<PAGE>

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


                                  FORM 10-K/A
                               (AMENDMENT NO. 1)


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

                    FOR THE FISCAL YEAR ENDED JUNE 30, 2004

                                       OR

|_|  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                    FOR THE TRANSITION PERIOD FROM __ TO __.
                         COMMISSION FILE NUMBER 0-12957

                               [Enzon Inc. Logo]


             (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
                                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>

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

         Common Stock, $.01 par value; Preferred Stock Purchase Rights
                                (Title of Class)

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

   Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

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

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

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

                      DOCUMENTS INCORPORATED BY REFERENCE

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

<PAGE>
                                EXPLANATORY NOTE


   This annual report on Form 10-K/A amends our original annual report on Form
10-K for the year ended June 30, 2004 as of the date of filing the original
Form 10-K on September 13, 2004. We are amending and restating our original
annual report on Form 10-K in its entirety to correct an error made in the
accounting for a protective collar arrangement, which is classified as a
derivative hedging instrument, entered into to reduce the exposure associated
with the 1.5 million shares of common stock of NPS Pharmaceuticals Inc.
("NPS") we hold and an error in assessing the realizeability of deferred tax
assets related to available-for-sale securities. This amended Annual Report on
Form 10-K/A for the year ended June 30, 2004 reflects corrections and
restatements of the following financial statements: (a) consolidated balance
sheet as of June 30, 2004; (b) consolidated statement of operations for the
year ended June 30, 2004; (c) consolidated statement of stockholders' equity
for the year ended June 30, 2004; and (d) consolidated statement of cash flows
for the year ended June 30, 2004. For a more detailed description of
corrections and restatements made to the financial statements, see "Note 2.
Restatement of Consolidated Financial Statements" to the accompanying notes to
the consolidated financial statements.

   In addition to the changes discussed above, we have also made other changes,
including, but not limited to the following: (a) we corrected our total assets
and total stockholders' equity for the year ended June 30, 2004 in "Item 6
Selected Financial Data"; (b) we corrected our other income for the year ended
June 30, 2004 under "Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations"; (c) we corrected our unrealized loss on
securities that arose during the year and our total comprehensive loss for the
year ended June 30, 2004 in Note 4 "Comprehensive Income" to the accompanying
notes to the consolidated financial statements; (d) we corrected our unrealized
gain previously included in other comprehensive income and recognized in other
income for the year ended June 30, 2004 with respect to the sale and repurchase
of shares of NPS in Note 15 "Merger Termination Agreement" to the accompanying
notes to the consolidated financial statements (e) we corrected our total gross
deferred tax assets, valuation allowance and net deferred tax assets for the
year ended June 30, 2004 in Note 16 "Income Taxes" to the accompanying notes to
the consolidated financial statements; and (f) we corrected our net loss and net
loss per common share for the quarter and fiscal year ended June 30, 2004 in
Note 24 "Quarterly Results of Operations (Unaudited)" to the accompanying notes
to the consolidated financial statements.

   This amended Annual Report on Form 10-K/A speaks as of the end of our fiscal
year 2004 as required by Form 10-K or as the date of filing the original Form
10-K. It does not update any of the statements contained therein. This Annual
Report on Form 10-K/A contains forward looking statements, which were made at
the time the original Annual Report on Form 10-K was filed on September 13,
2004 and is subject to the factors described in "Item 1. Business -- Risk
Factors" and must be considered in light of any subsequent statements
including forward looking statements in any written statement subsequent to
the filing of the original Form 10-K, including statements made in filings on
reports on Form 8-K.


                                       2

<PAGE>
                          ENZON PHARMACEUTICALS, INC.

                         2004 FORM 10-K/A ANNUAL REPORT
                               TABLE OF CONTENTS

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                                                                                                                          PAGE
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<S>              <C>                                                                                                 <C>
                                                            PART I
Item 1.          Business........................................................................................            5
Item 2.          Properties......................................................................................           34
Item 3.          Legal Proceedings...............................................................................           34
Item 4.          Submission of Matters to a Vote of Security Holders.............................................           34
                                                           PART II
Item 5.          Market for the Registrant's Common Equity, Related Stockholder Matters,
                 and Issuer Purchases of Equity Securities.......................................................           35
Item 6.          Selected Financial Data.........................................................................           36
Item 7.          Management's Discussion and Analysis of Financial Condition and Results of Operations...........           36
Item 7A.         Quantitative and Qualitative Disclosures About Market Risk......................................           62
Item 8.          Financial Statements and Supplementary Data.....................................................           62
Item 9.          Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............           62
Item 9A.         Controls and Procedures.........................................................................           63
                                                           PART III
Item 10.         Directors and Executive Officers of the Registrant..............................................           64
Item 11.         Executive Compensation..........................................................................           64
Item 12.         Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..           64
Item 13.         Certain Relationships and Related Transactions..................................................           64
Item 14.         Principal Accounting Fees and Services..........................................................           64
                                                           PART IV
Item 15.         Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................           65
</TABLE>


                                       3
<PAGE>
   ABELCET(R), ADAGEN(R), CLEAR(R), MARQIBO(R), ONCASPAR(R), and SCA(R) are our
registered trademarks. Other trademarks and trade names used in this annual
report are the property of their respective owners.

   All information on this Form 10-K/A is as of September 13, 2004, except as
described in the "Explanatory Note" on page 2 and other non-material changes
that have been made subsequent to such date and the Company undertakes no
obligation to update this information.

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

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

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


                                       4
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

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

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

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

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

   Our drug development programs focus on human therapeutics for life-
threatening diseases through applications of our macromolecular engineering
technology platform, including our proprietary PEG (polyethylene glycol)
modification and single-chain antibody (SCA(R)) technologies. We also
complement our internal research and development efforts with strategic
transactions and partnerships that provide access to promising clinical
compounds. MARQIBO(R) (vincristine sulfate liposomes injection), which was
formerly referred to as Onco TCS and which we are jointly developing with our
partner Inex Pharmaceuticals Corporation ("Inex"), is currently being
evaluated for marketing approval


                                       5
<PAGE>
by the United States Food and Drug Administration ("FDA"). We are also
internally developing two late-stage clinical compounds, Pegamotecan and ATG
FRESENIUS S, and we have various other compounds at earlier stages of
development that we are developing independently or through strategic
partnerships.

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

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

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

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


                                       6
<PAGE>
Inc. and its worldwide development and commercialization partner, Pfizer,
announced the FDA's acceptance of an NDA for MACUGEN(TM) for the treatment of
neovascular age-related macular degeneration. The FDA has designated the
MACUGEN(TM) NDA for Priority Review.

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

MARKETED PRODUCTS

 ABELCET

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

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

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

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

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

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

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


                                       7
<PAGE>
   The CLEAR database supports the efficacy and safety of ABELCET across a wide
spectrum of fungal pathogens (both yeasts and molds) and broad spectrum of
patients. Additionally and of particular significance, the CLEAR database also
documents the efficacy and safety of ABELCET in rapidly emerging, more
difficult to treat and often treatment resistant pathogens such as Fusarium,
Zygomycetes, and Candida (Krusei and Glabrata). The CLEAR registry reflects
the largest known registry in these emerging fungal pathogens.

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

 ONCASPAR

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

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

 ADAGEN

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

   The ADA enzyme in ADAGEN is obtained from bovine intestine. We purchase this
enzyme from the world's only FDA-approved supplier, Hoffmann-LaRoche
Diagnostics GmbH ("Roche Diagnostics"), based in Germany, which until 2002
supplied ADA derived from cattle in Germany. In


                                       8
<PAGE>
November 2000, bovine spongiform encephalopathy ("BSE"), also known as mad cow
disease, was detected in certain cattle herds in Germany. During 2002, in
order to comply with FDA requirements, our supplier secured a new source of
bovine intestines from New Zealand, which has no confirmed cases of BSE in its
cattle herds. There is evidence of a link between the agent that causes BSE in
cattle and a new variant form of Creutzfeld-Jakob disease or nvCJD in humans.
Based upon the use of certain purification steps taken in the manufacture of
ADAGEN and from our analysis of relevant information concerning this issue, we
consider the risk of product contamination to be low. However, the lengthy
incubation period of BSE and the absence of a validated test for the BSE agent
in pharmaceutical products make it impossible to be absolutely certain that
ADAGEN is free of the agent that causes nvCJD. To date, cases of nvCJD have
been rare in the United Kingdom, where large numbers of BSE-infected cattle
are known to have entered the human food chain. To date, no cases of nvCJD
have been linked to ADAGEN or, to our knowledge, any other pharmaceutical
product, including vaccines manufactured using bovine derived materials from
countries where BSE has been detected. Nonetheless, at the present time, there
may be some risk that bovine-derived pharmaceutical products, including
ADAGEN, could give rise to nvCJD.

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

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

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

 DEPOCYT

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

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


                                       9
<PAGE>
   In a randomized, multi-center trial of patients with lymphomatous
meningitis, treated either with 50 mg of DEPOCYT administered every 2 weeks or
standard intrathecal chemotherapy administered twice a week, DEPOCYT achieved
a complete response rate of 41% compared with a complete response rate of 6%
for unencapsulated cytarabine. In this study, complete response was
prospectively defined as (i) conversion of positive to negative CSF cytology
and (ii) the absence of neurologic progression. DEPOCYT also demonstrated an
increase in the time to neurologic progression of 78.5 days for DEPOCYT versus
42 days for unencapsulated cytarabine. There are no controlled trials,
however, that demonstrate a clinical benefit resulting from this treatment,
such as improvement in disease related symptoms, increased time to disease
progression, or increased survival.

 PEG-INTRON

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

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

 Hepatitis C

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

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

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

   In the pivotal Phase III clinical study results, Schering-Plough reported
that PEG-INTRON plus REBETOL achieved an overall rate of sustained virologic
response ("SVR") of 54% in previously untreated adult patients with chronic
hepatitis C, compared to 47% for patients treated with


                                       10
<PAGE>
REBETRON (INTRON A plus REBETOL). When analyzed on an optimized dose/body-
weight basis, SVR was 61%. In 2001, researchers performed a retrospective
analysis on the pivotal clinical data in a study designed to evaluate the
effect of adherence to therapy on treatment outcome for HCV patients receiving
PEG-INTRON and REBETOL. Analysis of SVR rates according to patient compliance
during therapy showed that patients receiving greater than or equal to 80% of
their total interferon dose and greater than or equal to 80% of their
ribavirin dose for greater than or equal to 80% of the expected duration of
therapy had enhanced SVR rates compared to patients who were not adherent to
therapy.

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

   Hoffmann-La Roche markets PEGASYS, a PEGylated version of its alpha
interferon product ROFERON-A, in both North America and Europe. PEGASYS
competes directly with PEG-INTRON. Schering-Plough and Hoffmann-LaRoche have
been the major competitors in the global alpha-interferon hepatitis C market
since the approval of INTRON A and ROFERON-A. Since its launch in December
2002, PEGASYS has taken market share away from PEG-INTRON and the overall
market for pegylated alpha interferon in the treatment of hepatitis C has not
increased sufficiently to offset the effect PEGASYS sales have had on sales of
PEG-INTRON. As a result, quarterly sales of PEG-INTRON and the royalties we
receive on those sales have declined in recent quarters. We cannot assure you
that PEGASYS will not continue to gain market share at the expense of PEG-
INTRON, which could result in lower PEG-INTRON sales and lower royalties to
us.

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

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

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

 Cancer

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


                                       11
<PAGE>
in several Phase 2 studies as a potential treatment for ovarian epithelial,
peritoneal cavity or fallopian tube cancers; metastatic kidney cancer; and
stage IV melanoma.

PRODUCTS UNDER DEVELOPMENT

 MARQIBO(R)

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

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

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

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

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

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

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

   The NDA was submitted under the provisions of Subpart H of the Food, Drug
and Cosmetic Act. The Accelerated Approval regulations are intended to make
promising products for life-threatening diseases available to the market on
the basis of preliminary evidence prior to formal demonstration of


                                       12
<PAGE>
patient benefit. These regulations provide a path to approval using clinical
data from a single-arm trial. The risk of non-approval with an NDA submitted
under Subpart H is higher than those associated with a standard NDA review
because of, among other things, the smaller number of patients and more
limited data. To the extent the FDA challenges or invalidates any of the
clinical trial data, the risks are greater with a Subpart H review that the
remaining data will not be sufficient to support regulatory approval. Even if
approval is obtained, approvals granted under Subpart H are provisional and
require a written commitment to complete post-approval clinical studies that
formally demonstrate patient benefit. Securing FDA approval based on a single-
arm trial, such as the trial underlying the MARQIBO NDA, is a particular
challenge and approval can never be assured. If approved, we plan to market
MARQIBO through our North American specialty sales force, which currently
targets the oncology market.

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

   The current standard first-line treatment for the aggressive form of NHL is
the CHOP chemotherapy combination, comprising the drugs cyclophosphamide,
doxorubicin hydrochloride, ONCOVIN(R) (vincristine) and prednisone, every
three weeks for six to eight cycles.

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

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

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

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

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

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

 PEGAMOTECAN

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


                                       13
<PAGE>
   For many years, camptothecin has been known to be a highly potent cytotoxic
agent but its low solubility and systemic toxicity has rendered the product
not suitable for human use. Two camptothecin derivatives, topotecan and
irinotecan, have been approved by the FDA for the treatment of small-cell
lung, ovarian, and colorectal cancers. These two products together achieved
2002 worldwide sales of approximately $970 million.

   We have linked PEG and camptothecin so that it forms a prodrug, i.e., a
compound that is converted into the active drug within the body. The PEG
component confers a long circulating half-life and allows the compound to
accumulate in tumor sites. Animal tests have shown that Pegamotecan has better
or equal efficacy compared to other cytotoxic compounds, including other
topoisomerase I inhibitors. At the June 2004 ASCO meeting, clinical
investigators presented results from a Phase 2 study in which Pegamotecan was
evaluated as a single-agent treatment for gastric and gastroesophageal
junction cancers. In this open-label study, 35 patients with gastric and
gastroesophageal junction cancers were treated, of which 28 patients were
treatment naive and seven patients had received one prior chemotherapy
regimen. Of the 35 patients treated, 19 or 54% experienced a response or
stabilization of disease. Five patients (14%) achieved a partial response and
14 patients (40%) experienced stable disease. Additionally, Pegamotecan showed
promising activity based on time to response and duration of response. For
those patients that achieved a partial response, the median time to response
was 46 days, with a range of 40 days to 124 days, and the median duration of
response was 127 days, with a range of 108 days to 208 days.

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

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

 ATG-FRESENIUS S

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

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

   The immune system includes a host of targets that are impacted by the
transplant process. Monoclonal antibodies will, by definition, target only one
specific receptor such as the IL-2 receptor (Simulect/Zenapax). ATG-FRESENIUS
S is a polyclonal antibody preparation that binds to a number of targets
simultaneously, providing potentially enhanced efficacy through a more
comprehensive treatment of the immunological cascade. Thymoglobulin(R) (anti-
thymocyte globulin (rabbit)), which is marketed by Genzyme in the U.S., is the
market leading polyclonal antibody preparation for the prevention of organ
rejection in kidney transplant patients in the U.S. ATG-FRESENIUS S differs
from


                                       14
<PAGE>
Thymoglobulin in a number of significant ways, particularly because it
preferentially targets and depletes only activated T-cells, rather than
activated and non-activated T-cells, leading us to believe it will emerge
successfully in the clinic and allow us to compete in the market effectively.

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

 SS1P

   SS1P is a fusion protein, or immunotoxin, consisting of a disulfide linked
antibody fragment linked to domains II and III of Pseudomonas exotoxin A. The
antibody fragment targets mesothelin, a cell surface antigen over expressed in
mesothelioma, ovarian and pancreatic cancers. Importantly, mesothelin is only
minimally expressed in normal pancreas, pancreatitis (inflammation of the
pancreas), benign pancreatic adenoma, or elsewhere in the body.

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

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

 PRECLINICAL PIPELINE

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

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

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

RESEARCH AND DEVELOPMENT

   To date, our primary sources of new clinical products have been our internal
research and development activities and the licensing of compounds from third
parties, such as ATG-FRESENIUS S and MARQIBO. Research and development
expenses for the fiscal years ended June 30, 2004, 2003 and 2002 were
approximately $34.8 million, $21.0 million and $18.4 million, respectively. In
addition,


                                       15
<PAGE>
the Company acquired the commercialization rights in the United States, Canada
and Mexico to MARQIBO a product being developed jointly developed with Inex.
In January 2004 the Company made a $12.0 million up front payment which has
been expensed as acquired in-process research and development.

