties segment as, by the nature of the
segment's operations, goodwill would not naturally be associated with it. The
allocation process resulted in the Products reporting unit being assigned $144.0
million of goodwill and the Contract Manufacturing reporting unit receiving $7.0
million. The ensuing testing to estimate the implied fair value of goodwill
within each of the reporting units disclosed that the goodwill was impaired in
its entirety. Accordingly, an impairment loss related to goodwill was recognized
in the amount of $151.0 million in the consolidated statement of operations for
the six months ended December 31, 2005.

COST-METHOD INVESTMENTS

         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 the year ended June 30, 2005 the Company
began evaluating its investments in accordance with Emerging Issues Task Force
(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 change.

SHARE-BASED PAYMENTS

         Effective July 1, 2005, the Company adopted SFAS 123R, "Share-Based
Payment." SFAS 123R establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services and
requires that the compensation cost relating to share-based payment transactions
be recognized in the financial statements, measured by the fair value of the
equity or liability instruments issued, adjusted for estimated forfeitures.
Until we have developed sufficient reliable Enzon-specific information, we are
using an industry average for purposes of estimating forfeitures of share-based
payments. As stratified data are developed, they will be compared to the initial
average and the rate will be adjusted, as deemed necessary. The effect of
adoption of SFAS 123R was not material to the six months ended December 31,
2005. It is expected, however, that the new rules will have a material effect on
our consolidated results of operations and earnings per share in future periods
as future share-based payments are charged to operating expense. The impact such
payments will have on results of operations will be a function of the number of
shares awarded, vesting and the trading price of the Company's stock at date of
grant.

                                       68
<PAGE>

         Options or stock awards issued to non-employees and consultants are
recorded at their fair value as determined in accordance with SFAS No. 123R 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 or service period.

         Fair value of share-based payments is determined using the
Black-Scholes valuation model which employs weighted average assumptions for
expected volatility of the Company's stock, expected term until exercise of the
options, the risk free interest rate, and dividends, if any. Expected volatility
is based on historical Enzon stock price information.

         We have elected the modified prospective transition method which
requires that compensation costs be recorded, as earned, for all unvested stock
options and restricted stock awards outstanding at June 30, 2005. In April 2005,
the Board of Directors accelerated the vesting of all of the Company's
out-of-the-money unvested stock options awarded to directors, officers and
employees and, in June 2005, the Board of Directors accelerated the vesting of
unvested stock options granted in May and June 2005 to Company officers. This
acceleration resulted in our not being required to recognize aggregate
compensation expense of approximately $21.4 million over the succeeding 42
months ($5.0 million in the six months ended December 31, 2005). As of December
31, 2005, there was $1.8 million of total unrecognized compensation cost related
to unvested options that is expected to be recognized over a weighted-average
period of 43 months.

RECENTLY ISSUED ACCOUNTING STANDARDS

         In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections", which replaces APB Opinion No. 20, "Accounting Changes", and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements".
Statement 154 changes the requirements for the accounting and reporting of a
change in accounting principle. APB Opinion No. 20 previously required that most
voluntary changes in an accounting principle be recognized by including the
cumulative effect of the new accounting principle in net income of the period of
the change. SFAS No. 154 now requires retrospective application of changes in an
accounting principle to prior period financial statements, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. The Statement is effective for fiscal years beginning
after December 15, 2005. The adoption of this statement will not have an
immediate material impact on our financial statements although the accounting
change that would trigger its future implementation may be material.

         In November 2005, the FASB Staff issued Staff position (FSP) 115-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments". This document addresses the determination as to when an investment
is considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. The Staff essentially reaffirms previous
guidance relating to impairment of debt and equity securities and nullifies
certain requirements of EITF Issue 03-1 of the same title. The guidance in FSP
115-1 is effective for reporting periods beginning after December 15, 2005. Our
management does not anticipate the new guidance will have a material effect on
our consolidated results of operations or financial condition. Disclosure
requirements of EITF 03-1 carried forward into FSP 115-1 have been effective
since July 2004.

FORWARD-LOOKING INFORMATION AND FACTORS THAT MAY AFFECT FUTURE RESULTS

         Throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations, we have disclosed forward-looking information in an
attempt to better enable the reader to understand our future prospects and make
informed judgments. By their nature, forward-looking statements are subject to
numerous events and circumstances that may influence outcomes or events prevent
their occurrence. Such factors may be external to the Company and entirely
outside its control.

                                       69
<PAGE>

         Certain risks and uncertainties are listed below. It is not possible,
however to predict or identify all such factors. Accordingly, you should not
consider the examples set forth below to be complete.

The risk that:

o        We will continue to experience operating losses for the next several
         years

o        There will be a decline in sales of one or more of our marketed
         products or products sold by others from which we derive royalty
         revenues or license fees. Such sales declines could result from
         increased competition, loss of patent protection, pricing and/or
         regulatory constraints.

o        We will not achieve success in our research and development efforts
         including clinical trials conducted by us or by our collaborative
         partners.

o        We will be unable to obtain critical compounds used in the manufacture
         of our products.

o        We or one of our key suppliers will experience manufacturing problems
         or delays.

o        We will fail to obtain adequate financing to meet our future capital
         and financing needs.

o        Key personnel will leave the Company.

o        Our research and development activities will fail to yield new marketed
         products.

         We cannot guarantee that our assumptions and expectations expressed in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations will be correct. Failure of events to be achieved or of certain
underlying assumptions to prove accurate could cause actual results to vary
materially from past results and from those results anticipated or projected. We
undertake no obligation to update forward-looking statements.

More detailed Risk Factors in Item 1 A, Part I of this report.

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 equity and debt
securities, time deposits and auction rate securities. 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 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 December 31, 2005 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
December 31, 2005 (in thousands).

<TABLE>
<CAPTION>
                                 2006          2007         2008         2009         Total       Fair Value
                             ------------  ------------  -----------  -----------  -------------  ------------
<S>                          <C>           <C>           <C>          <C>          <C>            <C>
Fixed Rate                      $88,501       $35,085      $10,478      $17,150      $151,214        $150,080
Average Interest Rate             2.44%         3.50%        3.83%        4.32%         2.99%
                             ------------  ------------  -----------  -----------  -------------  ------------
                                $88,501       $35,085      $10,478      $17,150      $151,214        $150,080
                             ============  ============  ===========  ===========  =============  ============
</TABLE>

         Our 4.5% convertible subordinated notes in principal amount of $394.0
million at December 31, 2005 and $399.0 million at June 30, 2005 are due July 1,
2008 have a fixed interest rate. The fair value of the notes was approximately
$356.1 million at December 31, 2005 and $353.6 million at June 30, 2005. 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.

                                       70
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Financial statements and notes thereto appear on pages F-1 to F-47 of
this Transition Report on Form 10-K.

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

         Not Applicable.

ITEM 9A. CONTROLS AND PROCEDURES

(A)      EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

         Our management, under the direction of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of 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)) as of December
31, 2005. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective as of December 31, 2005.

(B) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING AND REMEDIATION PLANS

         There were no changes in the Company's internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act, during the three-month period ended December 31, 2005 covered by
this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.

         During the six months ended December 31, 2005, we implemented a
remediation plan to enhance our accounting department and policies and
procedures to address the material weaknesses in our internal control over
financial reporting that existed as of June 30, 2005. Our remedial plan
included:

         o        revised our policies and procedures to provide for an
                  increased level of management oversight and review with
                  respect to accounting for certain agreements with
                  third-parties;

         o        improved training, education, and revised our policies and
                  procedures to provide for an increased level of management
                  oversight with respect to the computation of our estimated
                  revenue reserves for wholesaler price adjustments; and

         o        improved training, education, supervision including the hiring
                  of additional accounting and financial personnel, to ensure
                  that all relevant financial personnel have the appropriate
                  level of technical expertise to effectively interpret and
                  apply accounting standards.

         Management is committed to monitoring its remediation plan and has
implemented the necessary enhancements to its accounting department and its
policies and procedures to fully remediate the material weaknesses mentioned
above.

(C)      MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

         It is the responsibility of the management of Enzon Pharmaceuticals,
Inc. and subsidiaries to establish and maintain effective internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).
Internal control over financial reporting is designed to provide reasonable
assurance to Enzon's management and board of directors regarding the preparation
of reliable consolidated financial statements for external purposes in
accordance with generally accepted accounting principles.

                                       71
<PAGE>

         Enzon's internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of Enzon; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of Enzon are being made only in
accordance with authorizations of management and directors of Enzon; and (iii)
provide reasonable assurance regarding the prevention or timely detection of
unauthorized acquisition, use or disposition of Enzon's assets that could have a
material effect on the consolidated financial statements of Enzon.

         Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.

         Management has performed an assessment of the effectiveness of Enzon's
internal control over financial reporting as of December 31, 2005 based upon
criteria set forth in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment, management has concluded that our internal control over
financial reporting was effective as of December 31, 2005.

         Our independent auditor, KPMG LLP, an independent registered public
accounting firm, has issued an auditors' report on our assessment of internal
control over financial reporting as of December 31, 2005. This auditors' report
follows.

<TABLE>
<CAPTION>
/s/ Jeffrey H. Buchalter                                          /s/ Craig A. Tooman
------------------------                                          ----------------------
<S>                                                               <C>
    Jeffrey H. Buchalter                                              Craig A. Tooman
    Chairman, President, and Chief Executive Officer                  Executive Vice President, Finance and
    (Principal Executive Officer)                                     Chief Financial Officer
                                                                      (Principal Financial Officer)
</TABLE>



                                       72
<PAGE>

(D)    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Enzon
Pharmaceuticals, Inc. and subsidiaries (the Company) maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.

We conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2005 and June 30, 2005, and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for the six months ended December 31, 2005 and each of the years in the
three-year period ended June 30, 2005, and our report dated March 3, 2006
expressed an unqualified opinion on those consolidated financial statements.


/s/ KPMG LLP

Short Hills, New Jersey
March 3, 2006
                                       73
<PAGE>

ITEM 9B.  OTHER INFORMATION

         None.

                                       74
<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 and Related Stockholder Matters, Item
13 - Certain Relationships and Related Transactions and Item 14 - Principal
Accountant Fees and Services is incorporated into Part III of this Transition
Report on Form 10-K by reference to the Proxy Statement for our Annual Meeting
of Stockholders scheduled to be held on May 18, 2006.


                                       75
<PAGE>

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

         (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>
            3(i)          Restated Certificate of Incorporation                                                 +
            3(ii)         By laws, as amended                                                                 (18)
            4.1           Indenture dated as of June 26, 2001, between the Company and Wilmington              (3)
                          Trust Company, as trustee, including the form of 4 1/2% Convertible
                          Subordinated Note due 2008 attached as Exhibit A thereto
            4.2           Rights Agreement dated May 17, 2002 between the Company and Continental              (5)
                          Stock Transfer Trust Company, as rights agent
            4.3           First Amendment to the Rights Agreement, dated as of February 19, 2003              (10)
                          between the Company and Continental Stock Transfer & Trust Company, as
                          rights agent
           10.1           Lease - 300-C Corporate Court, South Plainfield, New Jersey                          (1)
           10.2           Lease dated April 1, 1995 regarding 20 Kingsbridge Road, Piscataway,                 (4)
                          New Jersey
           10.3           First Amendment to Lease regarding 20 Kingsbridge Road, Piscataway, New               +
                          Jersey, dated as of November 13, 2001
           10.4           Lease 300A-B Corporate Court, South Plainfield, New Jersey                           (2)
           10.5           Modification of Lease Dated May 14, 2003 - 300-C Corporate Court, South             (11)
                          Plainfield, New Jersey
           10.6           Lease - 685 Route 202/206, Bridgewater, New Jersey                                   (6)
           10.7           2001 Incentive Stock Plan as amended**                                              (12)
           10.8           Development, License and Supply Agreement between the Company and                    (7)
                          Schering Corporation; dated November 14, 1990, as amended*
           10.9           Asset Purchase Agreement between the Company and Elan Pharmaceuticals,               (9)
                          Inc., dated as of October 1, 2002
           10.10          License Agreement between the Company and Elan Pharmaceuticals, Inc.,                (8)
                          dated November 22, 2002
           10.11          Separation Agreement with Arthur Higgins dated May 10, 2004 **                      (13)
           10.12          Development Agreement with Inex Pharmaceuticals dated January 19, 2004*             (13)
           10.13          Product Supply Agreement with Inex Pharmaceuticals dated January 19,                (13)
                          2004*
           10.14          Co-Promotion Agreement with Inex Pharmaceuticals dated January 19, 2004*            (13)
           10.15          Employment Agreement with Kenneth J. Zuerblis dated June 14, 2004,                  (14)
                          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 **
           10.16          Executive Deferred Compensation Plan **                                             (14)
           10.17          Separation Agreement with Kenneth J. Zuerblis dated April 21, 2005 **               (16)

</TABLE>

                                       76
<PAGE>


<TABLE>
<CAPTION>
         Exhibit                                                                                          Reference
         Number                                         Description                                          No.
         ------                                         -----------                                       ---------
        <S>              <C>                                                                            <C>

           10.18         Restated Executive Deferred Compensation Plan **                                     (16)
           10.19         Amendment dated June 10, 2005, to Employment Agreement between the                   (16)
                         Company and Craig A. Tooman dated January 5, 2005 **
           10.20         Form of Non-Qualified Stock Option Agreement between the Company and                 (16)
                         Craig A. Tooman **
           10.21         Amended and Restated Severance Agreement with Paul S. Davit dated May 7,             (16)
                         2004 **
           10.22         Amended and Restated Severance Agreement with Ralph del Campo dated May              (16)
                         7, 2004 **
           10.23         Outside Directors' Compensation Plan, as amended **                                    +
           10.24         Separation Agreement with Dr. Ulrich Grau dated November 24, 2004 **                 (15)
           10.25         Employment Agreement with Ivan D. Horak, M.D. dated September 2, 2005,               (17)
                         along with a form of Stock Option Award Agreement and Restricted Stock
                         Unit Award Agreement between the Company and Mr. Horak executed as of
                         September 2, 2005 *, **
           10.26         Form of Restricted Stock Unit Award Agreement for Independent Directors**            (17)
           10.27         Form of Stock Option Award Agreement for Independent Directors 1987                  (17)
                         Non-Qualified Stock Option Plan **
           10.28         Form of Stock Option Award Agreement for Independent Directors 2001                  (17)
                         Incentive Stock Plan **
           10.29         Employment Agreement with Jeffrey H. Buchalter dated December 22, 2004 **            (15)
           10.30         Employment Agreement with Craig A. Tooman dated January 5, 2005 **                   (15)
           12.1          Computation of Ratio of Earnings to Fixed Charges                                      +
           12.2          Subsidiaries of Registrant                                                             +
           23.0          Consent of KPMG LLP, Independent Registered Public Accounting Firm                     +
           31.1          Certification of Principal Executive Officer pursuant to Section                       +
                         302 of the Sarbanes-Oxley Act of 2002
           31.2          Certification of Principal Financial Officer pursuant to Section 302 of                +
                         the Sarbanes-Oxley Act of 2002
           32.1          Certification of Principal Executive Officer pursuant to Section 906 of                +
                         the Sarbanes-Oxley Act of 2002
           32.2          Certification of Principal Financial Officer pursuant to Section 906 of                +
                         the Sarbanes-Oxley Act of 2002
</TABLE>

+        Filed herewith

(1)      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.

(2)      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.

(3)      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.

(4)      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.

(5)      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.

                                       77
<PAGE>

(6)      Previously filed as an exhibit to the Company's Quarterly Report on
         Form 10-Q for the quarter ended March 31, 2002.

(7)      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.

(8)      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.

(9)      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.

(10)     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.

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

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

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

(14)     Previously filed as an exhibit to the Company's Annual Report on Form
         10-K for the fiscal year ended June 30, 2004.