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

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

PROPRIETARY TECHNOLOGIES

 MACROMOLECULAR ENGINEERING

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

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

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

 PEG TECHNOLOGY

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

   These advantages include:

   o extended circulating life,

   o lower toxicity,

   o increased drug stability, and

   o enhanced drug solubility.


                                       16
<PAGE>
                         [PEG-enhanced molecule image]


                    A depiction of a PEG-enhanced molecule.

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

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

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

 SCA TECHNOLOGY

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

   SCAs are genetically engineered versions of antibodies incorporating only a
small portion of the antibody, namely the antigen binding domains designated
variable light (VL) and variable heavy (VH).


                                       17
<PAGE>
SCA proteins are designed to expand on the therapeutic and diagnostic
applications possible with monoclonal antibodies. SCAs have the binding
specificity and affinity of monoclonal antibodies and, in their native form,
are about one-fifth to one-sixth of the size of a monoclonal antibody,
typically giving them very short half-lives. SCAs differ from monoclonal
antibodies in various respects, which may offer benefits for certain
applications:

   o faster clearance from the body,

   o greater tissue penetration for both diagnostic imaging and therapy,

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

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

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

   o the potential for non-parenteral application.


       [Monoclonal Antibody Image]         [Single-Chain Antibody Image]


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

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

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

 SCAS UNDER DEVELOPMENT

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

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

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


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<PAGE>
   The most advanced SCA-based compound is our licensee Alexion's pexelizumab.
Pexelizumab is an SCA directed against complement protein C5, which is a
component of the body's normal defense against foreign pathogens.
Inappropriate complement activation during cardiopulmonary bypass graft
surgery ("CABG") and myocardial infarction can lead to clinical problems. In
July 2004, Alexion announced that they and their collaboration partner for
pexelizumab, Procter & Gamble Pharmaceuticals, Inc. (Procter & Gamble), have
initiated patient enrollment for a pivotal Phase 3 trial in patients
undergoing coronary artery bypass graft surgery (PRIMO-CABG-2). Alexion also
reported in June 2004 that they, together with Procter & Gamble, had reached
agreement with the FDA on the design for the PRIMO-CABG-2 study under the
Special Protocol Assessment process. The study is expected to enroll
approximately 4,000 patients in North America and Europe. PRIMO-CABG-2
represents the second Phase 3 trial conducted in CABG patients. Alexion
expects that, if successful, this trial will complete the filing package that
will serve as the primary basis of review for the approval of a Biologics
License Application ("BLA") for the CABG indication.

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

 SCHERING-PLOUGH AGREEMENT

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

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

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

 AVENTIS LICENSE AGREEMENTS

   During 2002, we amended our license agreement with Aventis to reacquire the
rights to market and distribute ONCASPAR in the United States, Mexico, Canada
and the Asia/Pacific region. In return


                                       19
<PAGE>
for the marketing and distribution rights we paid Aventis $15.0 million and
are obligated to pay a 25% royalty on net sales of ONCASPAR through 2014. The
license agreement may be terminated by Aventis earlier upon 60 days' notice if
we fail to make the required royalty payments or we decide to cease selling
ONCASPAR. Following the expiration of the agreement in 2014, all rights will
revert back to us, unless the agreement is terminated earlier because we fail
to make royalty payments or cease to sell ONCASPAR. Prior to the amendment,
Aventis was responsible for marketing and distribution of ONCASPAR. Under the
previous agreement, Aventis paid us a royalty on net sales of ONCASPAR of
27.5% on annual sales up to $10.0 million and 25% on annual sales exceeding
$10.0 million. These royalty payments included Aventis' cost of purchasing
ONCASPAR from us under a supply agreement.

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

 MEDAC LICENSE AGREEMENT

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

 INEX DEVELOPMENT AND COMMERCIALIZATION AGREEMENTS

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

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

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


                                       20
<PAGE>
   We will share equally with Inex the future development costs to obtain and
maintain marketing approvals in North America for MARQIBO, and we will pay all
sales and marketing costs and certain other post-approval clinical development
costs typically associated with commercialization activities. We plan to
market MARQIBO to the oncology market through our North American sales force,
which currently markets ABELCET, ONCASPAR, and DEPOCYT. Inex has the option of
complementing our sales efforts by co-promoting MARQIBO through the formation
of a dedicated North American sales and medical science liaison force. The
costs of building Inex's co-promotion force will be shared equally by both
companies and we will record all sales in the licensed territories. Inex
retains manufacturing rights and we will reimburse Inex for the manufacture
and supply of the drug at manufacturing cost plus five percent.

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

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

 FRESENIUS DEVELOPMENT AND SUPPLY AGREEMENT

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

   Under this agreement, we are responsible for obtaining regulatory approval
of the product in the U.S. In September 2004, we made a milestone payment to
Fresenius of $1.0 million upon FDA approval of the first IND and we are
obligated to make another milestone payment of $1.0 million upon our
submission of a BLA to the FDA. Fresenius will be responsible for
manufacturing and supplying the product to us and we are required to purchase
all of the finished product from Fresenius for net sales of the product in
North America. We will purchase finished product at 40% of net sales, which
percentage can be reduced should certain defined sales targets be exceeded. We
are required to purchase a minimum of $2.0 million of product in the first
year after commercial introduction and $5.0 million in the second year, with
no minimum purchase requirements thereafter. Fresenius will supply the product


                                       21
<PAGE>
to us without charge for the clinical trials for the first indication. For
subsequent trials, we will purchase the clinical supplies from Fresenius.

 MICROMET ALLIANCE

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

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

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

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

 NEKTAR ALLIANCE

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

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

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


                                       22
<PAGE>
   We have also entered into a cross-license agreement with Nektar under which
each party cross-licensed to the other party certain patents. We also granted
Nektar the right to grant sub-licenses under certain of our PEG patents to
third parties. We will receive a royalty or a share of profits on final
product sales of any products that use our patented PEG technology. We receive
approximately 0.5% or less of Hoffmann-La Roche's sales of PEGASYS, which
represents equal profit sharing with Nektar on this product. There are
currently two PEG products licensed through our Nektar partnership that are
being evaluated in late-stage clinical trials, MACUGEN(TM) (pegaptanib sodium
injection), for age-elated macular degeneration and diabetic macular edema,
and CDP870, an anti-TNF therapy for rheumatoid arthritis. We retain the right
to use all of our PEG technology and certain of Nektar's PEG technology for
our own product portfolio, as well as those products we develop in co-
commercialization collaborations with third parties. This agreement expires
upon the later of the expiration of the last licensed patent or the date the
parties are no longer required to pay royalties. Either party may terminate
the agreement upon a material breach of the agreement by the other party that
is not cured within 90 days of the receipt of written notice from the non-
breaching party or upon the declaration of bankruptcy by the other party.

   We purchased $40 million of newly issued Nektar convertible preferred stock
in January 2002. The preferred stock is convertible into Nektar common stock
at a conversion price of $22.79 per share. In the event Nektar's common stock
price three years from the date of issuance of the preferred stock or earlier
in certain circumstances is less than $22.79, the conversion price will be
adjusted down, although in no event will it be less than $18.23 per share.
Conversion of the preferred stock into common stock can occur anywhere from 1
to 4 years following the issuance of the preferred stock or earlier in certain
circumstances. As a result of a continued decline in the price of Nektar's
common stock, which the Company determined was other-than-temporary, during
December 31, 2002 the Company recorded a write-down of the carrying value of
its investment in Nektar, which resulted in a non-cash charge of $27.2 million.
During the year ended June 30, 2004, we converted the preferred stock into
common stock and sold approximately 50% of our investment in Nektar, which
resulted in a net gain on investments of $11.0 million and cash proceeds of
$17.4 million.

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

 SKYEPHARMA AGREEMENTS

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

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

   We were required to purchase minimum levels of finished product for calendar
year 2003 equal to 90% of the previous year's sales of DEPOCYT by SkyePharma
and are required to purchase finished


                                       23
<PAGE>
product equal to $5.0 million in net sales for each subsequent calendar year
("Minimum Annual Purchases") through the remaining term of the agreement.
SkyePharma is also entitled to a milestone payment of $5.0 million if our
sales of the product exceed a $17.5 million annual run rate for four
consecutive quarters and an additional milestone payment of $5.0 million if
our sales exceed an annualized run rate of $25.0 million for four consecutive
quarters. We are also responsible for a $10.0 million milestone payment if the
product receives approval for all neoplastic meningitis prior to December 31,
2006. This milestone payment will be incrementally reduced if the approval is
received subsequent to December 31, 2006 to a minimum payment of $5.0 million
for an approval after December 31, 2007.

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

 MEDEUS MANUFACTURING AGREEMENT

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

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

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

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


                                       24
<PAGE>
SALES AND MARKETING

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

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

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

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

MANUFACTURING AND RAW MATERIALS

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

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

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

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

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


                                       25
<PAGE>
   In July 1999, the FDA conducted an inspection of our manufacturing facility
in connection with our product license for ADAGEN. Following that inspection,
the FDA documented several deviations from Current Good Manufacturing
Practices, known as cGMP, in a Form 483 report. We provided the FDA with a
corrective action plan. In November 1999, the FDA issued a warning letter
citing the same cGMP deviations listed in the July 1999 Form 483, but it also
stated that the FDA was satisfied with our proposed corrective actions. As a
result of the deviations, the FDA decided not to approve product export
requests from us for ONCASPAR until it determined that all noted cGMP
deviations were either corrected or in the process of being corrected. This
restriction was removed in August 2000.

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

PATENTS AND INTELLECTUAL PROPERTY RIGHTS

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

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

   o will afford us adequate protection from competing products, or

   o will not be challenged or declared invalid.

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

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

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

   o product manufacturing trade secrets;

   o patents on uses for products;

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

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


                                       26
<PAGE>
    The effect of product patent expiration or loss also depends upon:

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

   o the growth of the market;

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

   o the requirements of generic drug laws.

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

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

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

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

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

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


                                       27
<PAGE>
   Through our acquisition of ABELCET, we acquired several U.S. and Canadian
patents claiming the use and manufacture of ABELCET.

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

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

GOVERNMENT REGULATION

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

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

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

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

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

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

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

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

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

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


                                       28
<PAGE>
   o submitting the results of preliminary research, preclinical studies, and
     clinical studies as well as chemistry, manufacturing and control
     information on the drug or biological product to the FDA in a New Drug
     Application, or NDA, for a drug product, or a Biologics License
     Application, or BLA, for a biological product, and

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

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

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

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

   Any products manufactured or distributed by us pursuant to FDA approvals are
subject to extensive continuing regulation by the FDA, including record-
keeping requirements and a requirement to report adverse experiences with the
drug. In addition to continued compliance with standard regulatory
requirements, the FDA also may require post-marketing testing and surveillance
to monitor the safety and efficacy of the marketed product. Adverse
experiences with the product must be reported to the FDA. Product approvals
may be withdrawn if compliance with regulatory requirements is not maintained
or if problems concerning safety or efficacy of the product are discovered
following approval.

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

   o warning letters,


                                       29
<PAGE>
   o suspension of manufacturing,

   o seizure of the product,

   o voluntary recall of a product,

   o injunctive action, or

   o possible civil or criminal penalties.

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

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

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

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

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

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


                                       30
<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 United States for the
treatment of hepatitis C in May 2000 and January 2001, respectively. ABELCET
was approved in the United States in November 1995 and in Canada in September
1997. ONCASPAR was approved for marketing in the United States and Germany in
1994 and in Canada in December 1997 for patients with acute lymphoblastic
leukemia who are hypersensitive to native forms of L-asparaginase, and in
Russia in April 1993 for therapeutic use in a broad range of cancers. ADAGEN
was approved by the FDA in March 1990. DEPOCYT received U.S. approval in April
1999. Except for these approvals, none of our other products have been
approved for sale and use in humans in the United States or elsewhere.

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

COMPETITION

 General

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

 ABELCET

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

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

   The lipid-based formulations of amphotericin B include ABELCET, AMBISOME(R)
(marketed by Fujisawa/Gilead) and AMPHOTEC(R) (marketed by Intermune, Inc.).
These formulations provide the efficacy of CAB while limiting the toxicities
that are inherent in CAB usage. AMBISOME has proven to be a significant
competitor to ABELCET. Recently, Fugisawa/Gilead has reduced the price of
AMBISOME in certain geographic markets, increasing the competitive pressure on
ABELCET. To the


                                       31
<PAGE>
extent we are not able to address this competitive pressure successfully or we
deem it necessary to reduce the price of ABELCET in order to address this
competitive threat, market share or revenues or both could decrease, which
could have a material adverse effect on our business, financial condition or
results of operations.

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

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

 PEGylation

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

 ADAGEN

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


                                       32
<PAGE>
patients. ONCASPAR, our PEG-modified L-asparaginase product, is used to treat
patients with acute lymphoblastic leukemia who are hypersensitive to
unmodified forms of L-asparaginase. Currently, there is one unmodified form of
L-asparaginase (ELSPAR(R)) available in the United States and several
available in Europe. We believe that ONCASPAR has two advantages over these
unmodified forms of L-asparaginase: increased circulating blood life and
generally reduced immunogenicity.

 PEG-INTRON

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

 DEPOCYT

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

 Products Under Development

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

   ATG-FRESENIUS S will compete with Genzyme Corporation's THYMOGLOBULIN, a
polyclonal antibody already approved for the prevention of organ rejection in
kidney transplant patients, as well as several other antibody products
marketed by large pharmaceutical companies.

 SCA's

   There are several technologies which compete with our SCA protein
technology, including chimeric antibodies, humanized antibodies, human
monoclonal antibodies, recombinant antibody Fab


                                       33
<PAGE>
fragments, low molecular weight peptides and mimetics. These competing
technologies can be categorized into two areas:

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

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

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

EMPLOYEES

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

ITEM 2.  PROPERTIES

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

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

<TABLE>
<CAPTION>
                                                                                      APPROX.
                                                                                      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                    25,000    $613,000(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 $613,000 to $638,000.

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

ITEM 3.  LEGAL PROCEEDINGS

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

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

   None.


                                       34
<PAGE>
                                    PART II


ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
         MATTERS, 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 for the years ended June 30, 2004 and 2003, as reported by the NASDAQ
National Market. The quotations shown represent inter-dealer prices without
adjustment for retail markups, markdowns or commissions, and may not
necessarily reflect actual transactions.

<TABLE>
<CAPTION>
                                                                  HIGH      LOW
                                                                 ------   ------
<S>                                                              <C>      <C>
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
YEAR ENDED JUNE 30, 2003
First Quarter ...............................................     25.00    16.46
Second Quarter ..............................................     20.90    15.50
Third Quarter ...............................................     19.32    11.00
Fourth Quarter ..............................................     15.68    11.16
</TABLE>


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

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

EQUITY COMPENSATION PLAN INFORMATION

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

<TABLE>
<CAPTION>
                                                                                                            NUMBER OF SECURITIES
                                                                                                           REMAINING AVAILABLE FOR
                                                        NUMBER OF SECURITIES TO      WEIGHTED-AVERAGE       FUTURE ISSUANCE UNDER
                                                        BE ISSUED UPON EXERCISE     EXERCISE PRICE OF     EQUITY COMPENSATION PLANS
                                                        OF OUTSTANDING OPTIONS,    OUTSTANDING OPTIONS,     (EXCLUDING SECURITIES
PLAN CATEGORY                                             WARRANTS AND RIGHTS      WARRANTS AND RIGHTS      REFLECTED IN COLUMN A)
---------------                                         -----------------------    --------------------   -------------------------
<S>                                                     <C>                        <C>                    <C>
                                                                  (a)                      (b)                       (c)
Equity compensation plans approved by security
  holders...........................................             4,838                    $25.90                    3,410
Equity compensation plans not approved by security
  holders...........................................                --                        --                       --
                                                                 -----                    ------                    -----
Total...............................................             4,838                    $25.90                    3,410
                                                                 =====                    ======                    =====
</TABLE>


                                       35
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

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

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

<TABLE>
<CAPTION>
                                                                                             YEARS ENDED JUNE 30,
                                                                           --------------------------------------------------------
                                                                               2004          2003        2002      2001       2000
                                                                           -------------   --------    -------    -------   -------
                                                                           (RESTATED)(1)
<S>                                                                        <C>             <C>         <C>        <C>       <C>
Consolidated Statements of Operations Data:
 Total revenues........................................................      $169,571      $146,406    $75,805    $31,588   $17,018
 Cost of sales.........................................................        46,986        28,521      6,078      3,864     4,888
 Research and development expenses.....................................        34,769        20,969     18,427     13,052     8,383
 Write-down of carrying value of investment............................         8,341        27,237         --         --        --
 Acquired in process research and development..........................        12,000            --         --         --        --
 Other operating expenses..............................................        60,433        39,782     16,687     11,796    12,956
 Operating income (loss)...............................................         7,042        29,897     34,613      2,876    (9,209)
 Interest and dividend income..........................................        13,396         8,942     18,681      8,401     2,943
 Interest expense......................................................        19,829        19,828     19,829        275         4
 Other income (expense), net...........................................         2,896        26,938      3,218         11       (36)
 Income tax provision (benefit)........................................         1,592           223     (9,123)      (512)       --
 Net earnings available for common stockholders........................         1,913        45,726     45,806     11,525    (6,306)
 Net earnings per common shares
   Basic...............................................................      $   0.04      $   1.06    $  1.07    $  0.28    ($0.17)
   Diluted.............................................................      $   0.04      $   1.05    $  1.04    $  0.26    ($0.17)
</TABLE>

<TABLE>
<CAPTION>
                                                                                            YEARS ENDED JUNE 30,
                                                                        -----------------------------------------------------------
                                                                            2004          2003        2002        2001       2000
                                                                        -------------   --------    --------    --------   --------
                                                                        (RESTATED)(1)
<S>                                                                     <C>             <C>         <C>         <C>        <C>
Consolidated Balance Sheet Data:
 Current assets.....................................................      $168,225      $152,847    $221,462    $455,521   $ 57,581
 Current liabilities................................................        31,664        34,345      19,701       9,410      8,172
 Total assets.......................................................       722,410       728,566     610,748     549,675    130,252
 Other long-term obligations........................................         1,655         2,637         552       1,276      1,118
 Long-term debt.....................................................       400,000       400,000     400,000     400,000         --
 Total stockholders' equity.........................................       289,091       291,584     190,495     138,989    120,962
</TABLE>

---------------
(1) The Company restated the financial statements due to an accounting error
    related to the accounting for a derivative hedging instrument and an error
    in assessing the realizeability of deferred tax assets related to the
    unrealized loss on available-for-sale securities included in accumulated
    other comprehensive loss (see Note 2) of the notes to the Consolidated
    financial statements.

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

COMPANY OVERVIEW

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


                                       36
<PAGE>
RESTATEMENT OF FINANCIAL STATEMENTS

   The Company has restated its consolidated financial statements for the
fiscal year ended June 30, 2004 as discussed in Note 2 in the accompanying
consolidated financial statements. The following management's discussion and
analysis takes into account the effects of the restatement.

LIQUIDITY AND CAPITAL RESOURCES

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

   During the year ended June 30, 2004, net cash generated from operating
activities was $37.1 million, principally reflecting our net income of
$1.9 million, depreciation and amortization of $22.1 million, other non-cash
charges provided of $9.2 million, acquired in process research and development
of $12.0 million, write-down of the carrying value of Micromet of $8.3 million,
and a net increase in operating assets and liabilities of $2.0 million. During
the year ended June 30, 2003, net cash generated from operating activities was
$58.2 million, primarily reflecting our net income of $45.7 million and the
effect of non-cash amounts for the merger termination fee of $34.6 million,
the write-down of the carrying value of an investment of $27.2 million,
depreciation and amortization of $13.8 million, deferred taxes of $4.4 million,
and lower working capital of $10.5 million. During the year ended June 30,
2002, net cash generated from operating activities was $29.6 million,
primarily reflecting our net income of $45.8 million and the effect of non-
cash amounts for the depreciation and amortization, deferred taxes of
$9.0 million, and increased working capital of $7.2 million.

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

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

   As of June 30, 2004, we had $400.0 million of 4.5% convertible subordinated
notes outstanding. The notes bear interest at an annual rate of 4.5%. Interest
is payable on January 1 and July 1 of each year. Accrued interest on the notes
was $9.0 million as of June 30, 2004. The holders may convert all or a portion
of the notes into common stock at any time on or before July 1, 2008. The
notes are convertible into our common stock at a conversion price of $70.98
per share, subject to adjustment in certain events. The notes are subordinated
to all existing and future senior indebtedness. On or since July 7, 2004, we
may redeem any or all of the notes at specified redemption prices, plus
accrued and


                                       37
<PAGE>
unpaid interest to the day preceding the redemption date. The notes will
mature on July 1, 2008 unless earlier converted, redeemed at our option or
redeemed at the option of the note-holder upon a fundamental change, as
described in the indenture for the notes. Neither we nor any of our
subsidiaries are subject to any financial covenants under the indenture.
In addition, neither we nor any of our subsidiaries are restricted under the
indenture from paying dividends, incurring debt, or issuing or repurchasing
our securities.

   In August 2003, we entered into a Zero Cost Protective Collar arrangement
with a financial institution to reduce the exposure associated with the 1.5
million shares of common stock of NPS we received as part of the merger
termination agreement with NPS. By entering into this equity collar arrangement
and taking into consideration the underlying put and call option strike prices,
the terms are structured so that our investment in NPS stock, when combined with
the value of the Collar, should secure ultimate cash proceeds in the range of
85%-108% of the negotiated fair value per share of $23.47 (representing a 4.85%
discount off of the closing price of NPS common stock on the day before the
Collar was executed). The Collar is considered a derivative hedging instrument
under SFAS No. 133 and as such, we periodically measure its fair value and
recognize the derivative as an asset or a liability. The change in fair value is
recorded as either other comprehensive income (See Note 4) or in the Statement
of Operations depending on the portion of the derivative designated and
effective as a hedge. As of June 30, 2004, the market value of NPS' common stock
was $21.00 per share. When the underlying shares become unrestricted and freely
tradable, we are required to deliver to the financial institution as posted
collateral, a corresponding number of shares of NPS common stock. During the
year ended June 30, 2004, we sold and re-purchased 1,125,000 shares respectively
of common stock of NPS. The unrealized gain previously included in other
comprehensive income prior to the sale and repurchase with respect to these
shares aggregating $836,000 for the year ended June 30, 2004, was recognized in
the Statements of Operations and is included in "Other Income". With respect to
the remaining 375,000 shares of NPS common stock, as of June 30, 2004, $38,000
has been recorded in comprehensive income for the year ended June 30, 2004. The
fair value of the Collar represents a receivable from the counterparty of $1.7
million at June 30, 2004 representing the time value component of the collar
which was recorded as "Other Income" in the Statement of Operations for the year
ended June 30, 2004. The Collar will mature in four separate three-month
intervals beginning November 2004 through August 2005, at which time we will
receive the proceeds from the sale of the securities. The amount due at each
maturity date will be determined based on the market value of NPS' common stock
on such maturity date. The contract requires us to maintain a minimum cash
balance of $30.0 million and additional collateral up to $10.0 million (as
defined) under certain circumstances with the financial institution. The strike
prices of the put and call options are subject to certain adjustments in the
event we receive a dividend from NPS.

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

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

OFF-BALANCE SHEET ARRANGEMENTS

   As part of our ongoing business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities ("SPE"), which would have been established for the purpose of


                                       38
<PAGE>
facilitating off-balance sheet arrangements or other contractually narrow
limited purposes. As of June 30, 2004 we are not involved in any SPE
transactions.

CONTRACTUAL OBLIGATIONS

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

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

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

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

   Our strategic alliance with SkyePharma PLC ("SkyePharma") provides for the
two Companies to combine their drug delivery technology and expertise to
jointly develop up to three products for future commercialization. Research
and development costs related to the jointly developed products will be shared
equally based on an agreed upon annual budget, and future revenues generated
from the commercialization of jointly-developed products will also be shared
equally. In addition, SkyePharma is entitled to a $2.0 million milestone
payment for each product based on its own proprietary technology that enters
Phase 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 for calendar 2003 of 90% of the previous year sales by
SkyePharma and a sales level of $5.0 million for each subsequent calendar
year. SkyePharma is also entitled to a milestone payment of $5.0 million if
our sales of the product exceed a $17.5 million annualized run rate for four
consecutive quarters and an additional milestone payment of $5.0 million if
Enzon's sales exceed an annualized run rate of $25 million for four
consecutive quarters. We are also responsible for a $10.0 million milestone
payment if the product receives approval for all neoplastic meningitis prior
to December 31, 2006. This milestone payment is incrementally reduced if the
approval is received subsequent to December 31, 2006 to a minimum payment of
$5.0 million for an approval after December 31, 2007.

   Under our agreement with Fresenius Biotech ("Fresenius") we are responsible
for North American clinical development, approval, and commercialization of
ATG-FRESENIUS S. In September 2004, the Company made a $1.0 million milestone
payment to Fresenius upon FDA approval of an Investigational New Drug
Application. We are obligated to make another milestone payment of $1.0 million
upon


                                       39
<PAGE>
submission of a Biologics License Application. Upon the commercialization of
the product in North America, we will purchase the finished product from
Fresenius at a specified percentage of net sales.

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

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

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

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

<TABLE>
<CAPTION>
                                                                                          PAYMENTS DUE BY PERIOD
                                                                       ------------------------------------------------------------
                                                                                LESS THAN                                 MORE THAN
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS                     TOTAL      1 YEAR     2 - 3 YEARS    4 - 5 YEARS    5 YEARS
--------------------------------------------------                     ------   ---------    -----------    -----------   ---------
<S>                                                                    <C>      <C>          <C>            <C>           <C>
Long-term debt including current portion...........................    $400.0     $   --        $   --        $400.0        $  --
Operating lease obligations........................................      15.7        1.5           2.9           2.1          9.2
Inventory purchase obligations.....................................      45.0        5.0          10.0          10.0         20.0
Interest due on long-term debt.....................................      81.0       18.0          36.0          18.0          9.0
                                                                       ------     ------        ------        ------        -----
Totals.............................................................    $541.7      $24.5         $48.9        $430.1        $38.2
                                                                       ======     ======        ======        ======        =====
</TABLE>

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

FISCAL YEARS ENDED JUNE 30, 2004, 2003, AND 2002

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

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


                                       40
<PAGE>
   Net product sales increased by 167% to $59.3 million for the year ended
June 30, 2003 from $22.2 million for the year ended June 30, 2002. The
increase in net sales was due to the commencement of sales of ABELCET in North
America in November 2002 and DEPOCYT(R) in January 2003, and increased sales
of ADAGEN and ONCASPAR. During the year ended June 30, 2003, we recorded
$28.4 million related to sales of ABELCET in North America. During the year
ended June 30, 2003, we recorded DEPOCYT sales of $2.5 million. Sales of
ONCASPAR increased by 43% to $12.4 million for the year ended June 30, 2003,
compared to $8.7 million for the year ended June 30, 2002. In June 2002, we
reacquired the rights to market and distribute ONCASPAR in North America and
certain other territories, which we previously exclusively licensed to
Aventis. Sales of ADAGEN increased by 19% for the year ended June 30, 2003 to
$16.0 million, as compared to $13.5 million for the year ended June 30, 2002
due to an increase in the number of patients receiving the drug.

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

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

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

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

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

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

   We expect ADAGEN sales to grow over the next year at similar levels to those
achieved for the year ended June 30, 2004. We expect ONCASPAR sales to
continue to grow, but at a pace slower then


                                       41
<PAGE>
the 46% growth rate achieved in fiscal 2004. ONCASPAR sales may decline if we
are unable to correct certain manufacturing problems that have caused us to
recall two lots in recent months. We expect DEPOCYT sales to gain modestly
from the current sales level of approximately $1.0 million to $1.2 million per
quarter. However, we cannot assure you that any particular sales levels of
ABELCET, ADAGEN, ONCASPAR, DEPOCYT or PEG-INTRON will be achieved or
maintained.

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

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

   Cost of Sales and Manufacturing Revenue. Cost of sales and manufacturing
revenue, as a percentage of net product sales and manufacturing revenue,
decreased to 39% for the year ended June 30, 2004 as compared to 42% for the
year ended June 30, 2003. The decrease was principally due to the higher 2003
inventory costs as a result of certain purchase accounting adjustments to the
inventory acquired with the ABELCET acquisition, which was sold during the
year ended June 30, 2003, as well as manufacturing revenue with no related
costs due to a payment of $1.7 million from Elan for invoices that had been
previously disputed by Elan and therefore not previously recognized as income.

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

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

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


                                       42
<PAGE>
   Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 2004 increased by
$16.4 million to $47.0 million, as compared to $30.6 million in 2003.
The increase was primarily due to (i) increased sales and marketing expenses
of approximately $11.3 million related to the hiring of our North American
sales force in connection with our acquisition of ABELCET; (ii) increased
sales and marketing expense of approximately $2.7 million related to the
continued build out of a sales and marketing presence in oncology for ONCASPAR
and DEPOCYT; and (iii) increased costs of approximately $2.4 million that were
primarily attributable to personnel-related expenses.

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

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

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

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

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

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


                                       43
<PAGE>
   Other income (expense). Other income (expense) for the year ended June 30,
2004 was an expense of $3.5 million, as compared to other income of
$16.1 million for the year ended June 30, 2003. Other income (expense)
includes: net investment income, interest expense, and other income.

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

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

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

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

   Other income increased by approximately $2.8 million to $2.9 million for the
year ended June 30, 2004, as compared to $41,000 for the year ended June 30,
2003. The increase in other income was related to a derivative instrument we
entered into as a protective collar arrangement to reduce our exposure
associated with the 1.5 million shares of NPS common stock. During the year
ended June 30, 2004, we recorded other income of $1.7 million to reflect the
change in the fair value of this derivative hedging instrument and $836,000 on
the sale of NPS Common Stock.

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

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

   For the year ended June 30, 2003, we recognized net tax expense of
approximately $223,000. Certain tax expense, primarily related to the NPS
settlement in June 2003, was offset by the reduction in the valuation
allowance based on our net operating loss carryforwards expected to be
utilized in the future. We believe it is more likely than not that we will be
able to utilize the majority of our net operating loss carryforwards and tax
credits, and we therefore recognized $67.5 million of net deferred tax assets.
Of these assets, approximately $54.7 million related to net operating losses
from stock option


                                       44
<PAGE>
exercises which, pursuant to SFAS No. 109, Accounting for Income Taxes, was
recorded as an increase in additional paid in capital and not as a credit to
income tax expense. The remaining benefit from the reduction of the valuation
allowance totaled $11.2 million and was recorded as an income tax benefit in
the Statement of Operations. During the year ended June 30, 2003, we sold
approximately $6.0 million of our state net operating loss carryforwards for
proceeds of $474,000 (which was recorded as a tax benefit) and we purchased
approximately $11.8 million of gross state net operating loss carryforwards
for $1.1 million.

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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

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


                                       45
<PAGE>
   We assess the carrying value of our cost method investments in accordance
with SFAS No. 115 and SEC Staff Accounting Bulletin (SAB) No. 59. Commencing
with the first quarter of fiscal 2005 the Company will evaluate investments in
accordance with EITF 03-01, the Meaning of Other-Than-Temporary Impairment and
its application to Certain Investments. An impairment write-down is recorded
when a decline in the value of an investment is determined to be other-than-
temporary. These determinations involve a significant degree of judgment and
are subject to change as facts and circumstances changes.

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

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

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

RECENTLY ISSUED ACCOUNTING STANDARDS

   In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 (revised December 2003) ("FIN46-R"), Consolidation
of Variable Interest Entities, which addresses how a business enterprise
should evaluate whether it has a controlling financial interest in an entity
through means other than voting rights and accordingly should consolidate the
entity. FIN 46-R replaces FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which was issued in January 2003. FIN
46-R requires that if an entity has a controlling financial interest in a
variable interest entity, the assets, liabilities and results of activities of
the variable interest entity should be included in the consolidated financial
statements of the entity. The provisions


                                       46
<PAGE>
of FIN 46-R are effective immediately to those entities that are considered to
be special-purpose entities. For all other arrangements, the FIN 46-R
provisions are required to be adopted at the beginning of the first interim or
annual period ending after March 15, 2004. As of June 30, 2004 the Company is
not a party to transactions contemplated under FIN 46-R.

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

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

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

RISK FACTORS

   OUR BUSINESS IS HEAVILY DEPENDENT ON THE CONTINUED SALE OF PEG-INTRON AND
ABELCET. IF REVENUES FROM EITHER OF THESE PRODUCTS FAIL TO INCREASE AS
ANTICIPATED OR MATERIALLY DECLINE, OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS WILL BE MATERIALLY HARMED.