(15)     Previously filed as an exhibit to the Company's Quarterly Report on
         Form 10-Q for the quarter ended December 31, 2004.

(16)     Previously filed as an exhibit to the Company's Annual Report on Form
         10-K for the fiscal year ended June 30, 2005.

(17)     Previously filed as an exhibit to the Company's Quarterly Report on
         Form 10-Q for the quarter ended September 30, 2005.

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

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

**       Management contracts or compensatory plans and arrangements required to
         be filed pursuant to Item 601(b)(10)(ii)(A) or (iii) of Regulation S-K.


                                       78
<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:  March 3, 2006
                                       By:/s/Jeffrey H. Buchalter
                                          --------------------------------------
                                            Jeffrey H. Buchalter
                                            Chairman, President and
                                            Chief Executive Officer
                                            (Principal Executive Officer)

Dated:  March 3, 2006                   By:/s/Craig A. Tooman
                                           -------------------------------------
                                           Craig A. Tooman
                                           Executive Vice President, Finance and
                                           Chief Financial Officer
                                           (Principal Financial Officer)

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Transition 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/Craig A. Tooman                       Executive Vice President, Finance             March 3, 2006
-------------------------------           and Chief Financial Officer
Craig A. Tooman                           (Principal Financial Officer)

/s/Jeffrey H. Buchalter                   Chairman of the Board                         March 3, 2006
-------------------------------
Jeffrey H. Buchalter

/s/Goran Ando                             Director                                      March 3, 2006
-------------------------------
Goran Ando

/s/Rolf A. Classon                        Director                                      March 3, 2006
-------------------------------
Rolf A. Classon

/s/Rosina Dixon                           Director                                      March 3, 2006
-------------------------------
Rosina Dixon

/s/Robert LeBuhn                          Director                                      March 3, 2006
-------------------------------
Robert LeBuhn

/s/Victor P. Micati                       Director                                      March 3, 2006
-------------------------------
Victor P. Micati

/s/Phillip M. Renfro                      Director                                      March 3, 2006
-------------------------------
Phillip M. Renfro

/s/Robert C. Salisbury                    Director                                      March 3, 2006
-------------------------------
Robert C. Salisbury

</TABLE>



                                       79
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                         Page
                                                                                                     -------------
<S>                                                                                                  <C>
Report of Independent Registered Public Accounting Firm                                                   F-2
Consolidated Financial Statements:
 Consolidated Balance Sheets - December 31, 2005 and June 30, 2005                                        F-3
 Consolidated Statements of Operations - Six months ended December 31, 2005 and years ended
    June 30, 2005, 2004 and 2003                                                                          F-4
 Consolidated Statements of Stockholders' (Deficit) Equity - Six months ended December 31,
    2005 and years ended June 30, 2005, 2004 and 2003                                                     F-5
 Consolidated Statements of Cash Flows - Six months ended December 31, 2005 and years ended
    June 30, 2005, 2004 and 2003                                                                          F-7
 Notes to Consolidated Financial Statements                                                               F-8
Consolidated Financial Statement Schedule:
 Schedule II - Valuation and Qualifying Accounts                                                          F-47

</TABLE>




                                      F-1
<PAGE>

             Report of Independent Registered Public Accounting Firm



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

We have audited the accompanying consolidated balance sheets of Enzon
Pharmaceuticals, Inc. and subsidiaries (the Company) as of December 31, 2005 and
June 30, 2005, and the related consolidated statements of operations,
stockholders' (deficit) equity and cash flows for the six months ended December
31, 2005 and each of the years in the three-year period ended June 30, 2005. In
connection with our audits of the consolidated financial statements, we also
have audited the related financial statement schedule. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and 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 December 31, 2005 and June 30,
2005, and the results of their operations and their cash flows for the six
months ended December 31, 2005 and each of the years in the three-year period
ended June 30, 2005, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related 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.

As discussed in Notes 2 and 12 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 123R,
"Share-Based Payment," as of July 1, 2005.

As discussed in Notes 2 and 7 to the consolidated financial statements, the
Company recognized non-cash charges of $151.0 million and $133.1 million for the
impairment of its goodwill and certain intangible assets, respectively, during
the six months ended December 31, 2005.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Enzon
Pharmaceuticals, Inc. and subsidiaries' internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 3,
2006 expressed an unqualified opinion on management's assessment of, and an
unqualified opinion on the effective operation of, internal control over
financial reporting.

/s/ KPMG LLP


Short Hills, New Jersey
March 3, 2006


                                      F-2
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                   December 31, 2005  June 30, 2005
                                                                                   -----------------  --------------
<S>                                                                                <C>                <C>
                                      ASSETS
Current assets:
 Cash and cash equivalents                                                             $76,497          $  55,553
 Short-term investments                                                                 88,021            103,194
 Investments in equity securities                                                        6,365              4,256
 Accounts receivable, net                                                               14,087             25,638
 Inventories                                                                            16,014             15,679
 Other current assets                                                                    6,231              9,562
                                                                                   -----------------  --------------
   Total current assets                                                                207,215            213,882

Property and equipment, net                                                             34,978             33,214
Marketable securities                                                                   62,059             66,384
Investments in equity securities                                                             -              6,375
Amortizable intangible assets, net                                                      34,154            176,142
Goodwill                                                                                     -            150,985
Other assets                                                                             2,939              3,879
                                                                                   -----------------  --------------
   Total assets                                                                       $341,345           $650,861
                                                                                   =================  ==============

                  LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
 Accounts payable                                                                      $10,039          $   9,874
 Accrued expenses                                                                       12,242             17,874
 Accrued interest                                                                        8,865              9,000
 Deferred tax liability                                                                      -              1,106
                                                                                   -----------------  --------------
   Total current liabilities                                                            31,146             37,854
                                                                                   -----------------  --------------

Deferred tax liability                                                                       -              9,860
Notes payable                                                                          394,000            399,000
Other liabilities                                                                          169                645
                                                                                   -----------------  --------------
   Total liabilities                                                                   394,169            409,505
                                                                                   -----------------  --------------
Commitments and contingencies
Stockholders' (deficit) equity:
 Preferred stock - $.01 par value, authorized 3,000,000 shares;
   no shares issued and outstanding                                                          -                  -
 Common stock - $.01 par value, authorized 90,000,000 shares;
   issued and outstanding: 43,786,786 shares at December 31, 2005
   and 43,781,487 shares at June 30, 2005                                                  438                438
 Additional paid-in capital                                                            320,557            325,825
 Accumulated other comprehensive loss                                                   (1,090)            (4,527)
 Deferred compensation                                                                       -             (5,696)
 Accumulated deficit                                                                  (403,875)          (112,538)
                                                                                   -----------------  --------------
   Total stockholders' (deficit) equity                                                (83,970)           203,502
                                                                                   -----------------  --------------
   Total liabilities and stockholders' (deficit) equity                               $341,345           $650,861
                                                                                   =================  ==============
</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
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                             Six Months               Year Ended June 30,
                                                           Ended December   -----------------------------------------
                                                              31, 2005           2005          2004          2003
                                                           ---------------  -------------  ------------  ------------
<S>                                                        <C>              <C>            <C>           <C>
Revenues:
 Product sales, net                                          $  49,436         $ 99,192       $107,922      $59,264
 Royalties                                                      17,804           51,414         48,738       78,400
 Contract manufacturing                                          6,459           15,644         12,911        8,742
                                                           ---------------  -------------  ------------  ------------
   Total revenues                                               73,699          166,250        169,571      146,406
                                                           ---------------  -------------  ------------  ------------
Costs and expenses:
 Cost of product sales and contract manufacturing               23,216           46,023         46,986       28,521
 Research and development                                       13,985           36,957         34,769       20,969
 Selling, general and administrative                            28,617           57,195         47,001       30,571
 Amortization of acquired intangibles                            6,695           13,447         13,432        9,211
 Write-down of goodwill and intangibles                        284,101                -              -            -
 Write-down of carrying value of investment                          -                -          8,341       27,237
 Acquired in-process research and development                   10,000                -         12,000            -
 Restructuring charge                                                -            2,053              -            -
                                                           ---------------  -------------  ------------  ------------
   Total costs and expenses                                    366,614          155,675        162,529      116,509
                                                           ---------------  -------------  ------------  ------------
Operating (loss) income                                       (292,915)          10,575          7,042       29,897
Other income (expense):
 Investment income, net                                          3,248            4,360         13,396        8,942
 Interest expense                                               (9,841)         (19,829)       (19,829)     (19,828)
 Merger termination fee, net                                         -                -              -       26,897
 Other, net                                                     (2,776)          (6,768)         6,776           41
                                                           ---------------  -------------  ------------  ------------
(Loss) income before income tax (benefit) provision           (302,284)         (11,662)         7,385       45,949
Income tax (benefit) provision                                 (10,947)          77,944          3,177          223
                                                           ---------------  -------------  ------------  ------------
Net (loss) income                                            $(291,337)        $(89,606)     $   4,208     $ 45,726
                                                           ===============  =============  ============  ============

(Loss) earnings per common share - basic                     $   (6.69)        $  (2.06)     $    0.10     $   1.06
                                                           ===============  =============  ============  ============

(Loss) earnings per common share - diluted                  $    (6.69)        $  (2.06)     $    0.10     $   1.05
                                                           ===============  =============  ============  ============

Weighted-average shares - basic                                 43,520           43,486         43,350       43,116
                                                           ===============  =============  ============  ============

Weighted-average shares - diluted                               43,520           43,486         43,522       43,615
                                                           ===============  =============  ============  ============
</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' (DEFICIT) EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                       Common Stock                      Accumulated
                                     --------------       Additional       Other
                                     Number of   Par       Paid-in     Comprehensive     Deferred      Accumulated
                                      Shares    Value      Capital      Income (Loss)   Compensation      Deficit      Total
                                     ---------  -----     ----------   --------------   ------------   -----------     -----
<S>                                  <C>        <C>       <C>          <C>              <C>            <C>             <C>
BALANCE, JUNE  30, 2002              43,000      $430      $262,854        $1,096        $(1,202)       $(72,683)      $190,495
Net income                                -         -             -             -              -          45,726         45,726
Other comprehensive
income, net of tax:
  Net unrealized loss on
  available-for-sale securities           -         -             -        (1,255)             -               -         (1,255)
                                                                                                                   ------------
 Total comprehensive income                                                                                              44,471
Exercise of stock options               305         3         1,370             -              -               -          1,373
Issuance of restricted stock            200         2         3,558             -         (3,560)              -              -
Conversion and redemption
  of preferred stock                     14         -           (25)            -              -               -            (25)
Amortization of deferred
  compensation                            -         -             -             -            722               -            722
Dividends on preferred stock              -         -             -             -              -            (183)          (183)
Tax benefit related to
  stock option exercises                  -         -        54,731             -              -               -         54,731
                                    ---------  --------  -----------  --------------- --------------  -----------  ------------
BALANCE, JUNE  30, 2003              43,519      $435      $322,488         $(159)       $(4,040)       $(27,140)      $291,584
Net income                                -         -             -             -              -           4,208          4,208
Other comprehensive loss,
net of tax:
  Net unrealized loss on
  available-for-sale securities           -         -             -        (7,171)             -               -         (7,171)
                                                                                                                   ------------
  Total  comprehensive loss                                                                                              (2,963)
Exercise of stock options                98         1           526             -              -               -            527
Issuance of restricted stock            340         4         4,072             -         (4,076)              -              -
Forfeiture of restricted stock         (215)       (2)       (4,478)            -          3,163               -         (1,317)
Amortization of deferred
  compensation                            -         -             -             -          1,382               -          1,382
Other                                     9         -          (122)            -              -               -           (122)
                                    ---------  --------  -----------  --------------- --------------  -----------  ------------
BALANCE, JUNE 30, 2004               43,751      $438      $322,486       $(7,330)       $(3,571)       $(22,932)      $289,091

</TABLE>


                                                                     (Continued)

                                      F-5
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                       Common Stock                       Accumulated
                                     ------------------     Additional      Other
                                     Number of     Par       Paid-in     Comprehensive     Deferred      Accumulated
                                      Shares      Value      Capital      Income (Loss)   Compensation      Deficit      Total
                                     ---------    -----     ----------   --------------   ------------   -----------     -----
<S>                                  <C>        <C>         <C>          <C>              <C>            <C>         <C>
BALANCE, JUNE 30, 2004                 43,751      $438      $322,486        $(7,330)       $(3,571)      $(22,932)     $289,091
Net loss                                    -         -             -              -              -        (89,606)      (89,606)
Other comprehensive
income, net of tax:
  Net unrealized gain on
  available-for-sale securities             -         -             -          2,803              -              -         2,803
                                                                                                                      -----------
  Total comprehensive loss                                                                                               (86,803)
Exercise of stock options                  73         -           461              -              -              -           461
Issuance of restricted stock              116         2         4,772              -         (4,774)             -             -
Forfeiture of restricted stock           (158)       (2)       (1,894)             -          1,896              -             -
Amortization of deferred
  compensation                              -         -             -              -            753              -           753
                                      ---------  --------  -----------  --------------- --------------  ------------  -----------
BALANCE, JUNE  30, 2005                43,782      $438      $325,825        $(4,527)       $(5,696)     $(112,538)     $203,502
Net loss                                    -         -             -              -              -       (291,337)     (291,337)
Other comprehensive
income, net of tax:
  Net unrealized gain on
  available-for-sale securities             -         -             -          3,437              -              -         3,437
                                                                                                                      -----------
  Total comprehensive loss                                                                                              (287,900)
Exercise of stock options                   5         -            19              -              -              -            19
Share-based payment
expense, net                                -         -           409              -              -              -           409
Elimination of deferred
compensation upon
adoption of SFAS No. 123R                   -         -        (5,696)             -          5,696              -             -
                                      ---------  --------  -----------  --------------- --------------  ------------  -----------
BALANCE DECEMBER 31, 2005              43,787      $438      $320,557        $(1,090)   $          -    $(403,875)      $(83,970)
                                      =========  ========  ===========  =============== ==============  ============  ===========
</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
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              Six Months
                                                                 Ended                  Year Ended June 30,
                                                              December 31,    --------------------------------------
Cash flows from operating activities:                            2005            2005         2004         2003
                                                            ----------------  -----------  ------------ ------------
<S>                                                         <C>               <C>          <C>          <C>
  Net (loss) income                                             $(291,337)      $(89,606)      $4,208      $45,726
  Adjustments to reconcile net (loss) income to net cash
  provided by operating activities:
    Depreciation and amortization                                  11,405         22,681       22,072       13,264
    Amortization of bond premium (discount)                           355          2,555          939       (1,261)
    Amortization of debt issue costs                                  941          1,829        1,829        1,829
    Loss (gain) on sale of equity investment                        3,470         12,913      (13,004)      (2,315)
    Loss (gain) on sale of assets                                     148             (5)           -           (3)
    Gain on redemption of notes payable                              (406)          (151)           -            -
    Deferred income taxes                                         (10,966)        79,380          488       (4,379)
    Acquired in-process research and development                   10,000              -       12,000            -
    Stock-based compensation                                          409            753          (57)         830
    Non-cash write down of goodwill and intangibles               284,101              -            -            -
    Non-cash write down of carrying value of investment                 -              -        8,341       27,237
    Change in fair value of derivative                                  -          1,463       (1,728)           -
    Non-cash merger termination fee                                     -              -            -      (34,552)
Changes in operating assets and liabilities:
  Decrease (increase) in accounts receivable, net                  11,551            339        7,196       (7,123)
  (Increase) decrease in inventories                                 (335)        (4,464)         571       (1,000)
  Decrease (increase)  in other current assets                        138         (9,507)      (1,017)       2,649
  Increase (decrease) in accounts payable                             165          1,211       (4,146)       8,283
  (Decrease) increase in accrued expenses                          (5,767)         3,873          444        6,276
  (Decrease) increase in income taxes payable                           -              -       (2,274)       2,274
  (Decrease) increase in other, net                                  (476)        (1,003)       1,229          467
                                                            ----------------  -----------  ------------ ------------
    Net cash provided by operating activities                      13,396         22,261       37,091       58,202
                                                            ----------------  -----------  ------------ ------------
Cash flows from investing activities:
  Purchase of property and equipment                               (4,444)        (3,106)      (6,430)     (11,225)
  Purchase of acquired in-process research and
    development                                                   (10,000)             -      (12,000)           -
  Acquisition of ABELCET business                                       -              -            -     (369,265)
  License of DEPOCYT product                                            -              -            -      (12,186)
  Proceeds from sale of investments in equity securities            7,481         30,647       46,923            -
  Proceeds from sale of marketable securities                      30,525         33,000       33,444      371,544
  Purchase of marketable securities                              (174,887)      (219,855)     (93,315)    (142,232)
  Maturities of marketable securities                             163,448        115,694        4,540       57,000
                                                            ----------------  -----------  ------------ ------------
    Net cash provided by (used in) investing activities            12,123        (43,620)     (26,838)    (106,364)
                                                            ----------------  -----------  ------------ ------------
Cash flows from financing activities:
  Proceeds from issuance of common stock                               19            229          527        1,265
  Redemption of notes payable                                      (4,594)          (849)           -            -
  Redemption of preferred stock                                         -              -            -          (26)
  Preferred stock dividend paid                                         -              -            -         (183)
                                                            ----------------  -----------  ------------ ------------
    Net cash (used in) provided by financing activities            (4,575)          (620)         527        1,056
                                                            ----------------  -----------  ------------ ------------
Net increase (decrease) in cash and cash equivalents               20,944        (21,979)      10,780      (47,106)
Cash and cash equivalents at beginning of period                   55,553         77,532       66,752      113,858
                                                            ----------------  -----------  ------------ ------------
Cash and cash equivalents at end of period                        $76,497        $55,553      $77,532      $66,752
                                                            ================  ===========  ============ ============
</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