   Our results of operations are heavily dependent on the revenues derived from
the sale and marketing of PEG-INTRON and ABELCET. Under our agreement with
Schering-Plough, pursuant to which Schering-Plough applies our PEG technology
to develop a modified form of Schering-Plough's INTRON A, we are receiving
royalties on worldwide sales of PEG-INTRON. During the fiscal year ended
June 30, 2004, total royalties comprised approximately 28% of our total
revenues. Hoffmann-La Roche recently received FDA and European Union approval
for PEGASYS, which competes with PEG-INTRON in the United States, Europe and
Canada. The launch of PEGASYS has led to greater competitive pressure on PEG-
INTRON sales. Since its launch, PEGASYS has taken market share away from PEG-
INTRON and the overall market for pegylated alpha-interferon in the treatment
of Hepatitis C has not increased sufficiently so as to offset the effect the
increasing PEGASYS sales have had on sales of PEG-INTRON. As a result,
quarterly sales of PEG-INTRON and the royalties we receive on


                                       47
<PAGE>
those sales have declined in recent quarters. We cannot assure you that
PEGASYS will not continue to gain market share at the expense of PEG-INTRON
which could result in lower PEG-INTRON sales and lower royalties to us.
Schering-Plough is responsible for conducting and funding the clinical
studies, obtaining regulatory approval, manufacturing and marketing the
product worldwide on an exclusive basis. Schering-Plough received marketing
authorization for PEG-INTRON and in PEG-INTRON and REBETOL capsules as
combination therapy for the treatment of hepatitis C in the U.S. and the
European Union. If Schering-Plough fails to effectively market PEG-INTRON or
discontinues the marketing of PEG-INTRON for these indications, this would
have a material adverse effect on our business, financial condition and
results of operations.

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

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

   WE MAY NOT SUSTAIN PROFITABILITY.

   Prior to the fiscal year ended June 30, 2001, we had incurred substantial
losses. As of June 30, 2004, we had an accumulated deficit of approximately
$25.2 million. Although we earned a profit for the fiscal years ended June 30,
2004, 2003 and 2002, we cannot assure you that we will be able to remain
profitable. Our ability to remain profitable will depend primarily on
Schering-Plough's effective marketing of PEG-INTRON and our effective
marketing of ABELCET, as well as on the rate of growth in our other product
sales or royalty revenue and on the level of our expenses. Our ability to
achieve long-term profitability will depend upon our and our licensees'
ability to obtain regulatory approvals for additional product candidates. Even
if our product candidates receive regulatory approval, we cannot assure you
that our products will achieve market acceptance or will be commercialized
successfully or that our operations will sustain profitability.


                                       48
<PAGE>
   WE ARE SUBJECT TO EXTENSIVE REGULATION. COMPLIANCE WITH THESE REGULATIONS
CAN BE COSTLY, TIME CONSUMING AND SUBJECT US TO UNANTICIPATED DELAYS IN
DEVELOPING OUR PRODUCTS. THE REGULATORY APPROVAL PROCESS IS HIGHLY UNCERTAIN
AND WE MAY NOT SUCCESSFULLY SECURE APPROVAL FOR MARQIBO.

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

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

   o criminal penalties,

   o civil penalties,

   o fines,

   o recall or seizure,

   o injunctions requiring suspension of production,

   o orders requiring ongoing supervision by the FDA, or

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

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

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


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

   WE HAVE EXPERIENCED PROBLEMS COMPLYING WITH THE FDA'S REGULATIONS FOR
MANUFACTURING OUR PRODUCTS, AND HAVE HAD TO CONDUCT VOLUNTARY RECALLS OF
CERTAIN OF OUR PRODUCTS. THESE PROBLEMS COULD MATERIALLY HARM OUR BUSINESS.

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

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

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

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

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

   Since January 2000, the FDA has conducted follow-up inspections as well as
routine inspections of our manufacturing facilities related to ABELCET,
ONCASPAR and ADAGEN. Following certain of these inspections, the FDA has
issued Form 483 reports citing deviations from cGMP, the most recent


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<PAGE>
ones of which were issued in April 2004 for our New Jersey and Indianapolis
manufacturing facilities. We have or are in the process of responding to such
reports with corrective action plans.

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

   If we or our licensees, including Schering-Plough, face additional
manufacturing problems in the future or if we or our licensees are unable to
satisfactorily resolve current or future manufacturing problems, the FDA could
require us or our licensees to discontinue the distribution of our products or
to delay continuation of clinical trials. In addition, if we or our licensees,
including Schering-Plough, cannot market and distribute our products for an
extended period, sales of the products and customer relationships will suffer,
which would adversely affect our financial results.

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

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

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

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

   o the order and timing of clinical indications pursued,

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

   o the number of patients required for enrollment,

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

   o the difficulty in obtaining sufficient patient populations and
     clinicians.

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

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

   IF PRECLINICAL AND CLINICAL TRIALS DO NOT YIELD POSITIVE RESULTS, OUR
PRODUCT CANDIDATES WILL FAIL.


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<PAGE>
   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

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

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

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

   EVEN IF WE OBTAIN REGULATORY APPROVAL FOR OUR PRODUCTS, THEY MAY NOT BE
ACCEPTED IN THE MARKETPLACE.

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

   o the receipt, timing and scope of regulatory approvals,

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

   o the availability of third-party reimbursement, and

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

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

   WE DEPEND ON OUR COLLABORATIVE PARTNERS. IF WE LOSE OUR COLLABORATIVE
PARTNERS OR THEY DO NOT APPLY ADEQUATE RESOURCES TO OUR COLLABORATIONS, OUR
PRODUCT DEVELOPMENT AND FINANCIAL PERFORMANCE MAY SUFFER.

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

   The amount and timing of resources dedicated by our collaborators to their
collaborations with us is not within our control. If any collaborator breaches
or terminates its agreements with us, or fails to conduct its collaborative
activities in a timely manner, the commercialization of our product candidates

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<PAGE>
could be slowed or blocked completely. We cannot assure you that our
collaborative partners will not change their strategic focus or pursue
alternative technologies or develop alternative products as a means for
developing treatments for the diseases targeted by these collaborative
programs. Our collaborators could develop competing products. In addition, our
revenues will be affected by the effectiveness of our corporate partners in
marketing any successfully developed products. For example, our royalty
revenues relating to PEG-INTRON have declined significantly due to PEG-
INTRON'S loss of market share to Roche's PEGASYS.

   We cannot assure you that our collaborations will be successful. Disputes
may arise between us and our collaborators as to a variety of matters,
including financing obligations under our agreements and ownership of
intellectual property rights. These disputes may be both expensive and time-
consuming and may result in delays in the development and commercialization of
products.

   WE PURCHASE SOME OF THE COMPOUNDS UTILIZED IN OUR PRODUCTS FROM A SINGLE
SOURCE OR A LIMITED GROUP OF SUPPLIERS, AND THE PARTIAL OR COMPLETE LOSS OF
ONE OF THESE SUPPLIERS COULD CAUSE PRODUCTION DELAYS AND A SUBSTANTIAL LOSS OF
REVENUES.

   The supplier of the active pharmaceutical ingredient for ADAGEN has recently
elected to terminate its supply agreement with us and we may not be able to
secure an alternative source of supply before this supplier discontinues
supplying us.

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

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

   Hoffmann-La Roche Diagnostics GmbH ("Roche Diagnostics"), which is based in
Germany, is the only FDA-approved supplier of the adenosine deaminase enzyme,
or ADA, used in ADAGEN. During 2002 we obtained FDA approval of the use of the
ADA enzyme obtained from bovine intestines from cattle of New Zealand origin.
New Zealand currently certifies that it's cattle are bovine spongiform
encephalopathy (BSE or mad cow disease) free. Beginning in September 2002, the
United States


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<PAGE>
Department of Agriculture ("USDA") required all animal-sourced materials
shipped to the United States from any European country to contain a veterinary
certificate that the product is BSE free, regardless of the country of origin.
In September, 2003, Roche Diagnostics notified us that it has elected to
terminate our ADA supply agreement as of June 12, 2004. We are currently
seeking to develop recombinant ADA as an alternative to the bovine derived
product. This is a difficult and expensive undertaking as to which success
cannot be assured. Roche Diagnostics has indicated that it will continue to
supply us with our requirements of ADA for a reasonable period of time after
termination of our supply agreement as we work to develop another source of
ADA. If we are unable to secure an alternative source of ADA before Roche
Diagnostics discontinues supplying the material to us, we will likely
experience inventory shortages and potentially a period of product
unavailability and/or a long term inability to produce ADAGEN. If this occurs,
it will have a measurable (and potentially material) negative impact on our
business and results of operations and it could potentially result in
significant reputational harm and regulatory difficulties.

   THE UNITED STATES AND FOREIGN PATENTS UPON WHICH OUR ORIGINAL PEG TECHNOLOGY
WAS BASED HAVE EXPIRED. WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS, WHICH MAY
OFFER ONLY LIMITED PROTECTION AGAINST POTENTIAL INFRINGEMENT AND THE
DEVELOPMENT BY OUR COMPETITORS OF COMPETITIVE PRODUCTS.

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

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

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


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

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

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

   OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
COULD INCREASE OUR COSTS AND NEGATIVELY AFFECT OUR PROFITABILITY.

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

   WE HAVE LIMITED SALES AND MARKETING EXPERIENCE, WHICH MAKES US DEPENDENT ON
OUR MARKETING PARTNERS.

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


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<PAGE>
   WE MAY ACQUIRE OTHER COMPANIES OR PRODUCTS AND MAY BE UNABLE TO SUCCESSFULLY
INTEGRATE SUCH COMPANIES WITH OUR OPERATIONS.

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

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

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

   o coordinating our new product and process development;

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

   o hiring additional management and other critical personnel; and

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

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

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

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

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

   o continued progress of our research and development programs,

   o our ability to establish additional collaborative arrangements,

   o changes in our existing collaborative relationships,

   o progress with preclinical studies and clinical trials,

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

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

   o competing technological and market developments, and

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

   We may seek to raise any necessary additional funds through equity or debt
financings, collaborative arrangements with corporate partners or other
sources which may be dilutive to existing


                                       56
<PAGE>
stockholders. We cannot assure you that we will be able to obtain additional
funds on acceptable terms, if at all. If adequate funds are not available, we
may be required to:

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

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

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

   WE DEPEND ON KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE EMPLOYEES OR
RECRUIT ADDITIONAL QUALIFIED PERSONNEL, WHICH WOULD HARM OUR BUSINESS.

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

   We currently do not have a Chief Executive Officer. Since the departure of
our prior CEO, Arthur J. Higgins, who is now Chairman and Chief Executive
Officer of Bayer Health Care, we have been engaged in a search for a new CEO.
We have evaluated numerous candidates and are currently negotiating with a
lead candidate. We anticipate that this person will join us as CEO in the near
future. No assurance can be given as to whether or not this person will join
us as CEO. We are continuing the search process with respect to other
candidates in the event that the lead candidate does not become our new CEO.
If our lead candidate is unable or unwilling to join us as CEO in the near
future, the search process is likely to extend into calendar 2005. An extended
period of time without a CEO could materially, adversely effect our business,
financial conditions or results of operations.

RISKS RELATED TO OUR INDUSTRY

   WE FACE RAPID TECHNOLOGICAL CHANGE AND INTENSE COMPETITION, WHICH COULD HARM
OUR BUSINESS AND RESULTS OF OPERATIONS.

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

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

   We face intense competition from established biotechnology and
pharmaceutical companies, as well as academic and research institutions that
are pursuing competing technologies and products. We know that competitors are
developing or manufacturing various products that are used for the prevention,
diagnosis or treatment of diseases that we have targeted for product
development. For example, Hoffmann-La-Roche's PEGASYS has received FDA and
European Union approval for treatment of Hepatitis C as a monotherapy and in
combination with Ribavirin. PEGASYS competes


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<PAGE>
with PEG-INTRON in the United States and the European Union and has led to
intensive competitive pressure on PEG-INTRON sales. Since its launch, PEGASYS
has taken market share away from PEG-INTRON and the overall market for
pegylated alpha-interferon in the treatment of Hepatitis C has not increased
sufficiently so as offset the effect the increasing PEGASYS sales have had on
sales of PEG-INTRON. As a result, quarterly sales of PEG-INTRON and the
royalties we receive on those sales have declined in recent quarters. We
cannot assure you that PEGASYS will not continue to gain market share at the
expense of PEG-INTRON which could result in lower PEG-INTRON sales and lower
royalties to us. Similarly, Fujisawa Healthcare, Inc. and Gilead
Pharmaceuticals are currently marketing AmBisome, and InterMune, Inc. is
marketing Amphotec, each of which is a liposomal version of amphotericin, for
the treatment of fungal infections. AmBisome and Amphotec compete with ABELCET
and sales of these competitive products have resulted in intensive competitive
pressure on ABELCET sales. DEPOCYT, an injectable, sustained release
formulation of the chemotherapeutic agent cytarabine for the treatment of
lymphomatous meningitis, competes with the generic drugs, Cytarabine and
Methotrexate, and ONCASPAR, a PEG-enhanced version of a naturally occurring
enzyme called L-asparaginase, competes with Asparaginase to treat patients
with acute lymphoblastic leukemia.

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

   WE MAY BE SUED FOR PRODUCT LIABILITY.

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

   BECAUSE OF THE UNCERTAINTY OF PHARMACEUTICAL PRICING, REIMBURSEMENT AND
HEALTHCARE REFORM MEASURES, WE MAY BE UNABLE TO SELL OUR PRODUCTS PROFITABLY
IN THE UNITED STATES.

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

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


                                       58
<PAGE>
Significant changes in the healthcare system in the United States or elsewhere
could have a material adverse effect on our business and financial
performance.

RISKS RELATED TO OUR SUBORDINATED NOTES AND COMMON STOCK

   THE PRICE OF OUR COMMON STOCK HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE
WHICH MAY SIGNIFICANTLY AFFECT THE TRADING PRICE OF OUR NOTES.

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

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

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

   o the status of corporate collaborations and supply arrangements,

   o regulatory approvals,

   o government regulation,

   o developments in patent or other proprietary rights,

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

   o litigation,

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

   o general market conditions in our industry.

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

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

   OUR NOTES ARE SUBORDINATED TO ALL EXISTING AND FUTURE INDEBTEDNESS.

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

   WE MAY BE UNABLE TO REDEEM OUR NOTES UPON A FUNDAMENTAL CHANGE.

   We may be unable to redeem our notes in the event of a fundamental change.
Upon a fundamental change, holders of the notes may require us to redeem all
or a portion of the notes. If a fundamental change were to occur, we may not
have enough funds to pay the redemption price for all tendered notes. Any
future credit agreements or other agreements relating to our indebtedness may
contain similar provisions, or expressly prohibit the repurchase of the notes
upon a fundamental change or may


                                       59
<PAGE>
provide that a fundamental change constitutes an event of default under that
agreement. If a fundamental change occurs at a time when we are prohibited
from purchasing or redeeming notes, we could seek the consent of our lenders
to redeem the notes or could attempt to refinance this debt. If we do not
obtain a consent, we could not purchase or redeem the notes. Our failure to
redeem tendered notes would constitute an event of default under the
indenture. In such circumstances, or if a fundamental change would constitute
an event of default under our senior indebtedness, the subordination
provisions of the indenture would restrict payments to the holders of notes. A
"fundamental change" is any transaction or event (whether by means of an
exchange offer, liquidation, tender offer, consolidation, merger, combination,
reclassification, recapitalization or otherwise) in connection with which all
or substantially all of our common stock is exchanged for, converted into,
acquired for or constitutes solely the right to receive, consideration which
is not all or substantially all common stock that:

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

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

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

   A PUBLIC MARKET FOR OUR NOTES MAY FAIL TO DEVELOP OR BE SUSTAINED.

   The initial purchasers of the notes, although they have advised us that they
intend to make a market in the notes, are not obligated to do so and may
discontinue this market making activity at any time without notice. In
addition, market making activity by the initial purchasers will be subject to
the limits imposed by the Securities Act and the Exchange Act of 1934, as
amended. As a result, we cannot assure you that any market for the notes will
develop or, if one does develop, that it will be maintained. If an active
market for the notes fails to develop or be sustained, the trading price of
the notes could be materially adversely affected.

   EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.

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

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

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

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


                                       60
<PAGE>
   THE ISSUANCE OF PREFERRED STOCK MAY ADVERSELY AFFECT RIGHTS OF COMMON
STOCKHOLDERS OR DISCOURAGE A TAKEOVER.

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

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

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

   WE HAVE A SIGNIFICANT AMOUNT OF INDEBTEDNESS.

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

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

   o making it more difficult to obtain additional financing.

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

   THE MARKET FOR UNRATED DEBT IS SUBJECT TO DISRUPTIONS, WHICH COULD HAVE AN
ADVERSE EFFECT ON THE MARKET PRICE OF THE NOTES.

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


                                       61
<PAGE>
                       RATIO OF EARNINGS TO FIXED CHARGES


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

<TABLE>
<CAPTION>
                                                                                                       YEAR ENDED JUNE 30,
                                                                                              -------------------------------------
                                                                                              2004   2003    2002    2001     2000
                                                                                              ----   ----    ----    ----   -------
<S>                                                                                           <C>    <C>     <C>     <C>    <C>
Ratio of earnings to fixed charges*.......................................................    1:1     3:1     3:1    21:1       N/A
Deficiency of earnings available to cover fixed charges*..................................    N/A     N/A     N/A     N/A   ($6,306)
</TABLE>

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

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

   Our holdings of financial instruments are comprised of debt securities and
time deposits. All such instruments are classified as securities available-
for-sale. We do not invest in portfolio equity securities or commodities or
use financial derivatives for trading purposes. Our debt security portfolio
represents funds held temporarily pending use in our business and operations.
We manage these funds accordingly. We seek reasonable assuredness of the
safety of principal and market liquidity by investing in rated fixed income
securities while at the same time seeking to achieve a favorable rate of
return. Our market risk exposure consists principally of exposure to changes
in interest rates. Our holdings are also exposed to the risks of changes in
the credit quality of issuers. We typically invest the majority of our
investments in the shorter-end of the maturity spectrum, and at June 30, 2004
all of our holdings were in instruments maturing in four years or less.

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

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

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   Financial statements and notes thereto appear on pages F-1 to F-42 of this
Form 10-K/A Annual Report.

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

   Not Applicable.


                                       62
<PAGE>
ITEM 9A.   CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

   Our management evaluated (with the participation of our acting principal
executive officer and principal financial officer) the effectiveness of our
disclosure controls and procedures as of the end of the period covered by our
Annual Report on Form 10-K filed on September 13, 2004. Based on that
evaluation, our acting principal executive officer and principal financial
officer had concluded that our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, (the "Exchange Act")) were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.

   Subsequent to filing our original Form 10-K, and in connection with
preparation and review of our consolidated financial statements for the quarter
ended September 30, 2004, management determined that an error related to the
accounting for a derivative hedging instrument as of and for the quarter and
year ended June 30, 2004 and an error in assessing the realizeability of
deferred tax assets related to the unrealized loss on available-for-sale
securities included in accumulated other comprehensive loss as of June 30, 2004
had occurred.

   Executive management and the Audit Committee determined that there was a
material weakness relating to the timely review and monitoring of certain
account analyses, including the derivative hedging instrument and the assessment
of the realizeability of deferred tax assets established through accumulated
other comprehensive loss. In connection with restating our consolidated
financial statements as provided in this report, our acting principal executive
officer and principal financial officer supervised and participated with other
management in reevaluating the effectiveness of our disclosure controls and
procedures for the year ended June 30, 2004 and based on the reevaluation, the
acting principal executive officer and principal financial officer concluded
that as of the year ended June 30, 2004 there were deficiencies in our
disclosure controls and procedures, which has resulted in the conclusion that
the disclosure controls were ineffective. Further background on this matter and
the changes in internal controls instituted as a result of the errors are
described below.

Changes in Internal Controls

   There were no significant changes made in our internal controls over
financial reporting during the period covered by this report, however, in
November, 2004, as described below, we made changes in our internal controls
over financial reporting.

   On October 29, 2004, we announced that we would restate our consolidated
financial statements for the year ended June 30, 2004, and the quarterly
information for the quarter ended June 30, 2004 included therein to correct an
error related to the accounting for a derivative hedging instrument and an error
in assessing the realizeability of deferred tax assets related to the unrealized
loss on available-for-sale securities included in accumulated other
comprehensive loss.

   The error related to the derivative resulted in a misallocation between other
income and accumulated other comprehensive loss as of and for the quarter and
year ended June 30, 2004. The error related to the assessment of the
realizeability of the deferred tax assets resulted in a decrease to deferred tax
assets and an increase to accumulated other comprehensive loss as of June 30,
2004. Executive management and the Audit Committee determined that there was a
material weakness relating to the timely review and monitoring of certain
account analyses, including the derivative hedging instrument and the assessment
of the realizeability of deferred tax assets established through accumulated
other comprehensive loss. Other than the matters discussed above, no other
matters were identified that required significant adjustments to or modification
of disclosure in our consolidated financial statements. We have instituted more
comprehensive review and monitoring procedures to mitigate the risk of errors in
these particular areas from occurring in the future.


                                       63
<PAGE>
                                    PART III


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


                                       64

<PAGE>
                                    PART IV


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

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

<TABLE>
<CAPTION>
EXHIBIT                                                                                                              REFERENCE
NUMBER                                            DESCRIPTION                                                           NO.
------                                            -----------                                                           ---
<S>        <C>                                                                                                      <C>
2.1         Mutual Termination Agreement and Release by and among Enzon Pharmaceuticals, Inc., NPS
            Pharmaceuticals, Inc., Momentum Merger Corporation, Newton Acquisition Corporation and
            Einstein Acquisition Corporation, dated as of June 4, 2003.                                                +/-+/(3)
3(i)        Certificate of Incorporation as amended                                                                     ~(3(i))
3(i)(a)     Amendment to Certificate of Incorporation                                                                     \\(A)
3(ii)       By laws, as amended                                                                                       ^^(3(ii))
4.1         Indenture dated as of June 26, 2001, between the Company and Wilmington Trust Company, as
            trustee, including the form of 4 1/2% Convertible Subordinated Note due 2008 attached as
            Exhibit A thereto                                                                                          +++(4.1)
4.2         Rights Agreement dated May 17, 2002 between the Company and Continental Stock Transfer
            Trust Company, as rights agent                                                                                 ^(1)
4.3         First Amendment to the Rights Agreement, dated as of February 19, 2003 between the
            Company and Continental Stock Transfer & Trust Company, as rights agent.                                     +/-(1)
10.1        Form of Change of Control Agreements dated as of January 20, 1995 entered into with an
            Executive Officer**                                                                                         #(10.2)
10.2        Lease - 300-C Corporate Court, South Plainfield, New Jersey                                                 =(10.3)
10.3        Lease dated April 1, 1995 regarding 20 Kingsbridge Road, Piscataway, New Jersey                             #(10.7)
10.4        Lease 300A-B Corporate Court, South Plainfield, New Jersey                                                ++(10.10)
10.5        Employment Agreement dated May 9, 2001, between the Company and Arthur J. Higgins**                      ///(10.30)
10.6        Amendment dated May 23, 2001, to Employment Agreement between the Company and Arthur J.
            Higgins dated May 9, 2001**                                                                              ///(10.31)
10.7        Form of Restricted Stock Award Agreement between the Company and Arthur J. Higgins**                      ////(4.3)
10.8        Modification of Lease Dated May 14, 2003 - 300-C Corporate Court, South Plainfield, New
            Jersey                                                                                                      @(10.8)
10.9        Lease - 685 Route 202/206, Bridgewater, New Jersey                                                       ^^^(10.14)
10.10       Employment Agreement with Ulrich Grau dated as of March 6, 2002**                                        ^^^(10.15)
10.11       2001 Incentive Stock Plan as amended**                                                                    @@(10.23)
10.12       Development, License and Supply Agreement between the Company and Schering Corporation;
            dated November 14, 1990, as amended*                                                                       ~(10.15)
10.13       Transition Agreement dated July 2, 2002 between the Company and Jeffrey McGuire**                         ~~(10.16)
10.14       Asset Purchase Agreement between the Company and Elan Pharmaceuticals, Inc., dated as of
            October 1, 2002                                                                                              \(2.1)
10.15       License Agreement between the Company and Elan Pharmaceuticals, Inc., dated November 22,
            2002                                                                                                     ~~~(10.18)
10.16       Option Agreement between the Company and Arthur J. Higgins, dated as of December 3,
            2002**                                                                                                   ~~~(10.19)
10.17       Form of Restricted Stock Agreement between the Company and Arthur J. Higgins **                          ~~~(10.20)
10.18       Royalty Agreement between the Company and Vivo Healthcare Corporation, dated as of
            October 16, 2002**                                                                                       ~~~(10.21)
10.19       Assignment Agreement between the Company and Vivo Healthcare Corporation, dated as of
            October 16, 2002**                                                                                       ~~~(10.22)
</TABLE>



                                       65

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT                                                                                                              REFERENCE
NUMBER                                            DESCRIPTION                                                           NO.
------                                            -----------                                                           ---
<S>        <C>                                                                                                      <C>
10.20       Restricted Stock Purchase Agreement dated as of June 4, 2003 by and between Enzon
            Pharmaceuticals, Inc. and NPS Pharmaceuticals, Inc.                                                       +/-+/-(4)
10.21       Registration Rights Agreement dated as of June 4, 2003 by and between Enzon
            Pharmaceuticals, Inc. and NPS Pharmaceuticals, Inc.                                                       +/-+/-(5)
10.22       Outside Directors' Compensation Arrangement                                                                    @@@@
10.23       Amendment No. 2 to Employment Agreement with Arthur Higgins dated December 3, 2003                        @@(10.24)
10.24       Amended and Restated Employment Agreement with Ulrich Grau dated December 5, 2003                         @@(10.25)
10.25       Restricted Stock Award Agreement with Ulrich Grau dated December 5, 2003                                  @@(10.26)
10.26       Separation Agreement with Arthur Higgins dated May 10, 2004                                              @@@(10.27)
10.27       Development Agreement with Inex Pharmaceuticals dated January 19, 2004***                                @@@(10.28)
10.28       Product Supply Agreement with Inex Pharmaceuticals dated January 19, 2004***                             @@@(10.29)
10.29       Co-Promotion Agreement with Inex Pharmaceuticals dated January 19, 2004***                               @@@(10.30)
10.30       Employment Agreement with Kenneth J. Zuerblis dated June 14, 2004, along with a form of
            Restricted Stock Award Agreement between the Company and Mr. Zuerblis executed as of
            June 14, 2004 and a form of Consulting Agreement between the Company and Mr. Zuerblis.                         @@@@
10.31       Executive Deferred Compensation Plan                                                                           @@@@
12.1        Computation of Ratio of Earnings to Fixed Charges                                                                <1
21.0        Subsidiaries of Registrant                                                                                     @@@@
23.0        Consent of KPMG LLP                                                                                              <1
31.1        Certification of Principal Financial Officer and Principal Executive Officer pursuant to
            Section 302 of the Sarbanes-Oxley Act of 2002                                                                    <1
32.1        Certification of Principal Financial Officer and Principal Executive Officer pursuant to
            Section 906 of the Sarbanes-Oxley Act of 2002                                                                    <1
</TABLE>

<1        Filed herewith

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

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

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

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

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

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

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

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

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

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


                                       66

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

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

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

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

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

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

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

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

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

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

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

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

   (b) Reports on Form 8-K.

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

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

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

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

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

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

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


                                       67
<PAGE>
                                   SIGNATURES


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

                                         ENZON PHARMACEUTICALS, INC.
                                         ---------------------------------------
                                          (Registrant)

Dated: November 10, 2004                  by:/S/ Kenneth J. Zuerblis
                                         ---------------------------------------
                                         Kenneth J. Zuerblis
                                         Executive Vice President Finance,
                                         Chief Financial Officer


                                       68
<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 -- June 30, 2004 restated, and 2003 ........    F-3
 Consolidated Statements of Operations -- Years ended June 30, 2004
   restated, 2003 and 2002 ..............................................    F-4
 Consolidated Statements of Stockholders' Equity -- Years ended June 30,
   2004 restated, 2003 and 2002 .........................................    F-5
 Consolidated Statements of Cash Flows -- Years ended June 30, 2004
   restated, 2003 and 2002 ..............................................    F-7
 Notes to Consolidated Financial Statements -- Years ended June 30, 2004
   restated, 2003 and 2002 ..............................................    F-8
Consolidated Financial Statement Schedule:
 Schedule II -- Valuation and Qualifying Accounts .......................    S-1
</TABLE>


                                      F-1
<PAGE>
            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

We have audited the consolidated financial statements of Enzon
Pharmaceuticals, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the consolidated financial statement schedule as listed in the
accompanying index. These consolidated financial statements and consolidated
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and consolidated financial statement schedule based on
our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Enzon
Pharmaceuticals, Inc. and subsidiaries as of June 30, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2004, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As discussed in Note 2, the Company restated its consolidated financial
statements for the year ended June 30, 2004.

/s/KPMG LLP


Short Hills, New Jersey
August 17, 2004, except as to Note 2
 of the Notes to Consolidated Financial
 Statements, which is as of November 10, 2004.


                                      F-2
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                             JUNE 30, 2004 AND 2003
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                              2004        2003
                                                           ----------   --------
                                                           (RESTATED)
                                                            (NOTE 2)
<S>                                                        <C>          <C>
                         ASSETS
Current assets:
 Cash and cash equivalents ............................     $ 91,532    $ 66,752
 Short-term investments ...............................       27,119      25,047
 Accounts receivable, net .............................       25,977      33,173
 Inventories ..........................................       11,215      11,786
 Deferred tax assets ..................................        7,005      14,564
 Other current assets .................................        5,377       1,525
                                                            --------    --------
    Total current assets ..............................      168,225     152,847
                                                            --------    --------
Property and equipment, net  ..........................       34,859      32,593
Marketable securities .................................       67,582      61,452
Investments in equity securities ......................       37,906      56,364
Deferred tax assets ...................................       61,177      52,889
Amortizable intangible assets, net ....................      194,067     211,975
Goodwill ..............................................      150,985     150,985
Other assets ..........................................        7,609       9,461
                                                            --------    --------
                                                             554,185     575,719
                                                            --------    --------
    Total assets ......................................     $722,410    $728,566
                                                            ========    ========
          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable .....................................     $  8,663    $ 12,809
 Accrued expenses .....................................       14,001      10,262
 Accrued interest .....................................        9,000       9,000
 Income taxes payable .................................           --       2,274
                                                            --------    --------
    Total current liabilities .........................       31,664      34,345
                                                            --------    --------
 Accrued rent .........................................          343         449
 Unearned revenue .....................................        1,312       2,188
 Notes payable ........................................      400,000     400,000
                                                            --------    --------
                                                             401,655     402,637
                                                            --------    --------
Commitments and contingencies
Stockholders' equity:
 Common stock--$.01 par value, authorized 90,000,000
   shares issued and outstanding 43,750,934 shares in
   2004 and 43,518,359 shares in 2003 .................          438         435
 Additional paid-in capital ...........................      322,486     322,488
 Accumulated other comprehensive loss .................       (5,035)       (159)
 Deferred compensation ................................       (3,571)     (4,040)
 Accumulated deficit ..................................      (25,227)    (27,140)
                                                            --------    --------
    Total stockholders' equity ........................      289,091     291,584
                                                            --------    --------
    Total liabilities and stockholders' equity ........     $722,410    $728,566
                                                            ========    ========
</TABLE>