(1)   COMPANY OVERVIEW

         Enzon Pharmaceuticals, Inc. (Enzon or the Company) is a
biopharmaceutical company that discovers, develops, manufactures and markets
enhanced therapeutics for life-threatening diseases through the application of
its proprietary technologies, as well as through strategic transactions and
partnerships. The Company operates in three business segments: Products,
Royalties and Contract Manufacturing. Product sales revenues are comprised of
sales of four U.S. Food and Drug Administration (FDA) approved products,
ABELCET, ADAGEN, ONCASPAR and DEPOCYT. The Company derives income from royalties
and license fees on sales of products by other firms that use our proprietary
PEGylation technology, including PEG-INTRON, marketed by Schering-Plough
Corporation (Schering-Plough) and MACUGEN, marketed by OSI Pharmaceuticals, Inc.
and Pfizer Inc. The Company manufactures ABELCET for export and MYOCET for
Zeneus Pharma Ltd. (Zeneus) and the injectable multivitamin, MVI(R) for Mayne
Group Limited (Mayne) in our contract manufacturing operations. Expenditures
include the development of additional products under various stages of
development, as well as costs related to the sales and manufacture of products.

         Prior to the quarter ended December 31, 2005, the Company was managed
and operated as one business segment. All prior-period information has been
restated to reflect the new operating structure. See Note 21 for more
information regarding the Company's segments.

         Effective December 31, 2005, the Company changed its fiscal year end
from June 30 to December 31 in order to better align with the industry.
Accordingly, this transition report and the discussion that follows relate to
the six months ended December 31, 2005 and the three years ended June 30, 2005.

         In addition to the changes in segments and the fiscal year-end, the
Company effected the following additional changes during the six-month period
ended December 31, 2005: initiated a delay in royalty revenue recognition to
base it on actual amounts rather than estimates based on historical data;
recognized an impairment of certain long-lived intangible assets; recognized an
impairment of goodwill; and adopted new accounting rules related to cost
recognition of share-based compensation. These significant events are described
in detail in the notes that follow.

         The Company's business is subject to significant risks including, but
not limited to, (i) its ability to obtain funding, (ii) its uncertainty of
future profitability, (iii) the risks inherent in its clinical development
efforts, (iv) uncertainties associated with obtaining and enforcing its patents,
(v) uncertainties associated with utilizing and licensing the patent rights of
others, (vi) the lengthy, expensive and uncertain process of seeking regulatory
approvals, (vii) uncertainties regarding government reforms and product pricing
and reimbursement levels, (viii) technological change and competition, (ix)
manufacturing uncertainties, (x) dependence on collaborative partners and other
third-parties, (xi) concentration of revenue sources within a small number of
products, and (xii) limited distribution capabilities.

(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.


                                      F-8
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      USE OF ESTIMATES

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (U.S.) 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.

      FINANCIAL INSTRUMENTS

         The carrying values of cash and cash equivalents, short-term
investments, accounts receivable, other current assets, accounts payable,
accrued expenses and accrued interest, included in the Company's consolidated
balance sheets approximated their fair values at December 31, 2005 and June 30,
2005 due to their short-term nature. Marketable securities are carried on the
consolidated balance sheet at fair value based on quoted market prices. See Note
13 regarding derivative instruments. The carrying values of cost-method
investments in equity securities were $6.4 million and $10.6 million as of
December 31, 2005 and June 30, 2005, respectively. The fair values of these
investments in equity securities were $16.8 million and $21.4 million as of
December 31, 2005 and June 30, 2005, respectively. The carrying values of notes
payable were $394.0 million and $399.0 million as of December 31, 2005 and June
30, 2005, respectively. The fair values of notes payable were $356.1 million and
$353.6 million as of December 31, 2005 and June 30, 2005, respectively.

      CASH EQUIVALENTS

         The Company considers all highly liquid debt instruments with remaining
maturities at the date acquired not exceeding three months to be cash
equivalents. Cash equivalents consist primarily of money market funds. As of
December 31, 2005 and June 30, 2005, the Company held $71.2 million and $50.3
million, respectively, of cash equivalents.

       SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES

         The Company classifies its investments in marketable equity securities
and debt securities, including auction rate securities as available-for-sale.
The Company classifies those investments with maturities of one year or less as
current assets and investments in debt securities with maturities greater than
one year and marketable equity securities as non-current assets when it has the
intent and ability to hold such securities for at least one year. Debt and
marketable equity securities are carried at fair value, with the unrealized
gains and losses (which are deemed to be temporary), net of related tax effect,
included in the determination of other comprehensive income (loss) and reported
in stockholders' (deficit) equity. The fair value of substantially all
securities is determined by quoted market prices.

         The Company holds auction rate securities for which interest or
dividend rates are generally reset for periods of up to 90 days. The auction
rate securities outstanding at December 31, 2005 were investments in state
government bonds and corporate securities. At December 31, 2005, the Company
held auction rate securities with contractual maturities between 2008 and 2009.

         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 investment income, net. The cost of
securities is based on the specific identification method.

                                      F-9
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Investments are considered impaired when a decline in fair value is
determined to be other-than-temporary. The Company employs a systematic
methodology that considers available evidence in evaluating potential impairment
of its investments in accordance with Emerging Issues Task Force (EITF) Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" (EITF 03-1). In the event that the cost of an investment
exceeds its fair value, the Company evaluates, among other factors, the duration
and extent to which the fair value is less than cost; the financial health of
and business outlook for the issuer of the investment; and the Company's intent
and ability to hold the investment. The Company has determined that there were
no other-than-temporary declines in the fair values of its short-term
investments and marketable securities as of December 31, 2005 and June 30, 2005.

         The following table shows the gross unrealized losses and fair value of
the Company's available-for-sale securities (both short-term and long-term)
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at December 31, 2005 (in
thousands):

                                   Less than 12 months      12 Months or Greater
                                  -----------------------  ---------------------
                                    Fair      Unrealized    Fair     Unrealized
                                   value         loss       value       loss
                                  -----------------------  ---------------------
  U.S. Government agency debt(1)   $22,302        $(148)    $31,494      $(516)
  U.S. corporate debt(2)            32,060         (190)     30,086       (288)
                                  -----------------------  ---------------------
    Total                          $54,362        $(338)    $61,580      $(804)
                                  =======================  =====================

(1) U.S. Government agency debt. The unrealized losses of $664,000 in the U.S.
Government agencies and Federal agency mortgage-backed securities were
attributable to increases in interest rates. These holdings do not permit the
issuer to settle the securities at a price less than the amortized cost.
Further, because the declines in market value are due to increases in interest
rates and not the credit quality of the issuer, and the Company has the ability
and the intent to hold these investments until a recovery of fair value, the
Company does not consider its investments in U.S. Government agency debt to be
other-than-temporarily impaired at December 31, 2005.

(2) U.S. corporate debt. The unrealized losses of $478,000 on the U.S. corporate
debt were attributable to increases in interest rates, as well as bond pricing.
The Company invests in bonds that are rated A1 or better, as dictated by its
investment policy. Since the changes in the market value of these investments
are due to changes in interest rates and not the credit quality of the issuer,
and the Company has the ability and intent to hold these investments until
recovery of the fair value, the Company does not consider its investments in
U.S. corporate debt to be other-than-temporarily impaired at December 31, 2005.

                                      F-10
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The amortized cost, gross unrealized holding gains or losses, and fair
value for securities available-for-sale by major security type at December 31,
2005 were as follows (in thousands):


<TABLE>
<CAPTION>
                                                                Gross             Gross
                                             Amortized        Unrealized        Unrealized           Fair
                                               Cost         Holding Gains     Holding Losses        Value*
                                           --------------  ----------------  -----------------   -------------
<S>                                        <C>             <C>               <C>                <C>
U.S. Government agency debt                  $  59,458             $2             $   (664)        $  58,796
U.S. corporate debt                             72,606              3                 (478)           72,131
Auction rate securities                         19,150              3                    -            19,153
                                           --------------  ----------------  -----------------   -------------
                                             $ 151,214             $8              $(1,142)         $150,080
                                           ==============  ================  =================   =============
</TABLE>

* Included in short-term investments $88,021 and marketable securities
  $62,059 at December 31, 2005.

         The amortized cost, gross unrealized holding gains or losses, and fair
value for securities available-for-sale by major security type at June 30, 2005
were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                Gross             Gross
                                             Amortized       Unrealized         Unrealized           Fair
                                               Cost         Holding Gains     Holding Losses        Value*
                                           --------------  ----------------  -----------------   -------------
<S>                                        <C>             <C>               <C>                 <C>
U.S. Government agency debt                  $  98,417         $      -          $   (536)         $  97,881
U.S. corporate debt                             62,182                -              (510)            61,672
Auction rate securities                         10,025                -                 -             10,025
                                           --------------  ----------------  -----------------   -------------
                                              $170,624         $      -           $(1,046)          $169,578
                                           ==============  ================  =================   =============
</TABLE>

* Included in short-term investments $103,194 and marketable securities
  $66,384 at June 30, 2005.

         Maturities of debt and marketable equity securities classified as
available-for-sale at December 31, 2005 were as follows (in thousands):

           Year ended December 31,        Amortized Cost         Fair Value
           -----------------------       -----------------    -----------------

           2006                              $  88,501            $  88,021
           2007                                 35,085               34,557
           2008                                 10,478               10,352
           2009                                 17,150               17,150
                                         -----------------    -----------------
                                              $151,214             $150,080
                                         =================    =================

         Gross realized gains (losses) from the sale of short-term investments,
marketable securities and equity securities included in net (loss) income for
the six months ended December 31, 2005 and the years ended June 30, 2005, 2004
and 2003 were a loss of $3.5 million, a loss of $12.9 million, a gain of $13.0
million and a gain of $2.3 million, respectively.

                                      F-11
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      INVESTMENTS IN EQUITY SECURITIES

         As of December 31, 2005, the Company's investments in equity securities
are comprised of a cost-method investment in Nektar Therapeutics (Nektar). At
December 31, 2005 the Company's investment in Nektar was in the form of
preferred stock that automatically converted into 1,023,292 shares of Nektar
common stock on January 9, 2006. As of December 31, 2005 and June 30, 2005, the
Company's investment in Nektar had an aggregate book value of $6.4 million and
$6.4 million, respectively. At June 30, 2005, the Company's investment in equity
securities also included an investment in NPS Pharmaceuticals, Inc. (NPS) common
stock. The Company's investment in NPS common stock was recorded at its fair
value and unrealized gains or losses are reflected in accumulated other
comprehensive (loss) income. During August 2005, the Company sold its remaining
investment in NPS common stock, which resulted in the recognition of a $3.5
million loss as a component of other income (expense) in the statement of
operations and cash proceeds of $7.5 million. See Note 13.

         The Company's consolidated statements of operations for the years ended
June 30, 2004 and 2003 include charges of $8.3 million and $27.2 million, to
establish new cost bases for its investments in Micromet AG (Micromet) and
Nektar, respectively, due to declines in fair value that were determined to be
other-than-temporary. There were no impairment charges related to equity
securities recognized during the six months ended December 31, 2005 or the year
ended June 30, 2005. The Company realized a net gain of $11.0 million for the
year ended June 30, 2004 related to the partial sale of Nektar convertible
preferred stock. See Note 15.

      DERIVATIVE FINANCIAL INSTRUMENTS

         The Company addresses certain financial exposures through a controlled
program of risk management that, at times, included the use of derivative
financial instruments. The Company does not use derivative financial instruments
for trading or speculative purposes. The Company accounts for derivative
financial instruments in accordance with Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended, and as such, the Company periodically measures the fair
value and recognizes the derivative as an asset or a liability in the
consolidated balance sheets. The Company records the changes in fair value as
other income (expense) in the consolidated statements of operations. At June 30,
2005, the Company maintained a Zero Cost Protective Collar (the Collar)
arrangement in a derivative financial instrument. See Note 13. At December 31,
2005, the Company no longer holds any portion of the Collar.

      REVENUE RECOGNITION

         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. Revenues
from product sales and contract manufacturing are recognized when title passes
to the customer, generally at the time of shipment. For product sales, a
provision is made at the time of shipment for estimated future credits,
chargebacks, sales discounts, rebates, returns (estimates of these adjustments
are based on historical trends) and distribution service fees. As of December
31, 2005, the Company had entered into distribution service agreements with
three of its largest wholesalers. The Company pays these wholesalers a fixed
percentage of revenue in exchange for certain distribution-related services.

         Royalty revenue from the Company's agreements with third parties is
recognized when the Company can reasonably estimate the amounts earned. Prior to
October 1, 2005, royalties under the Company's license agreements with third
parties were recognized when earned through the sale of product by the licensee
as management was able to reasonably estimate the amount earned by the Company
net of licensee adjustments in arriving at net sales. During the quarter ended
December 31, 2005, management determined that historical patterns and
preliminary data from licensees were no longer sufficiently reliable for
purposes of estimating royalty revenue. Royalties are a material component of
the Company's total revenue and estimation errors could potentially be
significant to reported operating results. Preliminary data received from
licensees does not incorporate all adjustments needed to arrive at the Company's
royalty revenue, resulting in the need for the Company to make adjustments based
on historical data. Because of the influence of competition, the potential

                                      F-12
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


exists for increased volatility in historical patterns upon which estimates had
been made. Coupled with this factor is the requirement to prepare and file the
Company's financial statements on an accelerated basis. As a result, the Company
will now recognize royalty revenue when actual amounts are known rather than
recognizing royalty revenue on the basis of estimates. In most cases, this will
be upon notification from the third-party licensee which is typically one
quarter following the quarter in which the sales occurred. The Company does not
participate in the selling or marketing of products for which it receives
royalties.

         In accordance with Staff Accounting Bulletin (SAB) 104, "Revenue
Recognition," up-front 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.