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

                                      F-3
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    YEARS ENDED JUNE 30, 2004, 2003 AND 2002
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                                     2004         2003       2002
                                                                                                  ----------    --------   --------
                                                                                                  (RESTATED)
                                                                                                   (NOTE 2)
<S>                                                                                               <C>           <C>        <C>
Revenues:
 Product sales, net...........................................................................     $107,922     $ 59,264   $ 22,183
 Manufacturing revenue........................................................................       12,911        8,742         --
 Royalties....................................................................................       47,707       77,589     53,329
 Contract revenue.............................................................................        1,031          811        293
                                                                                                   --------     --------   --------
    Total revenues............................................................................      169,571      146,406     75,805
                                                                                                   --------     --------   --------
Costs and expenses:
 Cost of sales and manufacturing revenue......................................................       46,986       28,521      6,078
 Research and development.....................................................................       34,769       20,969     18,427
 Selling, general and administrative..........................................................       47,001       30,571     16,545
 Amortization of acquired intangibles.........................................................       13,432        9,211        142
 Write-down of carrying value of investment...................................................        8,341       27,237         --
 Acquired in process research and development.................................................       12,000           --         --
                                                                                                   --------     --------   --------
    Total costs and expenses..................................................................      162,529      116,509     41,192
                                                                                                   --------     --------   --------
Operating income..............................................................................        7,042       29,897     34,613
                                                                                                   --------     --------   --------
Other income (expense):
 Investment income, net.......................................................................       13,396        8,942     18,681
 Interest expense.............................................................................      (19,829)     (19,828)   (19,829)
 Merger termination fee, net..................................................................           --       26,897         --
 Other........................................................................................        2,896           41      3,218
                                                                                                   --------     --------   --------
                                                                                                     (3,537)      16,052      2,070
                                                                                                   --------     --------   --------
Income before tax provision (benefit).........................................................        3,505       45,949     36,683
Tax provision (benefit).......................................................................        1,592          223     (9,123)
                                                                                                   --------     --------   --------
Net income....................................................................................     $  1,913     $ 45,726   $ 45,806
                                                                                                   ========     ========   ========
Basic earnings per common share...............................................................     $   0.04     $   1.06   $   1.07
                                                                                                   ========     ========   ========
Diluted earnings per common share.............................................................     $   0.04     $   1.05   $   1.04
                                                                                                   ========     ========   ========
Weighted average number of common shares outstanding -- basic.................................       43,350       43,116     42,726
                                                                                                   ========     ========   ========
Weighted average number of common shares and dilutive potential common shares outstanding.....       43,522       43,615     44,026
                                                                                                   ========     ========   ========
</TABLE>


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

                                      F-4
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    YEARS ENDED JUNE 30, 2004, 2003 AND 2002
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                      PREFERRED STOCK        COMMON STOCK
                     -----------------    -----------------    ADDITIONAL    ACCUMULATIVE        OTHER
                     NUMBER OF    PAR     NUMBER OF    PAR      PAID-IN     COMPREHENSIVE      DEFERRED      ACCUMULATED
                      SHARES     VALUE     SHARES     VALUE     CAPITAL     INCOME (LOSS)    COMPENSATION      DEFICIT       TOTAL
                     ---------   -----    ---------   -----    ----------   -------------    ------------    -----------   --------
<S>                  <C>         <C>      <C>         <C>      <C>          <C>              <C>             <C>           <C>
Balance, June 30,
  2001...........        7         --      41,991      $420     $257,682       $   885          ($1,509)      ($118,489)   $138,989
Common stock
  issued for
  exercise of
  non-qualified
  stock options..       --         --       1,009        10        5,172            --               --              --       5,182
Amortization of
  deferred
  compensation...       --         --          --        --           --            --              307              --         307
Comprehensive
  income:
 Net income......       --         --          --        --           --            --               --          45,806      45,806
 Net change in
  unrealized gain
  on available
  for sale
  securities.....       --         --          --        --           --           211               --              --         211
                        --         --      ------      ----     --------       -------          -------       ---------    --------
 Total
  comprehensive
  income.........       --         --          --        --           --           211               --          45,806      46,017
                        --         --      ------      ----     --------       -------          -------       ---------    --------
Balance, June 30,
  2002...........        7         --      43,000      $430     $262,854       $ 1,096          ($1,202)       ($72,683)   $190,495
Common stock
  issued for
  exercise of
  Non-qualified
  stock options..                  --         305         3        1,370            --               --              --       1,373
Issuance of
  restricted
  common stock...       --         --         200         2        3,558            --           (3,560)             --          --
Conversion and
  redemption of
  preferred stock       (7)        --          14        --          (25)           --               --              --         (25)
Amortization of
  deferred
  compensation...       --         --          --        --           --            --              722              --         722
Dividends on
  preferred stock       --         --          --        --           --            --               --            (183)       (183)
Tax benefit
  recognized
  related to
  stock option
  exercises......       --         --          --        --       54,731            --               --              --      54,731
Comprehensive
  income:
 Net income......       --         --          --        --           --            --               --          45,726      45,726
Net change in
  unrealized loss
  on available
  for sale
  securities.....       --         --          --        --           --        (1,255)              --              --      (1,255)
                        --         --      ------      ----     --------       -------          -------       ---------    --------
 Total
  comprehensive
  income.........       --         --          --        --           --        (1,255)              --          45,726      44,471
                        --         --      ------      ----     --------       -------          -------       ---------    --------
Balance, June 30,
  2003, carried
  forward........       --         --      43,519      $435     $322,488         ($159)         ($4,040)       ($27,140)   $291,584
</TABLE>


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

                                      F-5
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--CONTINUED
                         YEARS ENDED 2004, 2003 AND 2002
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                   PREFERRED STOCK        COMMON STOCK
                                                                  ------------------   ------------------   ADDITIONAL
                                                                  NUMBER OF     PAR    NUMBER OF     PAR      PAID-IN
                                                                    SHARES     VALUE     SHARES     VALUE     CAPITAL
                                                                  ---------    -----   ---------    -----   ----------
<S>                                                               <C>          <C>     <C>          <C>     <C>
Balance, June 30, 2003, brought forward .......................       --        --       43,519     $435     $322,488
Common stock issued for exercise of
  non-qualified stock options..................................       --        --           97        1          526
Issuance of restricted common stock ...........................       --        --          340        4        4,072
Cancellation of restricted common stock .......................       --        --         (215)      (2)      (4,478)
Common stock issued for Independent
  Director's Stock Plan........................................       --        --           10       --          143
Amortization of deferred compensation .........................       --        --           --       --           --
Other .........................................................       --        --           --       --         (265)
Comprehensive income:
 Net income (Restated, Note 2).................................       --        --           --       --           --
 Net change in unrealized loss on available for sale
  securities, net of reclassification adjustments (Restated,
  Note 2)......................................................       --        --           --       --           --
 Net change in unrealized loss on NPS Investment (Restated,
  Note 2)......................................................       --        --           --       --           --
                                                                      --        --       ------     ----     --------
 Total comprehensive income (loss) (Restated, Note 2) .........       --        --           --       --           --
                                                                      --        --       ------     ----     --------
Balance, June 30, 2004 (Restated, Note 2) .....................       --        --       43,751     $438     $322,486
                                                                      ==        ==       ======     ====     ========

<CAPTION>

                                                                   ACCUMULATED        OTHER
                                                                  COMPREHENSIVE      DEFERRED     ACCUMULATED
                                                                  INCOME (LOSS)    COMPENSATION     DEFICIT       TOTAL
                                                                  -------------    ------------   -----------    --------
<S>                                                               <C>              <C>            <C>            <C>
Balance, June 30, 2003, brought forward .......................        ($159)        ($4,040)       ($27,140)    $291,584
Common stock issued for exercise of
  non-qualified stock options..................................           --              --              --          527
Issuance of restricted common stock ...........................           --          (4,076)             --           --
Cancellation of restricted common stock .......................           --           3,163              --       (1,317)
Common stock issued for Independent
  Director's Stock Plan........................................           --              --              --          143
Amortization of deferred compensation .........................           --           1,382              --        1,382
Other .........................................................           --              --              --         (265)
Comprehensive income:
 Net income (Restated, Note 2).................................           --              --           1,913        1,913
 Net change in unrealized loss on available for sale
  securities, net of reclassification adjustments (Restated,
  Note 2)......................................................       (1,325)             --              --       (1,325)
 Net change in unrealized loss on NPS Investment (Restated,
  Note 2)......................................................       (3,551)             --              --       (3,551)
                                                                     -------         -------        --------     --------
 Total comprehensive income (loss) (Restated, Note 2) .........       (4,876)             --           1,913       (2,963)
                                                                     -------         -------        --------     --------
Balance, June 30, 2004 (Restated, Note 2) .....................      ($5,035)        ($3,571)       ($25,227)    $289,091
                                                                     =======         =======        ========     ========
</TABLE>


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

                                      F-6
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                    YEARS ENDED JUNE 30, 2004, 2003 AND 2002
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                   2004         2003         2002
                                                                                                ----------    ---------   ---------
                                                                                                (RESTATED)
                                                                                                 (NOTE 2)
<S>                                                                                             <C>           <C>         <C>
Cash flows from operating activities:
 Net income.................................................................................     $  1,913     $  45,726   $  45,806
 Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation and amortization............................................................       22,072        13,264         972
   Amortization of bond premium/discount....................................................          939        (1,261)     (2,680)
   Amortization of debt issue costs.........................................................        1,829         1,829       1,829
   Gain on sale of equity investment........................................................      (11,813)       (2,318)     (1,185)
   Deferred income taxes....................................................................        1,592        (4,379)     (9,000)
   Acquired in process research and development.............................................       12,000            --          --
   Non-cash (credit) expense for stock based compensation...................................          (57)          830         391
   Non-cash write down of carrying value of investment......................................        8,341        27,237          --
   Change in fair value of derivative.......................................................       (1,728)           --          --
   Non-cash merger termination fee..........................................................           --       (34,552)         --
Changes in operating assets and liabilities:
 Decrease (increase) in accounts receivable, net............................................        7,196        (7,123)    (14,963)
 Decrease (increase) in inventories.........................................................          571        (1,000)       (362)
 (Increase) decrease in other current assets................................................       (1,017)        2,649      (1,337)
 Decrease (increase) in deposits............................................................           23           571        (386)
 (Decrease) increase in accounts payable....................................................       (4,146)        8,283        (144)
 Increase in accrued expenses...............................................................          444         6,276       1,981
 Increase in accrued interest...............................................................           --            --       8,750
 (Decrease) increase in income taxes payable................................................       (2,274)        2,274          --
 Increase in accrued rent...................................................................         (106)         (104)        (29)
 Increase in unearned revenue...............................................................        1,312            --          --
                                                                                                 --------     ---------   ---------
   Net cash provided by operating activities................................................       37,091        58,202      29,643
                                                                                                 --------     ---------   ---------
Cash flows from investing activities:
 Purchase of property and equipment.........................................................       (6,430)      (11,225)     (7,503)
 Purchase of intangible asset...............................................................           --            --     (15,000)
 Purchase of acquired in process research and development...................................      (12,000)           --          --
 Acquisition of ABELCET business............................................................           --      (369,265)         --
 License of DEPOCYT product.................................................................           --       (12,186)         --
 Purchase of cost method investments........................................................           --            --     (48,341)
 Proceeds from sale of cost method investments..............................................       46,923            --          --
 Proceeds from sale of marketable securities................................................       33,444       371,544     271,734
 Purchase of marketable securities..........................................................      (79,315)     (142,232)   (511,997)
 Maturities of marketable securities........................................................        4,540        57,000      80,260
 Decrease in long-term investments..........................................................           --            --        (260)
                                                                                                 --------     ---------   ---------
   Net cash used in investing activities....................................................      (12,838)     (106,364)   (231,107)
                                                                                                 --------     ---------   ---------
Cash flows from financing activities:
 Proceeds from issuance of common stock.....................................................          527         1,265       5,098
 Redemption of preferred stock..............................................................           --           (26)
 Preferred stock dividend paid..............................................................           --          (183)         --
                                                                                                 --------     ---------   ---------
   Net cash provided by financing activities................................................          527         1,056       5,098
                                                                                                 --------     ---------   ---------
   Net increase (decrease) in cash and cash equivalents.....................................       24,780       (47,106)   (196,366)
Cash and cash equivalents at beginning of year..............................................       66,752       113,858     310,224
                                                                                                 --------     ---------   ---------
Cash and cash equivalents at end of year....................................................     $ 91,532     $  66,752   $ 113,858
                                                                                                 ========     =========   =========
</TABLE>


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


                                      F-7
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1) COMPANY OVERVIEW

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

(2) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

   In October 2004, the Company determined that its previously issued financial
statements for the year ended June 30, 2004, and the quarterly information for
the quarter ended June 30, 2004 required restatement.

   The restatement is due to an accounting error related to the accounting for
a derivative hedging instrument and an error in assessing the realizeability
of deferred tax assets related to the unrealized loss on available-for-sale
securities included in accumulated other comprehensive loss.

   As described in Note 15 "Merger Termination Agreement", the Company entered
into a zero cost protective collar arrangement to reduce its exposure
associated with 1.5 million common shares of NPS Pharmaceutical, Inc. ("NPS"),
which the Company holds. Under the Company's protective collar arrangement,
when its underlying shares of NPS become unrestricted and freely tradable the
Company is required to deliver to the financial institution, which holds the
protective collar arrangement, as posted collateral, a corresponding number of
shares of NPS common stock. In accordance with this requirement during the
quarter and year ended June 30, 2004, the Company sold and repurchased shares
of common stock of NPS. In accounting for such sales and repurchases, the
unrealized gain previously included in other comprehensive income prior to the
sale and repurchase of the respective shares is realized and recognized as
other income. The accounting error resulted from the accounting for the sales
of the securities underlying the derivative which resulted in a misallocation
between other income and accumulated other comprehensive loss for the quarter
and year ended June 30, 2004. Other income was overstated by $964,000 for the
year ended June 30, 2004 and accumulated other comprehensive loss as of June
30, 2004 was overstated by $964,000.

   In reevaluating the realizeability of the Company's deferred tax assets
resulting from the excess of tax basis over book basis of available-for-sale
securities, it was determined that it is more likely than not that the
deferred tax asset related to available-for-sale securities, which would
result in a capital loss carryforward when realized, will not be realizable
and that a valuation allowance is required for the deferred tax asset. As
such, there was a decrease to deferred tax assets and an increase to the
accumulated other comprehensive loss in the amount of $2.5 million as of June
30, 2004.

   The following tables show the impact of the restatement on the relevant
captions from the Company's consolidated financial statements as of and for the
year ended June 30, 2004. These tables contain only the changed balances and do
not represent the complete consolidated balance sheet as of June 30, 2004 or
consolidated statement of operations for the year ended June 30, 2004 (in
thousands, except per share amounts).


                                      F-8
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(2) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                     CHANGES TO CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                   PREVIOUSLY
                                                                    REPORTED    ADJUSTMENTS    RESTATED
                                                                   ----------   -----------    --------
<S>                                                                <C>          <C>            <C>
Current deferred tax assets....................................     $  9,133      $(2,128)     $  7,005
Total current assets...........................................      170,353       (2,128)      168,225
Non-current deferred tax assets ...............................       61,502         (325)       61,177
Total non-current assets ......................................      554,510         (325)      554,185
Total assets ..................................................      724,863       (2,453)      722,410
Accumulated other comprehensive loss ..........................       (3,546)      (1,489)       (5,035)
Accumulated deficit............................................      (24,263)        (964)      (25,227)
Total stockholders' equity ....................................      291,544       (2,453)      289,091
Total liabilities and stockholders' equity ....................      724,863       (2,453)      722,410
</TABLE>

                CHANGES TO CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   PREVIOUSLY
                                                                    REPORTED    ADJUSTMENTS    RESTATED
                                                                   ----------   -----------    --------
<S>                                                                <C>          <C>            <C>
Other income ..................................................     $ 3,860        ($964)      $ 2,896
Total other income (expense) ..................................      (2,573)        (964)       (3,537)
Income before tax provision (benefit) .........................       4,469         (964)        3,505
Net income ....................................................       2,877         (964)        1,913
Basic earnings per common share ...............................        0.07        (0.03)         0.04
Diluted earnings per common share .............................        0.07        (0.03)         0.04
</TABLE>

   The restatement did not result in any changes to cash and cash equivalents as
of June 30, 2004 or any changes to the net cash flows from operations, investing
or financing activities in the Consolidated Statements of Cash Flows for the
year ended June 30, 2004 although it did impact certain components of net cash
flow from operations.

   As a result of the adjustments discussed above, modifications were required
to previously filed footnotes as follows: Note 3, Note 4, Note 5, Note 15, Note
16 and Note 24.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 PRINCIPLES OF CONSOLIDATION

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

 CASH EQUIVALENTS

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

 MARKETABLE SECURITIES

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


                                      F-9
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

reported in stockholders' equity. The fair value of substantially all
securities is determined by quoted market prices.

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

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

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

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

<TABLE>
<CAPTION>
                                                              GROSS            GROSS
                                             AMORTIZED     UNREALIZED       UNREALIZED      FAIR MARKET
                                                COST      HOLDING GAINS   HOLDING LOSSES      VALUE*
                                             ---------    -------------   --------------    -----------
<S>                                          <C>          <C>             <C>               <C>
   U.S. Government agency debt...........     $24,017          $ 5           $    (351)       $23,671
   U.S. corporate debt...................      71,832            6                (808)        71,030
                                              -------          ---           ---------        -------
                                              $95,849          $11            $ (1,159)       $94,701
                                              =======          ===           =========        =======
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                              GROSS            GROSS
                                             AMORTIZED     UNREALIZED       UNREALIZED      FAIR MARKET
                                                COST      HOLDING GAINS   HOLDING LOSSES      VALUE*
                                             ---------    -------------   --------------    -----------
<S>                                          <C>          <C>             <C>               <C>
   U.S. Government agency debt...........     $26,518         $166             $ --          $ 26,684
   U.S. corporate debt...................      59,804           11               --            59,815
                                              -------         ----             ----          --------
                                              $86,322         $177             $ --           $86,499
                                              =======         ====             ====          ========
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                              GROSS            GROSS
                                             AMORTIZED     UNREALIZED       UNREALIZED      FAIR MARKET
                                                COST      HOLDING GAINS   HOLDING LOSSES      VALUE*
                                             ---------    -------------   --------------    -----------
<S>                                          <C>          <C>             <C>               <C>
   U.S. Government agency debt...........     $339,638       $2,052            $  --         $341,690
   U.S. corporate debt...................       29,764           --             (298)          29,466
                                              --------       ------            -----         --------
                                              $369,402       $2,052            $(298)        $371,156
                                              ========       ======            =====         ========
</TABLE>

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


                                      F-10
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

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

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

<TABLE>
<CAPTION>
   YEARS ENDED JUNE 30,                       AMORTIZED COST   FAIR MARKET VALUE
   --------------------                       --------------   -----------------
<S>                                           <C>              <C>
   2005...................................       $27,263            $27,119
   2006...................................        41,132             40,569
   2007...................................        18,440             18,180
   2008...................................         9,014              8,833
                                                 -------            -------
                                                 $95,849            $94,701
                                                 =======            =======
</TABLE>

 FINANCIAL INSTRUMENTS

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

 REVENUE RECOGNITION

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

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

   In accordance with SAB 104, 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. SAB No. 104 updates the guidance
in SAB No. 101 and requires companies to identify separate units of accounting
based on the consensus reached on Emerging Issues Task Force ("EITF") Issue
No. 00-21 Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). EITF
00-21 provides guidance on how to determine when an arrangement that involves
multiple revenue-generating activities or deliverables should be divided into
separate units of accounting for revenue recognition purposes, and if this
division is required, how the arrangement consideration should be allocated
among the separate units of accounting. EITF 00-21 is effective for revenue
arrangements entered into in quarters beginning after June 15, 2003. If the
deliverables in a revenue arrangement


                                      F-11
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

constitute separate units of accounting according to the EITF's separation
criteria, the revenue-recognition policy must be determined for each
identified unit. If the arrangement is a single unit of accounting under the
separation criteria, the revenue-recognition policy must be determined for the
entire arrangement. The adoption of EITF 00-21 did not impact the Company's
historical consolidated financial position or results of operations, but could
affect the timing or pattern of revenue recognition for future collaborative
research and/or license agreements. Prior to the adoption of EITF 00-21,
revenues from the achievement of research and development process, were
recognized when and if the milestones were achieved.

 INVENTORIES

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

 PROPERTY AND EQUIPMENT

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

 BUSINESS COMBINATIONS

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

 GOODWILL AND OTHER INTANGIBLE ASSETS

   Goodwill represents the excess of costs over the fair value of identifiable
net assets of businesses acquired. The Company adopted the provisions of SFAS
No. 142, Goodwill and Other Intangible Assets, as of July 1, 2002. In
accordance with the provisions of SFAS No. 142, goodwill and other intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination are not subject to amortization, are tested at least
annually for impairment, and are tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. The
Company completed its annual goodwill impairment test on May 31, 2004, which
indicated that goodwill was not impaired. An impairment loss is recognized to
the extent that the carrying amount exceeds the asset's fair value. This
determination is made at the Company level because the Company is in one
reporting unit and consists of two steps. First, the Company determines the
fair value of its reporting unit and compares it to its carrying amount.
Second, if the carrying amount of its reporting unit exceeds its fair value,
an impairment loss is recognized for any excess of the carrying amount of the
reporting unit's goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of
the reporting unit in a manner similar to a


                                      F-12
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

purchase price allocation, in accordance with FASB Statement No. 141, Business
Combinations. The residual fair value after this allocation is the implied
fair value of the company's goodwill. Recoverability of amortizable intangible
assets is determined by comparing the carrying amount of the asset to the
future undiscounted net cash flow to be generated by the asset. The
evaluations involve amounts that are based on management's best estimate and
judgment. Actual results may differ from these estimates. If recorded values
are less than the fair values, no impairment is indicated. SFAS No. 142 also
requires that intangible assets with estimated useful lives be amortized over
their respective estimated useful lives. At the time of adoption of SFAS No.
142, the Company did not have any goodwill or other intangible assets with an
indefinite useful life. As of June 30, 2004, the Company does not have
intangibles with indefinite useful lives, other than goodwill.

 ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS

   In accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, such as property, plant, and equipment and purchased
intangibles subject to amortization are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Assets to be disposed of would
be separately presented in the consolidated balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposed group classified
as held for sale would be presented separately in the appropriate asset and
liability sections of the consolidated balance sheet.

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

 ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

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

 DERIVATIVE FINANCIAL INSTRUMENTS

   The Company addresses certain financial exposures through a controlled
program of risk management that, at times subsequent to June 30, 2003,
includes the use of derivative financial instruments. The Company does not use
derivative financial instruments for trading or speculative purposes. In
August 2003, the Company entered into a Zero Cost Protective Collar
arrangement with a financial institution to reduce the exposure associated
with the shares of NPS Pharmaceuticals, Inc. received in June 2003 as a result
of the termination of the proposed merger between the Company and NPS
Pharmaceuticals, Inc. (see Note 15). The contract has been designated as a
fair value hedge and accordingly, the change in fair value of the derivative
will be recorded in other comprehensive income or in the income statement
depending on the portion of the derivative designated as an effective hedge.
The Company formally assesses, both at inception of the hedge and periodically
on an ongoing basis, whether the derivative is highly effective in offsetting
changes in the fair value of the hedged item. If it is determined that a
derivative is not highly effective as a hedge or if a derivative ceases to be
a highly effective hedge, the Company discontinues hedge accounting
prospectively.


                                      F-13
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

 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 on deferred tax
assets and liabilities is recognized in income or expense in the period that
includes the enactment date of the rate change.

 FOREIGN CURRENCY TRANSACTIONS

   Gains and losses from foreign currency transactions, such as those resulting
from the translation and settlement of receivables and payables denominated in
foreign currencies, are included in the consolidated statements of operations.
The Company does not currently use derivative financial instruments to manage
the risks associated with foreign currency fluctuations. The Company recorded
a loss on foreign currency transactions of approximately $18,000 for the year
ended June 30, 2004. There were no gains or losses from foreign currency
transactions for the years ended June 30, 2003 and 2002. Gains and losses from
foreign currency transactions are included as a component of other income
(expense).

 STOCK-BASED COMPENSATION PLANS

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

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

   The following table illustrates the effect on net income and net income per
share as if the compensation cost for the Company's stock option grants had
been determined based on the fair value


                                      F-14
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

at the grant dates for awards consistent with the fair value method of SFAS
No. 123 (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                             YEARS ENDED JUNE 30,
                                                                        -------------------------------
                                                                          2004       2003       2002
                                                                        --------   -------    ---------
                                                                       (Restated)
<S>                                                                     <C>        <C>        <C>
   Net income applicable to common stockholders:
    As reported ....................................................    $  1,913   $45,726    $  45,806
    Add stock-based employee compensation expense included in
      reported net income, net of tax (1)...........................         328      433          307
    Deduct total stock-based employee compensation expense
      determined under fair-value-based method for all awards, net
      of tax (1)....................................................     (11,436)   (8,933)    (22,751)
                                                                        --------   -------    ---------
   Pro forma net income (loss)......................................    $ (9,195)  $37,226    $  23,362
                                                                        ========   =======    =========
   Net income (loss) per common share-basic:
    As reported ....................................................    $   0.04   $  1.06    $    1.07
    Pro forma ......................................................    $  (0.21)  $  0.86    $    0.55
   Net income (loss) per common share-diluted
    As reported ....................................................    $   0.04   $  1.05    $    1.04
    Pro forma ......................................................    $  (0.21)  $  0.85    $    0.53
</TABLE>

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

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

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

<TABLE>
<CAPTION>
                                                                                    YEARS ENDED JUNE 30,
                                                                                    -------------------
                                                                                    2004   2003    2002
                                                                                    ----   ----    ----
<S>                                                                                 <C>    <C>     <C>
   Risk-free interest rate......................................................    4.00%  2.97%   4.00%
   Expected stock price volatility..............................................      69%    75%     78%
   Expected term until exercise (years).........................................    4.73   4.21    4.23
   Expected dividend yield......................................................       0%     0%      0%
</TABLE>

 CASH FLOW INFORMATION

   Cash payments for interest were approximately $18.0 million, $18.0 million
and $9.3 million for the years ended June 30, 2004, 2003 and 2002,
respectively. There were $3.8 million and $2.1 million


                                      F-15
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

of tax payments made for the years ended June 30, 2004 and June 30, 2003,
respectively. There were no income tax payments made for the year ended
June 30, 2002.

 RECLASSIFICATIONS

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

(4) COMPREHENSIVE INCOME

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

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

<TABLE>
<CAPTION>
                                                                           YEARS ENDED JUNE 30,
                                                                    -----------------------------------
                                                                        2004          2003       2002
                                                                    -------------   -------    --------
                                                                     (Restated)
<S>                                                                 <C>             <C>        <C>
   Net income...................................................       $ 1,913      $45,726    $ 45,806
    Other comprehensive income:
    Unrealized (loss) gain on securities that arose during the
      year net of tax provision of $0, $345,000 and $658,000 for
      2004, 2003 and 2002, respectively.........................        (1,404)       1,007         211
   Unrealized loss on NPS investment arising during the period..        (4,383)          --          --
    Reclassification adjustment for gain included in net income,
    net of tax .................................................           911       (2,262)         --
                                                                       -------      -------    --------
                                                                        (4,876)      (1,255)        211
                                                                       -------      -------    --------
   Total comprehensive income (loss)............................       $(2,963)     $44,471     $46,017
                                                                       =======      =======    ========
</TABLE>

(5) EARNINGS PER COMMON SHARE

   Basic earnings per share is computed by dividing the net income available to
common stockholders adjusted for only cumulative undeclared preferred stock
dividends for the relevant period, by the weighted average number of shares of
Common Stock issued and outstanding during the periods. For purposes of
calculating diluted earnings per share for the years ended June 30, 2004, 2003
and 2002, the denominator includes both the weighted average number of shares of
Common Stock outstanding and the number of dilutive Common Stock equivalents.
The number of dilutive Common Stock equivalents includes the effect of
non-qualified stock options calculated using the treasury stock method and the
number of shares issuable upon conversion of the Series A Preferred Stock that
was outstanding as of June 30, 2003 and 2002. There were no Series A Preferred
Stock outstanding as of June 30, 2004. The number of shares issuable upon
conversion of the Company's 4.5% Convertible Subordinated Notes due 2008 (the
"Notes") and the effect of the vesting of certain restricted stock and certain
stock options using the treasury stock method have not been included as the
effect of their inclusion would be antidilutive. As of June 30, 2004, 2003 and
2002, the Company had 9,644,000, 6,514,000 and 6,955,000 potentially dilutive
common shares outstanding respectively, that could potentially dilute future
earnings per share calculations.


                                      F-16
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(5) EARNINGS PER COMMON SHARE -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED JUNE 30,
                                                                             -----------------------------
                                                                                2004      2003       2002
                                                                             ---------   -------   -------
                                                                            (Restated)
   <S>                                                                        <C>        <C>       <C>
      Net income..........................................................    $ 1,913    $45,726   $45,806
      Less: preferred stock dividends.....................................         --         11        14
                                                                              -------    -------   -------
      Net income available to common stockholders.........................    $ 1,913    $45,715   $45,792
                                                                              =======    =======   =======
      Weighted average number of common shares issued and outstanding --
       basic .............................................................     43,350     43,116    42,726
      Effect of dilutive common stock equivalents:
       Conversion of preferred stock .....................................         --         13        16
       Exercise of stock options .........................................        172        486     1,284
                                                                              -------    -------   -------
                                                                               43,522     43,615    44,026
                                                                              =======    =======   =======
</TABLE>

(6) BUSINESS COMBINATION

 (A)  ACQUISITION OF NORTH AMERICAN ABELCET BUSINESS

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

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

<TABLE>
<CAPTION>
   <S>                                                                     <C>
      Cash.............................................................    $360,000
      Acquisition costs, primarily legal, investment banking and
       accounting fees.................................................       9,264
                                                                           --------
                                                                           $369,264
                                                                           ========
</TABLE>

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

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

<TABLE>
<CAPTION>
   <S>                                                                     <C>
      Inventories......................................................    $  8,572
      Property, plant and equipment....................................      13,707
      Amortizable intangible assets....................................     196,000
      Goodwill.........................................................     150,985
                                                                           --------
                                                                           $369,264
                                                                           ========
</TABLE>


                                      F-17
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(6) BUSINESS COMBINATION -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                    ESTIMATED LIVES
                                                                    ---------------
   <S>                                                 <C>            <C>
      Product Patented Technology....................   $ 64,400       12 years
      Manufacturing Patent...........................     18,300       12 years
      NDA Approval...................................     31,100       12 years
      Trade name and other product rights............     80,000       15 years
      Manufacturing Contract.........................      2,200        3 years
                                                        --------
                                                        $196,000
                                                        ========
</TABLE>

   Goodwill will not be amortized but will be tested for impairment at least
annually. For income tax purposes, the entire amount of goodwill is deductible
and is being amortized over a 15 year period.

 (B)  ELAN/MEDEUS MANUFACTURING AGREEMENT

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

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

   The agreement also provides that through June 30, 2004, Enzon calculated
the actual product manufacturing costs on an annual basis and, to the extent
that this amount was greater than the respective transfer prices, Medeus
reimbursed Enzon for such differences. Conversely, if such actual
manufacturing costs were less than the transfer price, Enzon reimbursed
Medeus for such differences. In addition, for the periods from closing to
June 30, 2003 and the one year period ended June 30, 2004, respectively,
Medeus was responsible for reimbursing Enzon for Medeus' share of the plant's
excess capacity for such periods. This calculation was based on Medeus' portion
of the total products manufactured at the plant.

 (C)  PRO FORMA FINANCIAL INFORMATION

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

   The following pro forma results of operations of the Company for the years
ended June 30, 2003 and 2002, respectively, assume the acquisition of the
ABELCET Business occurred as of July 1, 2002


                                      F-18
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(6) BUSINESS COMBINATION -- (CONTINUED)

and 2001, respectively and assumes the purchase price has been allocated to
the assets purchased based on fair values at the date of acquisition (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                             YEARS ENDED JUNE 30,
                                                             -------------------
                                                               2003       2002
                                                             --------   --------
<S>                                                          <C>        <C>
   Product sales.........................................    $104,408   $118,672
   Total revenues........................................     182,808    173,294
   Net income............................................      45,240     60,416
   Pro forma earnings per share:
   Basic.................................................    $   1.05   $   1.41
   Diluted...............................................    $   1.04   $   1.37
</TABLE>

(7) INVENTORIES

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

<TABLE>
<CAPTION>
                                                                  YEARS ENDED
                                                                   JUNE 30,
                                                               -----------------
                                                                2004       2003
                                                               -------   -------
<S>                                                            <C>       <C>
   Raw materials...........................................    $ 3,143   $ 4,349
   Work in process.........................................      3,716     3,392
   Finished goods..........................................      4,356     4,045
                                                               -------   -------
                                                               $11,215   $11,786
                                                               =======   =======
</TABLE>

(8) INTANGIBLE ASSETS

   Intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    YEARS ENDED JUNE 30,
                                                                    -------------------     ESTIMATED
                                                                      2004       2003      USEFUL LIVES
                                                                    --------   --------    ------------
<S>                                                                 <C>        <C>         <C>
   Product Patented Technology..................................    $ 64,400   $ 64,400       12 years
   Manufacturing Patent.........................................      18,300     18,300       12 years
   NDA Approval.................................................      31,100     31,100       12 years
   Trade name and other product rights..........................      80,000     80,000       15 years
   Manufacturing Contract.......................................       2,200      2,200        3 years
   Patent.......................................................       2,092      2,092       15 years
   Product Acquisition Costs....................................      26,194     26,194    10-14 years
                                                                    --------   --------
                                                                     224,286    224,286
   Less: Accumulated amortization...............................      30,219     12,311
                                                                    --------   --------
                                                                    $194,067   $211,975
                                                                    ========   ========
</TABLE>


   Amortization charged to operations relating to intangible assets totaled
$17.9 million, $12.3 million, and $142,000 for the years ended June 30, 2004,
2003 and 2002, respectively. Amortization expense for the intangibles and
certain other product acquisition costs acquired with the North American
ABELCET business in November 2002 (Note 6) is expected to be approximately
$15.5 million per year.