      ACCOUNTS RECEIVABLE

         The Company records its allowance for doubtful accounts by applying
historical collection percentages to its aged accounts receivable balances. The
Company ages its accounts receivable based on its terms of sales. The allowance
for doubtful accounts at December 31, 2005 was $71,000. Prior period allowances
were zero. Historically, bad debts have been minimal.

      ACCRUALS FOR MEDICAID REBATES, RETURNS, CHARGEBACKS AND DISTRIBUTION
      SERVICE FEES

         With respect to accruals for estimated Medicaid rebates, the Company
evaluates its historical rebate payments by product as a percentage of
historical sales. This information is used to estimate the proportion of revenue
that will result in a rebate. At the time of rebate payments, which occur after
the related sales, the Company records a reduction to accrued expenses and, at
the end of each quarter, adjusts accrued expenses for any differences between
estimated and actual payments. Product returns are accrued based on historical
experience, projected future prescriptions of the products using historical
prescription data and the amount and expiry of inventory estimated to be in the
distribution channel, based on information obtained from the Company's major
customers. Chargeback accruals are based on an estimate of claims not yet
submitted by customers, using historical trends and market share data as well as
the Company's estimate of inventory in the distribution channel based on
information obtained from its major customers. In all cases, judgment is
required in estimating these reserves and actual claims for rebates, returns and
chargebacks could be materially different from the estimates. At December 31,
2005, the Company had entered into distribution service agreements with three of
its largest wholesalers. The Company pays these wholesalers a fixed percentage
of revenues in exchange for certain distribution related services. This expense
is accrued at the time of sale to the wholesaler and results in a reduction of
the net revenues recorded by the Company.

         These sales provision accruals, except for rebates which are recorded
as a liability, are presented as a reduction of the accounts receivable balance
and totaled $5.2 million, including $3.7 million in reserves for chargebacks, as
of December 31, 2005. At June 30, 2005 these sales provision accruals totaled
$7.2 million, including $6.1 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.

      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-13
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Depreciation of fixed assets
is provided by the straight-line method over the estimated useful lives of the
assets. 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.

      LONG-LIVED ASSETS  AND GOODWILL

         Long-lived assets, including amortizable intangible assets are tested
for impairment in accordance with the provisions of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". This testing is performed
when impairment indicators are present. The Company tests for impairment of
goodwill at least annually in accordance with the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets". More frequent analysis is performed
whenever impairment indicators suggest the need for it or the components of the
Company's segments or reporting units change. Impairment indicators are events
or circumstances that may be indicative of possible impairment such as a
significant adverse change in legal factors or in business climate, a current
period operating loss combined with a history of operating losses or a
projection or forecast that demonstrates continuing losses associated with the
use of a long-lived asset.

         SFAS No. 144 testing for the recoverability of amortizable intangible
assets is performed initially by comparing the carrying amount of the asset to
the future undiscounted net cash flows to be generated by the assets. If the
undiscounted net cash flow stream exceeds the carrying amount, no further
analysis is required. However, if this test shows a negative relationship, the
fair value of the intangible assets must be estimated and the Company would
record an impairment charge for any excess of the carrying amount over the fair
value. These evaluations involve amounts that are based on management's best
estimates and judgment. Actual results may differ from these estimates.

         While effecting the change in reporting segments and completing its
strategic planning process in the quarter ended December 31, 2005, the Company
determined, that an impairment indicator existed regarding the product ABELCET.
It was determined that the estimated future undiscounted cash flows for ABELCET
were less than the carrying amount of ABELCET assets. An independent valuation
firm was engaged to perform discounted cash flow analyses to assess whether or
not there was an impairment and, if so, the measure of the fair value of the
ABELCET-related assets. An impairment charge was recorded in connection with the
testing outlined above. See Note 7.

         In accordance with the provisions of SFAS No. 142, goodwill and
intangible assets determined to have an indefinite useful life are not subject
to amortization but must be tested at least annually for impairment. The
impairment test involves first determining the fair value of the reporting unit
and comparing that to its carrying amount. If the carrying amount exceeds the
fair value, an impairment loss is recognized for any excess of the carrying
amount the reporting unit's goodwill over the implied fair value of that
goodwill. The implied value of the goodwill is determined in the same manner as
would occur in a purchase transaction treating the fair value of the reporting
unit as the equivalent of the purchase price and deducting from that the fair
values of tangible and intangible assets assigned to the reporting unit.

                                      F-14
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Effective in the quarter ended December 31, 2005, the Company changed
the basis upon which it reports its business segments; the Company determined
that its reporting units were the same as its segments. This change necessitated
the allocation of goodwill to the newly identified reporting units on a relative
fair value basis. The Company considered the historical declining performance of
the ABELCET products and the impairment recognized to the related intangible
assets to be indicators that the Product Segment goodwill may be impaired. An
independent valuation firm was engaged to perform valuations of the reporting
units to assist the Company with the allocation of goodwill to the Products and
Contract Manufacturing segments, and estimate the fair value of assets using
discounted cash flow analyses. These valuations and tests disclosed that
goodwill was impaired. Refer to Note 21 for discussion of the change in
reporting segments and Note 7 for a more detailed analysis of the impairment.

      DEFERRED FINANCING COSTS

         Costs incurred in securing the Company's notes payable have been
recorded as deferred financing costs and are included within the balance of
other assets and other current assets in the accompanying consolidated balance
sheets. Such amounts are being amortized using the straight-line method, which
approximates the effective interest method, over the terms of the related
financing. The amortization of deferred financing costs is included in interest
expense in the accompanying consolidated statements of operations.

      ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

         Costs to acquire in-process research and development projects and
technologies that have no alternative future use at the date of acquisition are
expensed as incurred.

      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 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 or laws on deferred
tax assets and liabilities is recognized in operations in the period that
includes the enactment date of the rate change. A valuation allowance is
established to reduce the deferred tax assets to the amounts expected to be
realized.


                                      F-15

<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      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 the impact of foreign currency transaction gains of
$110,000, gains of $39,000 and losses of $57,000 for the six months ended
December 31, 2005 and the years ended June 30, 2005 and 2004, respectively.
There were no gains or losses from foreign currency transactions for the year
ended June 30, 2003. Gains and losses from foreign currency transactions are
included as a component of other income (expense).

      CONCENTRATIONS OF RISK

         A significant portion of the Company's product sales are to wholesalers
in the pharmaceutical industry. The Company monitors the creditworthiness of
customers to whom it grants credit terms and has not experienced significant
credit losses. The Company does not normally require collateral or any other
security to support credit sales.

         The Company's top three wholesalers accounted for 50%, 59%, 69% and 45%
of gross product sales for the six months ended December 31, 2005 and for the
years ended June 30, 2005, 2004, and 2003, respectively, and 28% and 25% of the
gross accounts receivable balance at December 31, 2005 and June 30, 2005,
respectively.

         The Company's holdings of financial instruments are comprised of equity
and debt securities and time deposits. The Company does not invest in portfolio
equity securities or commodities or use financial derivatives for trading
purposes. The Company seeks 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. The Company's market
risk exposure consists principally of exposure to changes in interest rates. The
Company's holdings also are exposed to the risks of changes in the credit
quality of issuers. The Company typically invests the majority of its
investments in the shorter-end of the maturity spectrum, and at December 31,
2005 all of its holdings were in instruments maturing in four years or less.

      SHARE-BASED COMPENSATION PLANS

         In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment",
which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and
supersedes Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123R requires all share-based payments to
employees to be recognized in the financial statements based on their fair
values beginning with the first annual reporting period that begins after June
15, 2005. Under SFAS No. 123R, the pro forma disclosures previously permitted
under SFAS No. 123 are no longer an alternative to financial statement
recognition.

         The Company adopted SFAS No. 123R effective July 1, 2005, which
requires that the costs resulting from all share-based payment transactions be
recognized in the financial statements at their fair values. The Company adopted
SFAS No. 123R using the modified prospective application method under which the
provisions of SFAS No. 123R apply to new awards and to awards modified,
repurchased, or cancelled after the adoption date. Additionally, compensation
cost for the portion of the awards for which the requisite service has not been
rendered that are outstanding as of the adoption date is recognized in the
consolidated statement of operations in research and development and selling,
general and administrative expenses over the remaining service period after the
adoption date based on the award's original estimate of fair value (in the case
of options, based on the Company's original estimate of fair value, and in the
case of restricted stock and restricted stock units (RSUs), based on the closing
price of the Company's common stock on the date of issuance). Results for prior
periods have not been restated.


                                      F-16
<PAGE>



                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         In connection with the adoption of SFAS No. 123R, the deferred stock
compensation at June 30, 2005 of $5.7 million relating to previous grants of
restricted stock was offset against additional paid-in capital during the
quarter ended September 30, 2005.

         As a result of adopting SFAS No. 123R, the Company's loss before income
tax benefit and net loss for the six months ended December 31, 2005 were
$410,000 less than if it had continued to account for share-based compensation
under APB 25. Basic and diluted loss per share for the six months ended December
31, 2005 would have been $(6.70) compared to reported basic and diluted loss per
share of $(6.69).

         On November 10, 2005, the FASB issued FASB Staff Position (FSP)
123(R)-3. "Transition Election Related to Accounting for the Tax Effects of
Share-based Payment Awards," that provides an elective alternative transition
method of calculating the pool of excess tax benefits available to absorb tax
deficiencies recognized subsequent to the adoption of SFAS 123R (APIC Pool) to
the method otherwise required by paragraph 81 of SFAS 123R. The Company may take
up to one year from the effective date of this FSP to evaluate its available
alternatives and make its one-time election. The Company is currently evaluating
the alternative methods. Until and unless the Company elects the transition
method described in this FSP, the Company will follow the transition method
described in paragraph 81 of SFAS No. 123R.

         Prior to the adoption of SFAS No. 123R, the Company presented all tax
benefits of deductions resulting from the exercise of stock options as operating
cash flows in the consolidated statement of cash flows. SFAS No. 123R requires
the cash flows resulting from tax benefits resulting from tax deductions in
excess of the compensation cost recognized for those options (excess tax
benefits) to be classified as financing cash flows. For the six months ended
December 31, 2005, there was no tax benefit resulting from share-based
compensation cost.

          Prior to the adoption of SFAS No. 123R, the Company applied the
intrinsic-value-based method of accounting prescribed by APB 25, and related
interpretations, to account for its stock options granted to employees. Under
this method, compensation cost was recorded only if the market price of the
underlying stock on the date of grant exceeded the exercise price. SFAS No. 123
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As permitted
by SFAS No. 123, the Company elected to apply the intrinsic-value-based method
of accounting described above, and adopted only the disclosure requirements of
SFAS No. 123, as amended.


                                      F-17
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The following table illustrates the pro forma effect on the Company's
net (loss) income and net (loss) income per share as if the Company had adopted
the fair-value-based method of accounting for stock-based compensation under
SFAS No. 123 for the years ended June 30, 2005, 2004 and 2003 (in thousands
except per-share amounts) In computing the pro forma amounts, option forfeitures
were accounted for as they occurred and no amounts of compensation expense have
been capitalized into inventory or other assets, but instead are considered
period expenses in the pro forma amounts:

<TABLE>
<CAPTION>
                                                                               Year ended June  30,
                                                                      ---------------------------------------
                                                                          2005          2004         2003
                                                                      ------------  ------------  -----------

<S>                                                                    <C>            <C>          <C>
Net (loss) income
 As reported                                                           $  (89,606)    $   4,208    $  45,726
 Add stock-based employee compensation expense included in
   reported net (loss) income, net of tax (1)                                 755           328          433

 Deduct total stock-based employee compensation expense
   determined under fair-value-based method for all awards,
   net of tax (1)                                                         (27,680)      (11,436)      (8,933)
                                                                       ----------     ---------    ---------

Pro forma net (loss) income                                            $ (116,531)    $  (6,900)   $  37,226
                                                                       ==========     =========    =========
Net (loss) income per common share-basic:
 As reported                                                           $    (2.06)    $    0.10    $    1.06
 Pro forma                                                             $    (2.68)    $   (0.16)   $    0.86
Net (loss) income per common share-diluted:
 As reported                                                           $    (2.06)    $    0.10    $    1.05
 Pro forma                                                             $    (2.68)    $   (0.16)   $    0.85
</TABLE>

(1) Information for 2005 has not been tax-effected as a result of the Company's
net operating loss position and related valuation allowance in that year.
Information for 2004 and 2003 has been adjusted for taxes using estimated tax
rates of 35% and 40%, respectively.

         The weighted-average fair value per share was $5.75, $8.10 and $12.50
for stock options, as if accounted for under SFAS No. 123 and granted in fiscal
years ended June 30, 2005, 2004 and 2003, 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:

<TABLE>
<CAPTION>
                                                                           Year ended June  30,
                                                                    -----------------------------------
                                                                        2005        2004         2003
                                                                    -----------  ----------  ----------

<S>                                                                     <C>          <C>         <C>
Risk-free interest rate                                                 3.63%        4.00%       2.97%
Expected stock price volatility                                           58%          69%         75%
Expected term until exercise (years)                                    5.18         4.73        4.21
Expected dividend yield                                                    0%           0%          0%
</TABLE>



                                      F-18
<PAGE>



                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Expected volatility is based on historical volatility of the Company's
common stock; the expected term until exercise represents the weighted average
period of time that options granted are expected to be outstanding giving
consideration to vesting schedules and our historical exercise patterns; and the
risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant for periods corresponding with the expected life of the
option.

CASH FLOW INFORMATION

         Cash payments for interest were approximately $9.0 million for the six
months ended December 31, 2005 and $18.0 million for each of the years ended
June 30, 2005, 2004 and 2003, respectively. There were $182,000, $632,000, $3.8
million and $2.1 million of income tax payments made for the six months ended
December 31, 2005 and the years ended June 30, 2005, 2004, and 2003,
respectively.

      RECLASSIFICATIONS

         Certain amounts previously reported have been reclassified to conform
to the six-month period ended December 31, 2005 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 (loss)
income and net unrealized gain (loss) on available-for-sale securities and is
presented in the consolidated statements of stockholders' (deficit) equity.

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

<TABLE>
<CAPTION>
                                                Six Months
                                                   Ended                   Year Ended June  30,
                                                December 31,     -----------------------------------------
                                                    2005             2005          2004          2003
                                                ---------------  ------------  ------------  -------------

<S>                                               <C>             <C>             <C>           <C>
Net (loss) income                                 $(291,337)      $(89,606)       $4,208        $45,726
                                                ---------------  ------------  ------------  -------------
 Other comprehensive income (loss):
 Unrealized gain (loss) on securities that
 arose during the year, net of tax (1)                6,897         (5,886)       (4,651)         1,007
 Reclassification adjustment for (loss)
 gain included in net (loss) income, net
 of tax (1)                                          (3,460)         8,689        (2,520)        (2,262)
                                                ---------------  ------------  ------------  -------------
                                                      3,437          2,803        (7,171)        (1,255)
                                                ---------------  ------------  ------------  -------------
Total comprehensive (loss) income                 $(287,900)      $(86,803)      $(2,963)       $44,471
                                                ===============  ============  ============  =============
</TABLE>

(1)  Information for the six months ended December 31, 2005 and the year ended
     June 30, 2005 has not been tax-effected as a result of the Company's net
     operating loss position and related valuation allowance in those periods.
     Information for the years ended June 30, 2004 and 2003 have been adjusted
     for income taxes using estimated effective tax rates of 35% and 40%,
     respectively.


                                      F-19
<PAGE>



                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(4) EARNINGS PER COMMON SHARE

         Basic earnings per share is computed by dividing the net (loss) income
available to common stockholders adjusted for cumulative undeclared preferred
stock dividends for the relevant period, by the weighted average number of
shares of common stock outstanding during the period. Restricted stock awards
are considered to be issued and outstanding shares of common stock at the time
they are granted and throughout their vesting period. Restricted stock units are
not considered to be outstanding shares until the service vesting period has
been completed and the underlying shares of common stock are actually issued.
For purposes of calculating diluted (loss) income per share, the denominator
includes both the weighted average number of shares of common stock outstanding
and the number of dilutive common stock equivalents if the inclusion of such
common stock equivalents was not anti-dilutive. The number of dilutive common
stock equivalents includes the effect of non-qualified stock options calculated
using the treasury stock method and, for the fiscal year ended June 30, 2003,
the number of shares issuable upon conversion of the Series A preferred stock
that were outstanding. There was no Series A preferred stock outstanding as of
December 31, 2005 or June 30, 2005, 2004 or 2003. The number of shares issuable
upon conversion of the Company's 4.5% convertible subordinated notes due 2008
and the impact of the vesting of certain restricted stock, restricted stock
units and certain stock options using the treasury stock method have not been
included as the effect of their inclusion would be antidilutive. As of December
31, 2005 and, June 30, 2005, 2004 and 2003, the Company had 12.5 million, 11.7
million, 9.6 million and 6.5 million potentially dilutive common shares
outstanding, respectively.

         The following table represents the reconciliation of the numerators and
denominators of the basic and diluted (loss) income per share computations for
net (loss) income available for common stockholders for the six months ended
December 31, 2005 and the years ended June 30, 2005, 2004 and 2003 (in
thousands):

<TABLE>
<CAPTION>
                                                           Six Months
                                                              Ended             Year ended June  30,
                                                           December 31,   ----------------------------------
                                                              2005          2005        2004        2003
                                                         ---------------  ----------  ----------  ----------

<S>                                                         <C>             <C>          <C>        <C>
Net (loss) income                                           $(291,337)      $(89,606)    $4,208     $45,726
Less: preferred stock dividends                                     -              -          -          11
                                                         ---------------  ----------  ----------  ----------
Net (loss) income available to common stockholders          $(291,337)      $(89,606)    $4,208     $45,715
                                                         ---------------  ----------  ----------  ----------

Weighted average number of common shares issued
and outstanding - Basic                                        43,520         43,486     43,350      43,116
Effect of dilutive common stock equivalents:
 Conversion of preferred stock                                      -              -          -          13
 Exercise of stock options                                          -              -        172         486
                                                         ---------------  ----------  ----------  ----------
Weighted average number of common shares - Diluted             43,520         43,486     43,522      43,615
                                                         ===============  ==========  ==========  ==========
</TABLE>



                                      F-20
<PAGE>



                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(5) INVENTORIES

         Inventories, net of reserves consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 At December 31,  At June 30,
                                                                      2005            2005
                                                               ------------------ --------------
<S>                                                                 <C>              <C>
Raw materials                                                        $6,695           $6,406
Work in process                                                       3,282            1,349
Finished goods                                                        6,037            7,924
                                                               ------------------ --------------
                                                                    $16,014          $15,679
                                                               ================== ==============
</TABLE>

(6) PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                         At December 31,      At June 30,            Estimated
                                              2005               2005                Useful lives
                                        -----------------  -----------------      ------------------
<S>                                           <C>               <C>
Land                                           $1,500            $1,500
Building                                        4,800             4,800                     7 years
Leasehold improvements                         20,113            17,822                  3-15 years*
Equipment                                      27,044            26,215                   3-7 years
Furniture and fixtures                          3,151             2,737                     7 years
Vehicles                                           38                38                     3 years
                                        -----------------  -----------------
                                               56,646            53,112
Less: Accumulated depreciation                 21,668            19,898
                                        -----------------  -----------------
                                              $34,978           $33,214
                                        =================  =================
</TABLE>

    * Shorter of the lease term or lives indicated

         During the six months ended December 31, 2005 and the years ended June
30, 2005, 2004 and 2003, the Company's fixed asset disposals were at a net book
value of approximately $148,000, $114,000, $249,000 and $270,000, respectively.

         Depreciation charged to operations relating to property and equipment
totaled $2.5 million, $4.8 million, $4.2 million and $2.5 million for the six
months ended December 31, 2005 and the years ended June 30, 2005, 2004 and 2003,
respectively.

(7)  INTANGIBLE ASSETS AND GOODWILL

         The majority of the Company's intangible assets resulted from the
November 2002 acquisition of ABELCET (see table below). Beginning in late 2004
and continuing through 2005, the Company identified a decline in sales of
ABELCET primarily attributable to increased competition in the antifungal
market. ABELCET sales have historically averaged approximately $15.0 million to
$16.0 million per quarter, however in late 2004 and into 2005, ABELCET sales had
declined to approximately $11.0 million per quarter. In November 2005,
management completed a long-term strategic plan that indicates the revenues from
sales of ABELCET may not recover to historical levels. In light of this
impairment indicator, the Company engaged an independent valuation specialist to
test the ABELCET asset group for impairment in accordance with SFAS No. 144 and
determine the fair value of the ABELCET assets.


                                      F-21
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Initial testing disclosed that the future undiscounted net cash flows
to be generated by the ABELCET asset group were insufficient to cover the
carrying value of the ABELCET asset group, primarily the related intangible
assets. The fair value of these intangible assets was then calculated using the
relief from royalty method and an impairment charge was recognized for the
excess of carrying amount over fair value in the aggregate amount of $133.1
million. The impairment was initially allocated, pro rata, to all assets, but
with the limit that none of the assets would be written down below their
respective fair values. Their amortizable lives were also reevaluated as part of
this process. The manufacturing contract became fully amortized during the six
months ended December 31, 2005.

         Intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                     At December 31,      Estimated      At June 30,        Estimated
                                          2005          Useful lives        2005           Useful lives
                                    ------------------  --------------  --------------   -----------------
<S>                                      <C>             <C>             <C>                   <C>
ABELCET
  Product patented technology             $6,000            9 years         $64,400              12 years
  Manufacturing patent                     9,000            9 years          18,300              12 years
  NDA approval                                 -                             31,100              12 years
  Trade name and  product rights               -                             80,000              15 years
  Manufacturing contract                       -                              2,200               3 years
Other
  Patent                                   1,875           1-2 years         1,906               1-5 years
  Product acquisition costs               26,194         10-14 years         26,194            10-14 years
                                    ------------------                  --------------
                                          43,069                            224,100
Less: Accumulated amortization             8,915                             47,958
                                    ------------------                  --------------
                                         $34,154                           $176,142
                                    ==================                  ==============
</TABLE>

         Amortization charged to operations relating to intangible assets
totaled $8.9 million, $17.9 million, $17.9 million, and $10.8 million for the
six months ended December 31, 2005 and the years ended June 30, 2005, 2004 and
2003, respectively. Estimated future annual amortization expense for the years
2006 through 2010 is $1.7 million per year due to the December 2005 impairment
write-down. The Company does not have intangibles with indefinite useful lives.

         Effective in the quarter ended December 31, 2005, the Company changed
the basis upon which it reports its business segments (see Note 21). The Company
determined that its reporting units were the same as its segments. This change
necessitated the allocation of goodwill to the newly identified reporting units
on a relative fair value basis.

         At the time the goodwill was allocated to the reporting units, the
Company performed a goodwill impairment test. The Company considered the
historical declining performance of ABELCET and the impairment recognized to the
related intangible assets to be indicators that the goodwill may be impaired. An
independent valuation firm was engaged to perform valuations of the reporting
units, to assist the Company with the allocation of goodwill and estimate the
fair value of assets using discounted cash flow analyses. Goodwill was allocated
to the Products and Contract Manufacturing segments, based on their respective
fair values. No goodwill was allocated to the Royalties segment as, by the
nature of the segment's operations, goodwill would not naturally be associated
with it. The allocation process resulted in the Products reporting unit being
assigned $144.0 million of goodwill and the Contract Manufacturing reporting
unit receiving $7.0 million. The ensuing testing to estimate the fair value of
the reporting units disclosed that the goodwill was impaired in its entirety.
Accordingly, an impairment loss related to goodwill was recognized in the amount
of $151.0 million in the consolidated statement of operations for the six months
ended December 31, 2005.



                                      F-22
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(8) ACCRUED EXPENSES

         Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                      At December 31,     At June 30,
                                                           2005               2005
                                                     ------------------   --------------
<S>                                                       <C>                <C>
Accrued compensation                                       $5,113             $9,423
Accrued Medicaid rebates                                    1,832              2,693
Unearned revenue                                              875              1,005
Accrued professional and consulting fees                      982              1,206
Accrued clinical trial costs                                  254                134
Accrued insurance and taxes                                 1,038                833
Other                                                       2,148              2,580
                                                     ------------------   --------------
                                                          $12,242            $17,874
                                                     ==================   ==============
</TABLE>

         During the year ended June 30, 2005, the Company incurred charges
totaling $2.1 million pertaining to a realignment of its costs through a
restructuring. This decision was based on increasingly competitive conditions in
the intravenous antifungal market, as well as the discontinuation of certain
research and development projects. The charges were primarily attributable to
employee termination benefits. As of December 31, 2005, $160,000 remained to be
paid in 2006.

(9)   NOTES PAYABLE

         As of December 31, 2005 and June 30, 2005, the Company had $394.0
million and $399.0 million, respectively, of principal amount of convertible
subordinated notes outstanding (the Notes) that bear interest at an annual rate
of 4.5%. The Notes mature on July 1, 2008. Accrued interest on the Notes was
$8.9 million and $9.0 million as of December 31, 2005 and June 30, 2005,
respectively. The holders may convert all or a portion of the Notes into common
stock at a conversion price of $70.98 at any time on or before July 1, 2008.

         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 plus accrued and unpaid interest. In May and October 2005, the Company
retired $1.0 million and $5.0 million face value of the Notes in exchange for
cash payments of $849,000 and $4.6 million, respectively, including accrued
interest.

(10)  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 a
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 Rights
Plan remains in place, then, unless (i) the Rights are redeemed by the Company
for $0.01 per right or (ii) 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 Rights 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 will expire on May 16, 2012.


                                      F-23
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      SERIES A PREFERRED STOCK

         During the fiscal year ended June 30, 2003, 6,000 shares of the
Company's Series A Cumulative Convertible Preferred Stock were converted into
13,636 shares of common stock. Accrued dividends of $156,000 on the Series A
Preferred Stock that was converted, were settled by cash payments. Also, 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 $26,000 and
accrued dividends of $27,000. All dividend obligations were settled as of June
30, 2003.

      COMMON STOCK

         Holders of shares of the Company's $0.01 par value common stock are
entitled to one vote per share on matters to be voted upon by the stockholders
of the Company.

         As of December 31, 2005, the Company has reserved shares of its common
stock for special purposes as detailed below (in thousands):

                 Non-Qualified and Incentive Stock Plans           8,432
                 Shares issuable upon conversion of Notes          5,551
                                                                ---------
                                                                  13,983
                                                                =========

(11)  STOCK OPTIONS

         The Company has incentive and non-qualified stock option plans for
employees, officers, directors and consultants. These plans, the 2001 Incentive
Stock Plan and the 1987 Non-Qualified Stock Option Plan, are administered by the
Compensation Committee of the Board of Directors. Options granted to employees
generally vest over four years from date of grant and options granted to
directors vest after one year. The exercise price of the options granted must be
at least 100% of the fair value of the Company's common stock at the time the
options are granted. Options may be exercised for a period of up to ten years
from the date they are granted.

         As of December 31, 2005, 8.4 million shares of common stock were
reserved for issuance pursuant to options and awards under two separate plans,
the 1987 Non-Qualified Stock Option Plan and the 2001 Incentive Stock Plan,
which may be granted to employees, non-employee directors or consultants to the
Company.

         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 of common stock 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.

         In November 1987, the Company's Board of Directors adopted the 1987
Non-Qualified Stock Option Plan. This plan has 7,900,000 shares of common stock
authorized for the issuance of stock options. The terms and conditions of the
options generally are to be determined by the Board of Directors, or a committee
appointed by the Board, at its discretion.



                                      F-24
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         In September 2004, the Board of Directors adopted a new compensation
plan for non-employee directors (the 2004 Outside Director Compensation Plan or
The 2004 Plan). Under the 2004 Plan, each non-employee director is to receive an
option to purchase 15,000 shares of common stock annually on the first trading
day of the calendar year. These grants are made under the 2001 Incentive Stock
Plan. The exercise price of the annual grant is equal to the closing price of
the common stock on the date of grant; it vests in one tranche on the first
anniversary date; and expires on the tenth anniversary date of the grant. In
addition, upon election of a new non-employee director to the Board, such newly
elected director is to receive a grant of options to purchase 20,000 shares of
common stock (the exercise price of which is equal to the closing price of the
common stock on the date of grant). These options vest in three equal tranches
on each of the first three anniversaries of the date of grant, if the recipient
director remains on the Board on each such date. Furthermore, for the
Chairperson of the Board, if not an employee of the Company, the number of
options granted annually and upon election is twice the number mentioned above.

         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 (options in thousands):

<TABLE>
<CAPTION>
                                                                                           Weighted
                                                          Weighted                          Average
                                                           Average                        Remaining     Aggregate
                                                          Exercise         Range of      Contractual    Intrinsic
                                              Options       Price           Prices       Term (years)  Value ($000)
                                            ------------------------------------------------------------------------
<S>                                              <C>        <C>       <C>                     <C>         <C>
Outstanding at June  30, 2002                    3,644      $38.07    $1.88 to $73.22
Granted at exercise prices which equaled
the fair value on the date of grant              1,133      $19.65    $11.35 to $24.76
    Exercised                                     (305)      $4.49    $2.03 to $14.13
    Forfeited                                     (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 value on the date of grant              2,151      $13.81    $10.66 to $17.72
    Exercised                                      (98)      $5.40    $2.75 to $14.13
    Forfeited                                   (1,153)     $35.02    $11.37 to $71.00
                                            ------------
Outstanding at June  30, 2004                    4,838      $25.90    $1.87 to $73.22
Granted at exercise prices which equaled
the fair value on the date of grant              2,391      $10.32    $5.73 to $16.56
    Exercised                                      (73)      $3.14    $2.06 to $11.37
    Forfeited                                   (1,534)     $37.00    $1.88 to $71.00
                                            ------------
Outstanding at June 30, 2005                     5,622      $16.63    $2.81 to $73.22
Granted at exercise prices which equaled
the fair value on the date of grant                958       $7.09    $6.90 to $7.96
    Exercised                                       (5)      $3.60    $3.38 to $6.00
    Forfeited                                     (461)     $29.62    $6.00 to $66.25
                                            ------------
Outstanding at December 31, 2005                 6,114      $14.17    $2.81 to $73.22         8.14        $ 1,703
                                            ============
Exercisable at December 31, 2005                 5,197                                        7.86        $ 1,396
                                            ============
</TABLE>

         On April 7, 2005, the Board of Directors accelerated the vesting of all
of the Company's unvested stock options awarded to directors, officers and
employees under the 1987 Non-Qualified Stock Option Plan and the 2001 Incentive
Stock Plan, all of which had an exercise price greater than $10.07 per share,
the closing price of the Company's common stock on the NASDAQ National Market on
April 7, 2005. As a result of the acceleration, options to acquire approximately
4.2 million shares (with exercise prices


                                      F-25
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


ranging from $10.10 to $73.22 per share), of the Company's common stock, which
otherwise would have vested from time to time over the next four years, became
immediately exercisable.

         On June 20, 2005, the Board of Directors accelerated the vesting of all
of the Company's then-outstanding unvested stock options awarded to officers
under the 1987 Non-Qualified Stock Option Plan and the 2001 Incentive Stock
Plan. Options having exercise prices of $6.95 and $5.73 per share, the closing
price of common stock on the NASDAQ National Market on May 12, 2005 and June 10,
2005 were accelerated. As a result, of the acceleration, options to acquire
approximately 1.1 million shares of the Company's common stock, which otherwise
would have vested from time to time over the next four years, became immediately
exercisable.

         The Board's decision to accelerate the vesting of these options was in
response to a review of the Company's long-term incentive compensation programs
in light of changes in market practices and recently issued changes in
accounting rules resulting from the issuance of SFAS No. 123R, which the Company
was required to adopt effective July 1, 2005. Management believed that
accelerating the vesting of these options prior to the adoption of SFAS No. 123R
may have resulted in the Company not having to recognize compensation expense in
the six months ended December 31, 2005 in the amount of $5.0 million or in
subsequent years through 2009 in the aggregate amount of $21.4 million.

         As of December 31, 2005, the Stock Option Plans had options outstanding
and exercisable by price range as follows (options in thousands):

<TABLE>
<CAPTION>
                                                 Weighted
                                                  Average         Weighted                       Weighted
     Range of                                    Remaining        Average                        Average
     Exercise                     Options       Contractual       Exercise       Options         Exercise
      Prices                    Outstanding     Life (years)       Price       Exercisable        Price
--------------------           --------------  ---------------  -------------  -------------  ---------------
<S>                                 <C>             <C>            <C>             <C>            <C>
$ 2.81 to $ 6.90                      366           4.19            $4.81            290          $ 4.33
$ 6.95 to $ 6.95                    1,020           9.36            $6.95          1,000          $ 6.95
$ 6.97 to $ 7.14                      770           9.81            $7.03            136          $ 7.01
$ 7.25 to $12.36                      611           8.62           $10.29            424          $11.39
$12.43 to $13.08                      172           8.82           $12.98            172          $12.98
$13.17 to $13.54                      751           8.97           $13.53            751          $13.53
$13.55 to $13.77                       82           8.95           $13.76             82          $13.76
$14.12 to $14.15                      655           7.84           $14.15            655          $14.15
$14.16 to $15.65                      623           8.28           $15.13            623          $15.13
$15.75 to $73.22                    1,064           6.19           $31.84          1,064          $31.84
                               --------------                                  -------------
                                    6,114           8.14           $14.17          5,197          $15.41
                               ==============                                  =============
</TABLE>


                                      F-26
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The following table summarizes the vested option activity for the six
months ended December 31, 2005 (options in thousands):

<TABLE>
<CAPTION>
                                                                             Weighted
                                                            Weighted         Average
                                                             Average        Remaining       Aggregate
                                                            Exercise       Contractual      Intrinsic
                                               Options        Price        Term (years)    Value ($000)
                                              -----------  ------------   ---------------  -------------
<S>                                               <C>         <C>               <C>           <C>
Exercisable at June 30, 2005                      5,526       $16.79
Granted at exercise prices which equaled
the fair value on the date of grant                 136
     Exercised                                       (5)
     Forfeited                                     (460)
                                              -----------
Exercisable at December 31, 2005                  5,197       $15.41            7.86          $1,396
                                              ===========
</TABLE>

         A summary of unvested options as of December 31, 2005 and changes
during the six months ended December 31, 2005 is presented below (options in
thousands):
<TABLE>
<CAPTION>
                                                                            Weighted
                                                           Number of         Average
                                                            Unvested       Grant Date
                                                            Options        Fair Value
                                                          -------------   --------------
<S>                      <C> <C>                              <C>             <C>
Unvested options at June 30, 2005                             111             $7.56
     Granted                                                  807
     Exercised                                                  -
     Forfeited                                                 (1)
                                                          -------------
Nonvested at December 31, 2005                                917             $7.15
                                                          =============
</TABLE>

         In the six months ended December 31, 2005, the Company recorded
share-based compensation of $442,000 related to stock options, which is included
in the Company's net loss for the period. No compensation costs were capitalized
into inventory during the period. The Company did not record a net tax benefit
related to share-based compensation expense. A cumulative effect adjustment with
regard to options was not required. The Company's policy is to use newly issued
shares to satisfy the exercise of stock options.

         Cash received from share option exercise for the six months ended
December 31, 2005 and the fiscal years ended June 30, 2005, 2004 and 2003 was
$19,000, $229,000, $527,000 and $1.3 million, respectively. The actual tax
benefit realized for the tax deductions from options totaled $20,000, $597,000,
$673,000 and $3.4 million for the six months ended December 31, 2005 and the tax
years ended 2005, 2004 and 2003, respectively.

         The Company has elected to use the Black-Scholes option-pricing model
to determine the fair value of stock options. For grants during the six months
ended December 31, 2005, the Company's weighted average assumptions for expected
volatility, expected term until exercise and risk-free interest rate were
55.69%, 4.66 years and 4.22%, respectively. Expected volatility is based on
historical volatility of the Company's common stock. The expected term of
options is estimated based on the Company's historical exercise rate and
forfeiture rates are estimated based on industry-specific average employment
termination experience. The risk-free rate is based on U.S. Treasury yields for
securities in effect at the time of grant with terms approximating the


                                      F-27
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


expected term until exercise of the option. No dividend payments were factored
into the valuations. The Company granted options with fair values ranging from
$3.35 to $3.76 per option or a weighted average of $3.57 per option during the
six months ended December 31, 2005. As of December 31, 2005, there was $3.4
million of total unrecognized compensation cost related to unvested options that
the Company expects to recognize over a weighted-average period of 43 months.
During the six months ended December 31, 2005, the grant-date fair value of
options that vested was $488,000.

(12)  RESTRICTED STOCK AND RESTRICTED STOCK UNITS (NONVESTED SHARES)

         The 2001 Incentive Stock Plan also provides for the issuance of
restricted stock and restricted stock units to employees, officers and directors
(collectively referred to in SFAS No. 123 as "nonvested shares"). These awards
effectively are the issuance by the Company to the recipient of shares of the
Company's common stock at either the date of the grant, in the case of a
restricted stock award, or upon vesting, in the case of a restricted stock unit.
The recipient pays no cash to receive the shares other than the $0.01 par value
in some cases. These awards have vesting periods of three to five years.

         Pursuant to the 2004 Outside Director Compensation Plan, each
non-employee director is to receive a grant of restricted stock units for shares
of common stock with a value of $25,000 annually on the first trading day after
June 30. This grant is made under the 2001 Incentive Stock Plan. The number of
shares covered by the annual grant is equal to $25,000 divided by the closing
price of the common stock on the date of grant; it vests in three equal tranches
on each of the first three anniversaries of the date of the grant if the
recipient director remains on the Board on each such date. In addition, upon
election of a new non-employee director to the Board, such newly elected
director is to receive a grant of restricted stock units for shares of common
stock in the amount of $25,000 (the number of shares covered by such grant being
equal to $25,000 divided by the closing price of the common stock on the date of
grant). These restricted stock units vest in three equal tranches on each of the
first three anniversaries of the date of grant, if the recipient director
remains on the Board on each such date. Furthermore, for the Chairperson of the
Board, if not an employee of the Company, the number of restricted stock units
granted annually and upon election is twice the number mentioned above.

         All nonvested shares are valued at fair value under SFAS No. 123R. The
market price of the Company's stock at grant date is factored by an expected
vesting period forfeiture rate based on industry-specific average employment
termination experience. This amount is then amortized over the vesting period on
a straight-line basis. As of July 1, 2005, the date of adoption of SFAS No.
123R, there were 723,000 nonvested shares outstanding.

                                      F-28
<PAGE>



                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         A summary of nonvested shares as of December 31, 2005 and changes
during the six months ended December 31, 2005 and the three fiscal years ended
June 30, 2005 is provided below (in thousands):

<TABLE>
<CAPTION>
                                                                              Weighted
                                                          Number of           Average
                                                          Nonvested          Grant Date
                                                           Shares            Fair Value
                                                      ------------------  -----------------
<S>                                                        <C>               <C>
                  Nonvested at June 30, 2002                   -              $    -
                     Granted                                 227
                     Vested                                   (2)
                                                      ------------------
                  Nonvested at June 30, 2003                 225              $17.81
                     Granted                                 340
                     Vested                                  (10)
                     Forfeited                              (215)
                                                      ------------------
                  Nonvested at June 30, 2004                 340              $11.99
                     Granted                                 574
                     Vested                                  (27)
                     Forfeited                              (164)
                                                      ------------------
                  Nonvested at June 30, 2005                 723             $  9.12
                     Granted                                 429
                     Vested                                   (4)
                     Forfeited                               (85)
                                                      ------------------
                  Nonvested at December 31, 2005           1,063             $  8.33
                                                      ==================
</TABLE>

         As of December 31, 2005, there was $8.9 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
that is expected to be recognized over a weighted average period of 46 months.
The total grant-date fair value of shares that vested during the six months
ended December 31, 2005 was $58,000.

         In the six months ended December 31, 2005, the Company recorded
share-based compensation of $423,000 related to nonvested share awards, which is
included in the Company's net loss for the period, predominantly in selling,
general and administrative expenses. No compensation costs were capitalized into
inventory during the period. The Company did not record a net tax benefit
related to share-based compensation expense. The Company's policy is to use
newly issued shares to satisfy nonvested share awards. There has been no tax
benefit realized to date related to tax deductions for nonvested share payments.

         During the fiscal years ended June 30, 2005, 2004 and 2003, total
deferred compensation cost of approximately $4.8 million, $4.1 million and $3.6
million, respectively, was calculated based on the fair value of the nonvested
shares awarded on their issuance dates. These amounts were being recognized as
periodic compensation expense over the underlying vesting periods. Netted
against each year's amortized expense was the amount of deferred compensation
cost for all awards forfeited during the period. The method of accounting for
nonvested share awards was changed effective July 1, 2005 to no longer account
for forfeitures when they occur, but rather on an estimated basis. Accordingly,
the unamortized amount of nonvested share awards outstanding as of July 1, 2005
was adjusted by an assumed forfeiture rated and it is this reduced amount that
will be amortized over the balance of the vesting period. This cumulative effect
adjustment, which is immaterial for purposes of separate presentation, is
included in selling, general and administrative in the consolidated statement of
operations for the six months ended December 31, 2005.


                                      F-29
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(13)  MERGER TERMINATION AGREEMENT

          On February 19, 2003, the Company entered into an agreement and plan
of merger with 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 imposed certain restrictions with respect to
the transferability of the underlying NPS shares including limiting the maximum
number of shares that could be transferred each month to 125,000 shares.
Considering such restrictions, 1.1 million shares of NPS common stock were
valued at $26.7 million, which was the fair value of NPS common stock on June 4,
2003 and the balance of 375,000 shares was considered to be restricted stock as
defined under the scope exception provisions of SFAS No. 115 "Accounting for
certain Investments in Debt and Equity Securities". 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.

         In August 2003, the Company entered into a Zero Cost Protective Collar
(the Collar) arrangement with a financial institution to reduce its exposure to
changes in the share price associated with the 1.5 million shares of common
stock of NPS received as part of the merger termination agreement with NPS. The
Collar matured in four separate three-month intervals from November 2004 through
August 2005, at which time the Company received proceeds from the sale of the
securities. The amount received at each maturity date was determined based on
the market value of NPS' common stock on such maturity date, as well as the
value of the Collar. From August 2003 to November 2003, the Collar was
designated a derivative hedging instrument in accordance with SFAS No. 133; in
November 2003, hedge accounting was terminated. The Company carried the
derivative as an asset or a liability at fair value. The change in fair value of
the Collar subsequent to the termination of hedge accounting was recorded in
other, net in the consolidated statements of operations.

         At June 30, 2005, the Company had a receivable from the financial
institution of $3.2 million. During the years ended June 30, 2005 and 2004, the
Company recorded an unrealized loss of $1.5 million and an unrealized gain of
$1.7 million, respectively, as a component of other, net representing the change
in fair value of the Collar. During the year ended June 30, 2005, a total of 1.1
million shares of the Collar matured resulting in a realized loss of $8.4
million, and net cash proceeds to the Company of $22.4 million.



                                      F-30
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The Company began selling and buying back the underlying NPS common
stock in November 2003, which resulted in the termination of the hedging
relationship. During the period from August 2003 through the date the hedging
relationship was terminated, the NPS common stock had appreciated $5.7 million
in value, of which $2.3 million was recorded in other, net in the consolidated
statement of operations and $3.5 million, was recorded as a component of other
comprehensive income in the statement of stockholders equity during the year
ended June 30, 2004. The $3.5 million gain recognized in accumulated other
comprehensive income at the point the hedging relationship was terminated was
subsequently recognized in earnings proportionate to the sale of the underlying
NPS common stock during 2005 and 2004.

         During the six-month period ended December 31, 2005, the Company sold
375,000 shares of NPS common stock it held and 375,000 shares of the Collar
instrument matured. This resulted in the recognition of a loss of $3.5 million
as a component of other, net for the six months ended December 31, 2005. The
Company received cash proceeds from the settlement of this instrument totaling
$7.5 million in the six-month period ended December 31, 2005. At December 31,
2005, the Company no longer holds any shares of NPS nor does it hold any portion
of the Collar. During the years ended June 30, 2005 and 2004, the Company sold
and repurchased 375,000 and 1.5 million shares, respectively, of NPS common
stock to remove the transferability restrictions on such shares, resulting in a
net realized loss of $578,000 and a gain of $2.4 million, respectively, included
in other, net in the consolidated statements of operations.

(14)  INCOME TAXES

         Under the asset and liability method of 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. Under SFAS No. 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.



                                      F-31
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                               Six Months
                                                 Ended                     Year ended June  30,
                                               December 31,    ----------------------------------------------
                                                  2005             2005             2004            2003
                                            -----------------  --------------   -------------  --------------
<S>                                              <C>               <C>               <C>           <C>
Current:
 Federal                                         $      -          $     -           $    -        $     -
 State                                                (75)             340                -          6,589
 Foreign                                               93                -                -              -
                                            -----------------  --------------   -------------  --------------
 Total current                                         18              340                -          6,589
                                            -----------------  --------------   -------------  --------------
Deferred:
 Federal                                           (9,395)          66,785            2,404         (5,454)
 State                                             (1,570)          10,819              773           (912)
                                            -----------------  --------------   -------------  --------------
 Total deferred                                   (10,965)          77,604            3,177         (6,366)
                                            -----------------  --------------   -------------  --------------
Income tax (benefit) provision                   $(10,947)         $77,944           $3,177        $   223
                                            =================  ==============   =============  ==============
</TABLE>

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

<TABLE>
<CAPTION>
                                                          Six Months
                                                            Ended               Year ended June  30,
                                                          December 31,  -------------------------------------
                                                              2005          2005        2004         2003
                                                        --------------  -----------  -----------  -----------

<S>                                                       <C>             <C>           <C>       <C>
Income tax expense computed at federal statutory rate     $(105,799)      $(4,082)      $2,585     $16,082
Nondeductible expenses                                          105           284          420           -
Add (deduct) effect of:
 State income taxes (including sale and purchase of
    state net operating loss carryforwards), net
    of federal tax                                          (16,350)         (414)         (49)      3,690
 Federal tax benefit through utilization of net
    operating loss carryforwards against current
    period income                                                 -             -            -      (8,349)
 Research and development tax credits                           549        (1,654)      (1,400)          -
 Foreign income taxes                                            93             -            -           -
 Increase (decrease) in beginning of year valuation
    allowance-federal                                       110,455        83,810        1,621     (11,200)
                                                        --------------  -----------  -----------  -----------
                                                          $ (10,947)      $77,944       $3,177    $     223
                                                        ==============  ===========  ===========  ===========
</TABLE>

         During the six months ended December 31, 2005 and the years ended June
30, 2005, 2004 and 2003, the Company recognized a tax benefit of $244,000,
$280,000, $254,000 and $474,000 respectively, from the sale of certain state net
operating loss carryforwards. During the fiscal years ended June 30, 2004 and
2003, the Company purchased $1.4 million and $968,000, respectively, of state
net operating loss carryforwards.

                                      F-32
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         At December 31, 2005 and June 30, 2005, 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>
                                                              At December 31,   At June 30,
                                                                  2005               2005
                                                            ------------------  ----------------

<S>                                                            <C>                <C>
Deferred tax assets:
 Inventories                                                   $     360         $     342
 Accrued compensation                                                680               793
 Returns and allowances                                            3,373             5,079
 Research and development credits carryforward                    14,805            14,952
 Federal AMT credits                                               1,592             1,592
 Deferred revenue                                                    357               410
 Capital loss carryforwards                                        4,094             2,681
 Write-down of carrying value of investment                        8,956             8,956
 Federal and state net operating loss carryforwards               63,473            58,873
 Acquired in-process research and development                      8,197             4,412
 Unrealized loss on securities                                       463             1,887
 Goodwill                                                         48,657                 -
 Intangible assets                                                57,629             2,672
 Other                                                               409               309
                                                            ------------------  ----------------
  Total gross deferred tax assets                                213,045           102,958
  Less valuation allowance                                      (210,525)         (100,070)
                                                            ------------------  ----------------
                                                                   2,520             2,888
                                                            ------------------  ----------------
Deferred tax liabilities:
 Goodwill                                                              -           (10,965)
 Unrealized gain on securities                                         -            (1,242)
 Book basis in excess of tax basis of acquired assets             (2,520)           (1,647)
                                                            ------------------  ----------------
                                                                  (2,520)          (13,854)
                                                            ------------------  ----------------
Net deferred tax (liabilities) assets                          $       -          $(10,966)
                                                            ==================  ================
</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 December
31, 2005, the Company had federal net operating loss carryforwards of
approximately $156.3 million and combined state net operating loss carryforwards
of approximately $150.2 million that will expire in the years 2009 through 2026.
The Company also has federal research and development tax credit carryforwards
of approximately $12.3 million for tax reporting purposes, which expire in the
years 2007 to 2026. In addition, the Company has $2.5 million of state research
and development tax credit carryforwards, which will expire in the years 2021 to
2024. The Company's ability to use the net operating loss and research and
development tax credit carryforwards is 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. Also at December 31, 2005, the Company has a
$48.7 million deferred tax asset relating to the write-off of goodwill for
books. The underlying tax basis in the goodwill will continue to be amortized
for tax purposes. Similarly, write-downs of ABELCET intangible assets for book
purposes but not for tax purposes resulted in approximately $57.6 million
additional deferred tax assets.



                                      F-33
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         As of December 31, 2005, management believes that it is not more likely
than not that the net deferred tax assets will be realized, based on future
operations and the reversal of deferred tax liabilities. The net increase in the
valuation allowance for the six months ended December 31, 2005 was primarily due
to the write-off of goodwill and the associated write-down of ABELCET
intangibles. These write-downs for book purposes but not for tax purposes
created new deferred tax assets for which an additional valuation allowance was
established. The write-off of goodwill also eliminated the associated deferred
tax liability reported at June 30, 2005. The valuation allowance increased
$110.5 million and $83.8 million for the six months ended December 31, 2005 and
the year ended June 30, 2005, respectively.

(15)  SIGNIFICANT AGREEMENTS

      SCHERING-PLOUGH AGREEMENT

         As a result of a November 1990 agreement between the Company and
Schering-Plough, the Company's PEG technology was used to develop an improved
version of Schering-Plough's product INTRON A. Schering-Plough is responsible
for marketing and manufacturing the product, PEG-INTRON, worldwide on an
exclusive basis and the Company receives royalties on worldwide sales of
PEG-INTRON for all indications. 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 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. 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. 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.

         The Company does 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.

      SANOFI-AVENTIS LICENSE AGREEMENTS

         During 2002, the Company amended its license agreement with
Sanofi-Aventis to reacquire the rights to market and distribute ONCASPAR in the
U.S., Mexico, Canada and most of the Asia/Pacific region. In return for the
marketing and distribution rights, the Company paid Sanofi-Aventis $15.0 million
and was also obligated to pay a 25% royalty on net sales of ONCASPAR in the U.S.
and Canada through 2014. The $15.0 million payment is being amortized on a
straight-line basis over its estimated economic life of 14 years. As of December
31, 2005 and June 30, 2005, the carrying value was $10.5 million and $11.0
million, respectively. The amortization and the 25% royalty payment to
Sanofi-Aventis are included in cost of sales of the product. The license
agreement may be terminated earlier by Sanofi-Aventis upon 60 days' notice if
the Company fails to make the required royalty payments or the Company decides
to cease selling ONCASPAR. Following the expiration of the agreement in 2014,
all rights will revert back to the Company, unless the agreement is terminated
earlier because the Company fails to make royalty payments or ceases to sell
ONCASPAR.


                                      F-34
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         In October 2005, the Company further amended its license agreement with
Sanofi-Aventis for ONCASPAR. The amendment became effective in January 2006 and
includes a significant reduction in the royalty rate, with a single-digit
royalty percentage now payable by Enzon only on those aggregate annual sales of
ONCASPAR in the U.S. and Canada that are in excess of $25.0 million. In
consideration for the amendment, Enzon made an upfront cash payment of $35.0
million to Sanofi-Aventis in January 2006. The $35.0 million payment will be
amortized on a straight-line basis over its economic life of 8.5 years. The
Company is obligated to make royalty payments through June 30, 2014, at which
time all of the Company's royalty obligations will cease.

      MEDAC LICENSE AGREEMENT

         In January 2003, the Company renewed an exclusive license to 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 parts of Asia. The Company's supply agreement with Medac
provides for Medac to purchase ONCASPAR from the Company at certain established
prices and meet certain minimum purchase requirements. Medac is responsible for
obtaining additional approvals and indications in the licensed territories
beyond the currently approved indication in Germany. 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. 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
the Company.

      INEX DEVELOPMENT AND COMMERCIALIZATION AGREEMENTS

         In March 2005, the Company terminated the agreements it entered into
with Inex Pharmaceuticals (Inex) in January 2004 regarding the development and
commercialization of Inex's proprietary oncology product MARQIBO(R) (vincristine
sulfate liposomes injection). The terminated agreements included a Product
Supply Agreement, a Development Agreement and a Co-Promotion Agreement,
(collectively, the MARQIBO Agreements).

         In January 2005, the FDA provided an action letter explaining that
MARQIBO was "not approvable" under the FDA's accelerated approval regulations
for relapsed aggressive non-Hodgkin's lymphoma. The FDA's response also said
that additional randomized controlled studies would need to be conducted prior
to re-applying for approval. In connection with the termination, the Company
paid Inex a final payment of $5.0 million in satisfaction of all of the
Company's financial obligations under the MARQIBO Agreements, including
development expenses and milestone payments. This payment is included in
research and development expense in the Company's consolidated statement of
operations for the year ended June 30, 2005.



                                      F-35
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      FRESENIUS BIOTECH DEVELOPMENT AND SUPPLY AGREEMENT

         In January 2006, the Company terminated its development and supply
agreement entered into in June 2003 and returned the rights to ATG-Fresenius S
to Fresenius Biotech. The termination did not result in either company making a
settlement payment to the other. The development and supply agreement with
Fresenius Biotech provided the Company with exclusive development and
distribution rights in the U.S. and Canada for a new formulation of the
polyclonal antibody preparation, ATG-Fresenius S. Under the agreement, the
Company was responsible for obtaining regulatory approval of the product in the
U.S. In September 2004, the Company made a milestone payment to Fresenius
Biotech of $1.0 million upon FDA approval of the first Investigational New Drug
application; the milestone payment was charged to research and development
expense during the year ended June 30, 2005.

         For a transition period, the Company is continuing to fulfill its
clinical and regulatory obligations related to the current ongoing clinical
trial for ATG-Fresenius S and Fresenius Biotech is reimbursing the Company for
certain costs related to those obligations. Fresenius Biotech will be
responsible for any further clinical development activities for ATG-Fresenius S
beyond the transition period.

      MICROMET ALLIANCE

         In November 2005, the Company agreed to pay Micromet $2.5 million to
end the collaboration formed in June 2002 to identify and develop antibody-based
therapeutics for the treatment of inflammatory and autoimmune diseases. Under
the termination agreement, Micromet received rights to the lead compound (MT203)
generated within the scope of the collaboration and the Company will receive
royalties on any future sales of this product.

         The termination of the research and development collaboration with
Micromet does not affect the Company's other agreements with Micromet, including
a cross-license agreement between the parties and a marketing agreement under
which Micromet is the exclusive marketer of the two companies' combined
intellectual property estate in the field of single-chain antibody (SCA)
technology. Enzon holds core intellectual property in SCAs. Micromet is the
exclusive marketing partner and has instituted 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 shared equally by the
two companies. During the six months ended December 31, 2005, the Company
recorded $1.5 million related to its share of revenues from Micromet's licensing
activities associated with this agreement of which $767,000 was netted against
the $2.5 million owed by the Company to Micromet. In January 2006, Micromet
announced that it had entered into a definitive merger agreement with CancerVax,
Inc., a publicly-traded U.S. Company. The merger is not expected to have any
effect on any of the Company's agreements with Micromet.

         In addition to the research and development collaboration, in 2002 the
Company made an $8.3 million investment in Micromet in the form of a convertible
note that was amended in June 2004. During the year ended June 30, 2004 the
Company recorded a complete write-down of the carrying value of this investment,
which resulted in a non-cash charge of $8.3 million. In January 2006, the note
was converted into 16,836 shares of Micromet common stock that constitutes
substantially less than 1% of Micromet's outstanding shares. These shares are
carried at zero basis on the Company's consolidated balance sheets.

                                      F-36
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      NATIMMUNE A/S

         In September 2005, the Company entered into a license agreement with
NatImmune A/S (NatImmune) for NatImmune's lead development compound, recombinant
human Mannose-Binding Lectin (rhMBL), a protein therapeutic under development
for the prevention of severe infections in MBL-deficient individuals undergoing
chemotherapy. Under the agreement, the Company received exclusive worldwide
rights, excluding the Nordic countries, and is responsible for the development,
manufacture, and marketing of rhMBL. The $10.0 million upfront cost of the
license agreement was charged to acquired in-process research and development in
the six months ended December 31, 2005. The Company will be responsible for
making additional payments upon the successful completion of certain clinical
development, regulatory, and sales-based milestones. NatImmune is also eligible
to receive royalties from any future product sales of rhMBL by Enzon and retains
certain rights to develop a non-systemic formulation of rhMBL for topical
administration.

      NEKTAR ALLIANCE

         In August 2005, the Company entered into an agreement with Nektar to
terminate the Company's joint product development agreement formed in January
2002 for up to three products using Nektar's pulmonary delivery technologies.
The termination did not result in either company making a settlement payment to
the other. Under the Company's product development collaboration with Nektar,
the companies were jointly developing inhaled leuprolide acetate and evaluating
other potential pulmonary projects for development. As a result of the
termination, all rights to inhaled leuprolide have reverted back to Nektar and
the Company has no further financial obligation to Nektar with respect to the
product development collaboration.

         In January 2002, the Company entered into a PEG technology licensing
agreement with Nektar under which the Company granted Nektar the right to grant
sub-licenses for a portion of our PEG technology to third parties. Nektar
continues to have the right to sub-license our patents that were defined in the
January 2002 agreement and the Company will receive a royalty or a share of
Nektar's profits for any products that utilize the Company's patented PEG
technology. Currently, Nektar has notified us of four third-party products for
which Nektar has granted sublicenses to our PEG technology, Hoffmann-La Roche's
PEGASYS (peginterferon alfa-2a), OSI Pharmaceutical's MACUGEN (pegaptanib sodium
injection), UCB's CIMZIA(TM) (certolizumab pegol, CDP870) and an undisclosed
product of Pfizer's. PEGASYS is currently being marked for the treatment of
hepatitis C and MACUGEN is currently being marketed through a partnership
between OSI Pharmaceuticals and Pfizer for the treatment of neovascular (wet)
age-related macular degeneration, an eye disease associated with aging that
destroys central vision. CIMZIA, a PEGylated anti-TNF-alpha antibody fragment is
currently in Phase 3 development for the treatment of rheumatoid arthritis. On
March 2, 2006, UCB announced that it submitted a request for regulatory approval
for CIMZIA for the treatment of Crohn's disease to the FDA, and that it plans to
request authorization for marketing of the drug from the European Union
regulatory authorities in a matter of weeeks.

         The Company retains all rights to use and/or sub-license all of the
Company's PEG technology for the Company's own proprietary products and/or those
the Company may develop with co-commercialization partners. Since 2002, the
Company has continued to broaden its intellectual property estate by filing
additional PEG patents that are exclusive to the Company, including a number
that pertain to our next-generation customized PEG linker platform that utilizes
proprietary linker chemistries that cover the spectrum of stable and controlled
releasable linkers.



                                      F-37
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         In January 2002, as part of a patent infringement lawsuit settlement
agreement, the Company purchased $40.0 million of newly issued Nektar
convertible preferred stock. During the year ended June 30, 2004, the Company
converted approximately 50% of the preferred stock into common stock and sold
approximately 50% of the Company's investment in Nektar, which resulted in a net
gain on investments of $11.0 million and cash proceeds of $17.4 million. In
January 2006, the remainder of the Company's Nektar preferred stock
automatically converted into 1,023,292 common stock and in January and February
2006, the Company sold all shares of Nektar common stock it held, resulting in a
net gain of $13.8 million and cash proceeds of $20.2 million.

      SKYEPHARMA AGREEMENTS

         In December 2002, the Company entered into a strategic alliance with
SkyePharma PLC (SkyePharma), under which the Company licensed the U.S. and
Canadian rights to SkyePharma's DEPOCYT, an injectable chemotherapeutic approved
for the treatment of patients with lymphomatous meningitis. Under the terms of
the agreement, the Company paid SkyePharma a license fee of $12.0 million.
SkyePharma manufactures DEPOCYT and the Company purchases finished product at
35% of the Company's net sales, which percentage can be reduced should a defined
sales target be exceeded. The Company has recorded the $12.0 million license fee
as an intangible asset that is being amortized over a ten-year period.

         This alliance also included a broad technology access agreement, under
which the two companies may draw upon 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 Enzon's proprietary PEG
modification technology, for which the Company received a $3.5 million
technology fee which has been deferred and is being amortized to total royalty
revenue over 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, as will future revenues
generated from the commercialization of any jointly-developed products.

         Under this alliance, the Company is required to purchase finished
product equal to $5.0 million in net sales for each 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 the Company's 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 the Company's sales
exceed an annualized run rate of $25.0 million for four consecutive quarters.
For the six months ended December 31, 2005, net sales of DEPOCYT were
approximately $4.5 million. The Company is 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.



                                      F-38
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         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 it purchased
from SkyePharma prior to termination.

      ZENEUS MANUFACTURING AGREEMENT

         Zeneus Pharma, Ltd. (Zeneus) owns the right to market ABELCET in any
markets outside of the U.S., Canada and Japan. The Company's supply agreement
with Zeneus requires that the Company supply Zeneus 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 that
would subsequently be adjusted to the Company's actual manufacturing cost.
Beginning on July 1, 2004 through the termination of the agreement in 2011, the
Company supplies these products at the Company's manufacturing cost plus fifteen
percent for ABELCET and plus twenty percent for MYOCET. In December 2005, Zeneus
became a wholly owned subsidiary of Cephalon, Inc.

(16)  RECENT ACCOUNTING PRONOUNCEMENTS

         In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections", which replaces APB No. 20, "Accounting Changes", and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements". Statement
154 changes the requirements for the accounting and reporting of a change in
accounting principle. APB No. 20 previously required that most voluntary changes
in an accounting principle be recognized by including the cumulative effect of
the new accounting principle in net income of the period of the change. SFAS No.
154 now requires retrospective application of changes in an accounting principle
to prior period financial statements, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. The
Statement is effective for fiscal years beginning after December 15, 2005. The
adoption of this statement will not have an immediate material impact on our
financial statements although the accounting change that would trigger its
implementation may be material.



                                      F-39
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         In November 2005, the FASB Staff issued FSP 115-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments".
This document addresses the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the measurement
of an impairment loss. The Staff essentially reaffirms previous guidance
relating to impairment of debt and equity securities and nullifies certain
requirements of EITF Issue 03-1 of the same title. The guidance in FSP 115-1 is
effective for reporting periods beginning after December 15, 2005. The Company
does not anticipate the new guidance will have a material effect on its
consolidated results of operations or financial condition. Disclosure
requirements of EITF 03-1 carried forward into FSP 115-1 have been effective
since July 2004.

(17)  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
employment agreements with certain members of upper management, that provide
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.

(18)  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 2006 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 December 31, 2005
are (in thousands):

                                                          Operating
                  Year ending December 31,                 leases
                  ------------------------              --------------
                  2006                                      $1,713
                  2007                                       1,746
                  2008                                         968
                  2009                                         867
                  2010                                         867
                  Thereafter                                 8,057
                                                        --------------
                  Total minimum lease payments             $14,218
                                                        ==============

         Rent expense amounted to $795,000, $1.4 million, $1.4 million and $1.3
million for the six months ended December 31, 2005 and the years ended June 30,
2005, 2004 and 2003, respectively.



                                      F-40
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(19)  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 six months ended December 31, 2005 and the years ended
June 30, 2005, 2004, and 2003 were $338,000, $631,000, $627,000 and $375,000,
respectively.

         In November 2003, the Board of Directors adopted the Executive Deferred
Compensation Plan (the Plan). The Plan was amended in January 2005. The Plan is
intended to aid the Company in attracting and retaining key employees by
providing a non-qualified compensation deferral vehicle. At June 30, 2005
$560,000 of deferred compensation pertaining to the Plan was included in accrued
expenses in the consolidated balance sheets. At December 31, 2005, there was no
deferred compensation included in accrued expenses.

(20)  RELATED PARTY TRANSACTIONS

         Two of the Company's executive officers received relocation benefits in
connection with their joining the Company. The Company is administering these
benefits through a relocation services agreement with an independent third party
(the Provider) pursuant to which, in accordance with the Company's relocation
policy, the Provider purchased their residences and holds the assets at purchase
prices calculated using the average of two independent appraisals of the
property. One officer was paid $412,384 in September 2005 in connection with the
transaction which amount represents his equity in the property. The other
officer was paid $324,388 in March 2005, representing his equity in the
property. These amounts are classified under other current assets on the
consolidated balance sheets at December 31, 2005 ($736,772) and June 30, 2005
($324,388). Under the relocation services agreement, the Company reimbursed the
Provider for the equity component of the Purchase Price and the related closing
costs. The Company is responsible for a $2,500 service fee to the Provider as
well as carrying and sales costs that the Provider incurs in connection with
selling each property. The Company will receive the net proceeds from the resale
of the property, and, if the property is sold for less than the Purchase Price,
the Company is responsible for reimbursing the Provider for the amount of the
deficiency.

(21)  BUSINESS AND GEOGRAPHICAL SEGMENTS

         During the quarter ended December 31, 2005, Enzon's operations were
organized into three reportable segments: Products, Royalties and Contract
Manufacturing. Previously, the Company operated as one business segment with
central control and decision making in the hands of the chief executive officer
or chief operating decision maker (CODM). Under the new structure, the
responsibility for management and oversight of operations of product sales and
marketing and for contract manufacturing has been distributed. The financial
performance of these operating segments is reviewed by the CODM for purposes of
allocating corporate resources.

         As a result of the realignment of responsibilities and the manner in
which the CODM monitors and evaluates performance of the Company and those
responsible for their respective franchises, the definition of the Company's
operating and reportable segments was changed in the quarter ended December 31,
2005. The three reportable segments are as follows:



                                      F-41
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Products - The Company has developed or acquired four therapeutic,
FDA-approved products focused primarily in oncology. The Company currently
markets its products through its specialized U.S. sales force that calls upon
specialists in oncology, hematology and other critical care disciplines. The
Company's four proprietary marketed brands are ABELCET, ADAGEN, ONCASPAR and
DEPOCYT.

         Royalties - The Company derives licensing income from royalties and
contract revenues received on the manufacture and sale of products that utilize
its proprietary technology. Royalties are primarily comprised of royalties the
Company receives on sales by Schering-Plough of PEG-INTRON. In addition to
royalties from PEG-INTRON, the Company also receives royalty revenues on PEGASYS
and MACUGEN through an agreement with Nektar under which the Company shares in
Nektar's revenues or profits on these products. Contract revenue represents fee
and royalty revenues received from firms utilizing Enzon's technology in their
manufacturing processes. Under the new segment reporting structure, contract
revenue is reported as part of royalty revenue.

         Contract Manufacturing - The Company contract manufactures ABELCET for
export and MYOCET for Zeneus and the injectable multivitamin, MVI(R) for Mayne
in its manufacturing facility in Indianapolis, Indiana.



                                      F-42
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The following tables present segment revenue and profitability
information for the six months ended December 31, 2005 and the fiscal years
ended June 30, 2005, 2004 and 2003. Historical data have been recast to conform
to the new three-segment approach. (In thousands):

<TABLE>
<CAPTION>
                                                                         Contract
  Segment                                Products      Royalties       Manufacturing  Corporate(1)   Consolidated
  -------                                --------      ---------       -------------  ------------   ------------

<S>                                      <C>            <C>             <C>           <C>             <C>
Revenues        December 31, 2005        $ 49,436       $17,804         $  6,459      $      -        $ 73,699
                June 30, 2005              99,192        51,414           15,644             -         166,250
                June 30, 2004             107,922        48,738           12,911             -         169,571
                June 30, 2003              59,264        78,400            8,742             -         146,406

Segment         December 31, 2005        (267,515)(2)    17,804           (5,614)      (37,590)       (292,915)
(Loss) Profit   June 30, 2005              13,584        51,414            4,421       (58,844)         10,575
                June 30, 2004              27,011        48,738            2,928       (71,635)          7,042
                June 30, 2003              10,199        78,400            3,565       (62,267)         29,897

Assets          December 31, 2005          58,304(2)      2,265            3,686       277,090         341,345
                June 30, 2005             342,342        15,949           10,153       282,417         650,861
                June 30, 2004             360,108        10,863           11,273       340,166         722,410
                June 30, 2003             374,984        18,676           14,259       320,647         728,566

Amortization    December 31, 2005           8,873             -                -             -           8,873
                June 30, 2005              17,925             -                -             -          17,925
                June 30, 2004              17,909             -                -             -          17,909
                June 30, 2003              10,820             -                -             -          10,820
</TABLE>

(1) Corporate expenses include operating income (loss) components that are not
directly attributable to an operating segment, including general and
administrative expenses, exploratory and preclinical research and development
expenses, and treasury activities. Corporate assets consist principally of cash,
short-term investments, marketable securities, property and equipment and
certain working capital items.

(2) During the quarter ended December 31, 2005, the Company recognized
impairment write-downs of intangible assets and goodwill in the amount of $133.1
million and $151.0 million, respectively.

         The Company does not identify or allocate property and equipment by
operating segment, and does not allocate depreciation as such to the operating
segments, nor does the CODM evaluate operating segments on these criteria.
Operating segments do not have intersegment revenue, and, accordingly, there
is none to be reported. The Company does not allocate interest income, interest
expenses or taxes to operating segments.

Following is a reconciliation of segment (loss) profit to consolidated (loss)
income before income tax (benefit) provision (in thousands):

<TABLE>
<CAPTION>
                                            Six Months                    Year Ended June 30,
                                              Ended            --------------------------------------
                                           December 31, 2005      2005           2004           2003
                                           -----------------      ----           ----           ----
<S>                                          <C>                <C>            <C>           <C>
Segment (loss) profit                        $(255,325)         $ 69,419       $ 78,677      $ 92,164
Unallocated corporated operating expense       (37,590)          (58,844)       (71,635)      (62,267)
                                             ---------          --------       --------      --------
  Operating (loss) income                     (292,915)           10,575          7,042        29,897
Other corporate income and expense              (9,369)          (22,237)           343        16,052
                                             ---------          --------       --------      --------
  (Loss) income before income tax
  (benefit) provision                        $(302,284)         $(11,662)      $  7,385      $ 45,949
                                             =========          ========       ========      ========
</TABLE>


                                      F-43
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Revenues consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                            Six Months
                                              Ended                        Year Ended June 30,
                                            December 31,     ------------------------------------------------
                                               2005              2005               2004            2003
                                          ---------------    --------------     -------------    ------------
<S>                                          <C>                <C>               <C>             <C>
Product sales, net
   ADAGEN                                    $10,896             $19,301           $17,113         $16,025
   ONCASPAR                                   13,005              21,216            18,050          12,432
   DEPOCYT                                     4,459               7,446             5,029           2,458
   ABELCET                                    21,076              51,229            67,730          28,349
                                          ---------------    --------------     -------------    ------------
      Total product sales, net                49,436              99,192           107,922          59,264
   Royalties                                  17,804              51,414            48,738          78,400
   Contract manufacturing                      6,459              15,644            12,911           8,742
                                          ---------------    --------------     -------------    ------------
          Total revenues                     $73,699            $166,250          $169,571        $146,406
                                          ===============    ==============     =============    ============
</TABLE>

         Outside the U.S., the Company principally sells: ADAGEN in Europe,
ONCASPAR in Germany, DEPOCYT in Canada, and ABELCET in Canada. Information
regarding revenues attributable to the U.S. 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):

<TABLE>
<CAPTION>
                                               Six Months
                                                 Ended                      Year Ended June 30,
                                               December 31,     ---------------------------------------------
                                                  2005              2005             2004           2003
                                             ---------------    -------------     -----------    ------------
<S>                                              <C>              <C>              <C>            <C>
Revenues:
   U.S.                                          $52,650          $113,891         $125,268       $106,160
   Europe                                         14,079            36,667           34,715         35,558
   Other                                           6,970            15,692            9,588          4,688
                                             ---------------    -------------     -----------    ------------
   Total revenues                                $73,699          $166,250         $169,571       $146,406
                                             ===============    =============     ===========    ============
</TABLE>




                                      F-44
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(22)  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following tables present summarized unaudited quarterly financial
data (in thousands, except per-share amounts):

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                 --------------------------------------
                                                   September 30,        December 31,
                                                       2005                2005(2)
                                                 ------------------  ------------------
<S>                                                  <C>                <C>
Revenues                                             $44,047            $  29,652
Gross profit (1)                                      16,605               16,074
Tax provision (benefit)                                1,112              (12,059)
Net loss                                              (5,766)            (285,571)
                                                 ==================  ==================
Net loss per common share:
    Basic                                            $ (0.13)           $   (6.56)
    Diluted                                          $ (0.13)           $   (6.56)
Weighted average number of shares -
    Basic                                             43,486               43,523
Weighted average number of shares -
    Diluted                                           43,486               43,523
</TABLE>


(1)  Gross profit is calculated as the aggregate of product sales, net and
     contract manufacturing revenue, less cost of product sales and
     manufacturing revenue.

(2)  During the quarter ended December 31, 2005, the Company recognized
     impairment write-downs of intangible assets in the amount of $133.1 million
     and goodwill in the amount of $151.0 million. The goodwill write-down
     triggered the elimination of a deferred tax liability resulting in a tax
     benefit of $12.0 million.



                                      F-45
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                         ------------------------------------------------------------
                                          September 30,     December 31,     March 31,      June 30,
                                              2004             2004            2005          2005
                                         ---------------  ----------------  ------------  -----------
<S>                                          <C>               <C>             <C>           <C>
Revenues                                     $40,454           $42,916         $39,213       $43,667
Gross profit (1)                              19,139            20,044          16,559        13,070
Tax (benefit) provision                         (637)              102          (1,761)       80,239
Net loss                                        (939)              (10)         (3,125)      (85,532)
                                         ===============  ================  ============  ===========
Net loss per common share:
    Basic                                    $ (0.02)          $ (0.00)        $ (0.07)      $ (1.97)
    Diluted                                  $ (0.02)          $ (0.00)        $ (0.07)      $ (1.97)
Weighted average number of shares -
    Basic                                     43,470            43,483          43,490        43,501
Weighted average number of shares -
    Diluted                                   43,470            43,483          43,490        43,501
</TABLE>


<TABLE>
<CAPTION>
                                                           Three Months Ended
                                         ------------------------------------------------------------
                                          September 30,     December 31,     March 31,      June 30,
                                              2003             2003            2004          2004
                                         ---------------  ----------------  ------------  -----------
<S>                                          <C>               <C>             <C>           <C>
Revenues                                     $40,644           $41,698        $44,379      $42,850
Gross profit (1)                              15,653            18,073         20,570       19,551
Tax provision (benefit)                          482              (631)        (3,408)       6,734
Net income (loss)                              1,136              (303)         8,103       (4,728)
                                         ===============  ================  ============  ===========
Net income (loss) per common share:
    Basic                                    $  0.03           $ (0.01)       $  0.19      $ (0.11)
    Diluted                                  $  0.03           $ (0.01)       $  0.18      $ (0.11)
Weighted average number of shares -
    Basic                                     43,290            43,307         43,368       43,394
Weighted average number of shares -
    Diluted                                   43,629            43,307         43,817       43,394
</TABLE>

(1)  Gross profit is calculated as the aggregate of product sales, net and
     contract manufacturing revenue, less cost of product sales and
     manufacturing revenue.



                                      F-46
<PAGE>


                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  Additions
                                                       --------------------------------
                                          Balance at    Charged to                                       Balance
                                          beginning     costs and        Charged to                      at end of
                                          of period      expenses      other accounts     Deductions      period
                                         ---------------------------------------------------------------------------
<S>                                        <C>                 <C>        <C>     <C>       <C>      <C>   <C>
Six months ended December 31, 2005:
     Allowance for chargebacks,
           returns, doubtful accounts
           and cash discounts              $  7,242             -         $15,014(1)        $(17,033)      $  5,223

Year ended June 30, 2005:
     Allowance for chargebacks,
           returns, doubtful accounts
           and cash discounts                 8,785             -          37,982(1)         (39,525)         7,242

Year ended June  30, 2004:
     Allowance for chargebacks,
           returns, doubtful accounts
           and cash discounts                 7,134             -          52,619(1)         (50,968)         8,785

Year ended June  30, 2003:
     Allowance for chargebacks,
           returns, doubtful accounts
           and cash discounts                     -             -          18,020(1)         (10,886)         7,134
</TABLE>

(1) Amounts are recognized as a reduction from gross sales.





                                      F-47
<PAGE>


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    Exhibit                                                                                               Page
    Number                                              Description                                      Number
    ------                                              -----------                                      ------
<S>                  <C>                                                                                  <C>
        3(i)         Restated Certificate of Incorporation                                                  E-2
       10.3          First Amendment to Lease regarding 20 Kingsbridge Road, Piscataway,                   E-13
                     New Jersey, dated as of November 13, 2001
       10.23         Outside Board of Directors' Compensation Plan, as amended                             E-29
       12.1          Computation of Ratio of Earnings to Fixed Charges                                     E-30
       12.2          Subsidiaries of registrant                                                            E-31
       23.0          Consent of KPMG LLP, independent registered public accounting firm                    E-32
       31.1          Certification of Principal Executive Officer pursuant to Section 302 of the           E-33
                     Sarbanes - Oxley Act of 2002
       31.2          Certification of Principal Financial Officer pursuant to Section 302 of the           E-35
                     Sarbanes - Oxley Act of 2002
       32.1          Certification of Principal Executive Officer Pursuant to Section 906 of the           E-37
                     Sarbanes - Oxley Act of 2002
       32.2          Certification of Principal Financial Officer Pursuant to Section 906 of the           E-38
                     Sarbanes - Oxley Act of 2002
</TABLE>


                                      E-1