                                      F-19
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(9) PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                         YEARS ENDED
                                                                          JUNE 30,
                                                                      -----------------     ESTIMATED
                                                                       2004       2003     USEFUL LIVES
                                                                      -------   -------    ------------
<S>                                                                   <C>       <C>        <C>
   Land...........................................................    $ 1,500   $ 1,500
   Building.......................................................      4,800     4,800        7 years
   Leasehold improvements.........................................     16,324    13,881     3-15 years
   Equipment......................................................     24,694    21,097      3-7 years
   Furniture and fixtures.........................................      2,721     2,564        7 years
   Vehicles.......................................................         38        55        3 years
                                                                      -------   -------
                                                                       50,077    43,897
   Less: Accumulated depreciation and amortization................     15,218    11,304
                                                                      -------   -------
                                                                      $34,859   $32,593
                                                                      =======   =======
</TABLE>

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

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

(10) ACCRUED EXPENSES
   Accrued expenses consist of (in thousands):

<TABLE>
<CAPTION>
                                                                     YEARS ENDED
                                                                      JUNE 30,
                                                                 ------------------
                                                                   2004      2003
                                                                 -------    -------
   <S>                                                           <C>        <C>
      Accrued wages and vacation..............................   $ 5,247    $ 4,157
      Accrued Medicaid rebates................................     2,011      1,904
      Unearned revenue........................................     1,641        958
      Other...................................................     5,102      3,243
                                                                 -------    -------
                                                                 $14,001    $10,262
                                                                 =======    =======
</TABLE>

(11) LONG-TERM DEBT

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


                                      F-20
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(11) LONG-TERM DEBT -- (CONTINUED)

value of the 4.5% Notes was approximately $369.0 million and $327.0 million at
June 30, 2004 and 2003, respectively.

(12) STOCKHOLDERS' EQUITY

 SHAREHOLDER RIGHTS PLAN

   During May 2002, the Company adopted a shareholder rights plan ("Rights
Plan"). The Rights Plan involves the distribution of one preferred share
purchase right ("Right") as a dividend on each outstanding share of the
Company's common stock to each holder of record on June 3, 2002. Each Right
shall entitle the holder to purchase one-thousandth of a share of Series B
Preferred Stock ("Preferred Shares") of the Company at a price of $190.00 per
one-thousandth of Preferred Share. The Rights are not immediately exercisable
and will become exercisable only upon the occurrence of certain events. If a
person or group acquires, or announces a tender or exchange offer that would
result in the acquisition of 15 percent or more of the Company's common stock
while the stockholder rights plan remains in place, then, unless (1) the
Rights are redeemed by the Company for $0.01 per right or (2) the Board of
Directors determines that a tender or exchange offer for all of the
outstanding Common Stock of the Company is in the best interest of the Company
and the stockholders, the Rights will be exercisable by all Right holders
except the acquiring person or group for one share of the Company or in
certain circumstances, shares of the third party acquirer, each having a value
of twice the Right's then-current exercise price. The Rights will expire on
May 16, 2012.

 SERIES A PREFERRED STOCK

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

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

 COMMON STOCK

   During the year ended June 30, 2004, the Company issued 340,000 shares of
restricted common stock and restricted common stock units to certain members of
management which vest over a five year vesting period. Total compensation cost
of approximately $4.1 million, calculated based on the fair value of the shares
on the issuance date, is being recognized as an expense over the vesting period.
For the year ended June 30, 2004, $504,000 was recorded as compensation expense,
which reflects the reversal of $1.29 million of compensation expense previously
recognized related to 215,000 shares of cancelled restricted stock as a
result of the May 10, 2004 resignation of the Company's


                                      F-21
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(12) STOCKHOLDERS' EQUITY -- (CONTINUED)

Chief Executive Officer and the cancellation of his unvested restricted stock.
In the quarter ended June 30, 2004, the Company reversed $1.18 million of
compensation expense which was previously recognized related to these
restricted shares, including $764,000 which was recognized for the nine months
ended March 31, 2004.

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

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

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

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

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

<TABLE>
<CAPTION>
   <S>                                                                    <C>
      Non-Qualified and Incentive Stock Plans.........................     8,248
      Shares issuable upon conversion of Notes........................     5,635
                                                                          ------
                                                                          13,883
                                                                          ======
</TABLE>

(13) INDEPENDENT DIRECTORS' STOCK PLAN

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

   Through December 31, 2002, the Company's Independent Directors received
compensation for serving on the Board of Directors payable in shares of the
Company's common stock or a combination of shares of common stock and cash
under the Company's Independent Directors' Stock Plan. In September of 2002,
the Compensation Committee of the Board of Directors decided to terminate the
Independent Directors' Stock Plan as a stand-alone plan and to instead issue
shares of the Company's common stock under the Independent Directors' Stock
Plan pursuant to the 2001 Incentive Stock Plan. During fiscal 2003, each
Independent Director was entitled to compensation of $2,500 per quarter and
$500 for each meeting attended by such Independent Director under the
Independent Directors' Stock


                                      F-22
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(13) INDEPENDENT DIRECTORS' STOCK PLAN -- (CONTINUED)

Plan. In 2002, in connection with the reduction of shares subject to the
option granted under the regular grant to Independent Directors' the
Compensation Committee of the Board of Directors approved a change, effective
for the quarter ended March 31, 2002 and for each quarter thereafter, to the
compensation under the Independent Directors Stock Plan to include the payment
of $500 for committee meetings attended by the Independent Directors which are
held on a day when no Board of Directors meeting is held. Under the
Independent Directors' Stock Plan the Independent Directors were entitled to
elect to receive up to 50% of the fees payable under the Independent
Directors' Stock Plan in cash, with the remainder of the fees to be paid in
shares of the Company's common stock. Fees payable and shares issuable under
the Independent Directors' Stock Plan were paid annually at the end of the
calendar year.

   Effective December 31, 2003, the Compensation Committee of the Board of
Directors approved the termination of the existing compensation program for
directors and implemented a new compensation structure. The new compensation
structure entitles each independent director to an annual cash payment of
$20,000. In addition, annual cash payments of $7,000 for chair of the audit
and finance committee, $3,500 for any other chair on any other committee of
the board and $1,000 for each meeting attended will be made to directors. The
structure also includes an annual option grant of 5,000 shares of common stock
issued on the first trading day of each year at the closing price on that day,
which will vest in one year and restricted stock units with an aggregate value
of $25,000 on the first trading day following June 30 based on the closing
price on the date of grant, which will vest in thirds on each of the first
three anniversaries after the date of grant. During the year ended June 30,
2004, the Company recorded cash compensation expense of $136,000 for the
Independent Directors.

(14) STOCK OPTION PLANS

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

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

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


                                      F-23
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(14) STOCK OPTION PLANS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                              WEIGHTED
                                                                              AVERAGE
                                                                              EXERCISE       RANGE OF
                                                                    SHARES     PRICE          PRICES
                                                                    ------    --------   ----------------
   <S>                                                              <C>       <C>        <C>
   Outstanding at June 30, 2001 .................................    3,284     $24.98    $ 1.88 to $73.22
    Granted at exercise prices which equaled
      the fair market value on the date of grant.................    1,399     $44.39    $25.10 to $65.86
    Exercised ...................................................   (1,008)    $ 4.13    $ 2.00 to $37.38
    Canceled ....................................................      (31)    $41.56    $22.31 to $70.69
                                                                    ------
   Outstanding at June 30, 2002 .................................    3,644     $38.07    $ 1.88 to $73.22
    Granted at exercise prices which equaled
      the fair market value on the date of grant.................    1,133     $19.65    $11.35 to $24.76
    Exercised ...................................................     (305)    $ 4.49    $ 2.03 to $14.13
    Canceled ....................................................     (534)    $40.63    $11.70 to $71.00
                                                                    ------
   Outstanding at June 30, 2003 .................................    3,938     $35.02    $ 1.88 to $73.22
    Granted at exercise prices which equaled
      the fair market value on the date of grant.................    2,151     $13.81    $10.66 to $17.72
    Exercised ...................................................      (98)    $ 5.40    $10.72 to $17.17
    Canceled ....................................................   (1,153)    $36.21    $11.37 to $71.00
                                                                    ------
   Outstanding at June 30, 2004 .................................    4,838     $25.90    $ 1.87 to $71.38
                                                                    ======
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                          WEIGHTED
                                                           AVERAGE     WEIGHTED                  WEIGHTED
                 RANGE OF                                 REMAINING     AVERAGE                   AVERAGE
                 EXERCISE                   OPTIONS      CONTRACTUAL   EXERCISE      OPTIONS     EXERCISE
                  PRICES                  OUTSTANDING       LIFE         PRICE     EXERCISABLE     PRICE
   -----------------------------------    -----------    -----------   --------    -----------   --------
   <S>                                    <C>            <C>           <C>         <C>           <C>
   $ 1.87 -- $11.37                            686          5.33        $ 7.14          406       $ 4.29
   $11.41 -- $14.13                            325          8.68        $12.50           57       $13.82
   $14.15 -- $14.15                            785          9.61        $14.15           --           --
   $14.16 -- $15.13                            599          9.72        $15.09            4       $14.55
   $15.15 -- $18.40                            505          5.22        $17.53          303       $17.59
   $18.41 -- $28.17                            589          6.76        $23.14          245       $24.61
   $29.75 -- $45.98                            544          6.86        $43.51          251       $42.51
   $47.38 -- $70.00                            774          2.71        $61.83          721       $62.31
   $71.00 -- $71.38                             31          6.32        $71.24           21       $71.22
                                             -----                                    -----
                                             4,838          6.71                      2,008       $35.37
                                             =====                                    =====
</TABLE>


                                      F-24
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(15) MERGER TERMINATION AGREEMENT

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

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

<TABLE>
<CAPTION>
                                                                  YEARS ENDED
                                                                   JUNE 30,
                                                               -----------------
                                                                2004       2003
                                                               -------   -------
<S>                                                            <C>       <C>
   Valued at fair value (including unrealized gain (loss)
    of ($3.9) million and $667, respectively) .............    $31,500   $27,382
   Valued as restricted stock..............................         --     7,837
                                                               -------   -------
                                                               $31,500   $35,219
                                                               =======   =======
</TABLE>

   In August 2003, the Company entered into a Zero Cost Protective Collar
arrangement with a financial institution to reduce the exposure associated
with the 1.5 million shares of common stock of NPS received as part of the
merger termination agreement with NPS. By entering into this equity collar
arrangement and taking into consideration the underlying put and call option
strike prices, the terms are structured so that the Company's investment in
NPS stock, when combined with the value of the Collar, should secure ultimate
cash proceeds in the range of 85%-108% of the negotiated fair value per share
of $23.47 (representing a 4.85% discount off of the closing price of NPS
common stock on the day before the collar was executed). The Collar is
considered a derivative hedging instrument under SFAS No. 133 and as such, the
Company periodically measures its fair value and recognizes the derivative as
an asset or a liability. The change in fair value is recorded in other
comprehensive income (See Note 4) or in the Statement of Operations depending
on the portion of the derivative designated and effective as a hedge. As of
June 30, 2004, the market value of NPS' common stock was $21.00 per share.
When the underlying shares become unrestricted and freely tradable, the
Company is required to deliver to the financial institution as posted
collateral, a corresponding number of shares of NPS common stock. During the
year ended June 30, 2004, we sold and re-purchased 1,125,000 shares
respectively of common stock of NPS. The unrealized gain previously included
in other comprehensive income prior to the sale and repurchase with respect to
these shares aggregating $836,000 for the year ended June 30, 2004, was
recognized in the Statements of Operations and is included in "Other Income".
With respect to the remaining 375,000 shares of NPS common stock as of June 30,
2004, $38,000 has been recorded in comprehensive income for the year ended
June 30, 2004. The fair value of the


                                      F-25
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(15) MERGER TERMINATION AGREEMENT -- (CONTINUED)

Collar represents a receivable from the counterparty of $1.7 million at June 30,
2004, which represents the time value component of the Collar and was recorded
as "Other Income" in the Statement of Operations for the year ended June 30,
2004. The Collar will mature in four separate three-month intervals from
November 2004 through August 2005, at which time the Company will receive the
proceeds from the sale of the securities. The amount due at each maturity date
will be determined based on the market value of NPS' common stock on such
maturity date. The contract requires the Company to maintain a minimum cash
balance of $30.0 million and additional collateral up to $10.0 million (as
defined) under certain circumstances with the financial institution. The strike
prices of the put and call options are subject to certain adjustments in the
event the Company receives a dividend from NPS.

(16) INCOME TAXES

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

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

<TABLE>
<CAPTION>
                                                                               YEARS ENDED JUNE 30,
                                                                            ---------------------------
                                                                             2004      2003      2002
                                                                            ------   -------    -------
<S>                                                                         <C>      <C>        <C>
   Current:
    Federal ............................................................    $   --   $    --    $    --
    State ..............................................................        --     6,589       (857)
                                                                            ------   -------    -------
    Total current ......................................................        --     6,589       (857)
                                                                            ------   -------    -------
   Deferred:
    Federal ............................................................     1,190    (5,454)    (6,132)
    State ..............................................................       402      (912)    (2,134)
                                                                            ------   -------    -------
    Total deferred .....................................................     1,592    (6,366)    (8,266)
                                                                            ------   -------    -------
   Income tax provision (benefit).......................................    $1,592   $   223    $(9,123)
                                                                            ======   =======    =======
</TABLE>


                                      F-26
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(16) INCOME TAXES -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                              YEARS ENDED JUNE 30,
                                                                         ------------------------------
                                                                          2004       2003        2002
                                                                         -------   --------    --------
                                                                       (Restated)
<S>                                                                      <C>       <C>         <C>
   Income tax expense computed at federal statutory rate.............    $ 1,227   $ 16,082    $ 12,839
   Non deductible expenses...........................................        420         --          --
   Add (deduct) effect of:
    State income taxes (including sale and purchase of state net
       operating loss carryforwards), net of federal tax ............       (276)     3,690      (1,931)
   Federal tax benefit through utilization of net operating loss
    carryforwards against current period income .....................         --     (8,349)    (13,116)
   Research and development tax credits..............................     (1,400)        --          --
   Increase (decrease) in beginning of year Valuation allowance-
    federal .........................................................      1,621    (11,200)     (6,915)
                                                                         -------   --------    --------
                                                                         $ 1,592   $    223    $ (9,123)
                                                                         =======   ========    ========
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                             YEARS ENDED JUNE 30,
                                                             -------------------
                                                               2004       2003
                                                             --------   --------
                                                            (Restated)
<S>                                                          <C>        <C>
   Deferred tax assets:
    Inventories .........................................    $    960   $    335
    Compensation ........................................         457        992
    Returns and allowances ..............................       5,679      3,313
    Research and development credits carryforward .......      13,248     10,408
    Federal AMT credits .................................       1,643      1,447
    Deferred revenue ....................................         378      1,319
    Capital loss carryforwards ..........................         722         --
    Write down of carrying value of investment ..........       8,956     11,126
    Federal and state net operating loss carryforwards ..      51,253     53,698
    Acquired in process research and development ........       4,739         --
    Unrealized loss on securities .......................       2,057         --
    Other ...............................................       1,221      1,164
                                                             --------   --------
      Total gross deferred tax assets....................      91,313     83,802
      Less valuation allowance...........................     (16,473)   (12,884)
                                                             --------   --------
                                                               74,840     70,918
                                                             --------   --------
   Deferred tax liabilities:
    Goodwill ............................................      (5,388)    (2,399)
    Unrealized gain on securities .......................          --       (345)
    Book basis in excess of tax basis of acquired assets       (1,270)      (721)
                                                             --------   --------
                                                               (6,658)    (3,465)
                                                             --------   --------
   Net deferred tax assets...............................    $ 68,182   $ 67,453
                                                             ========   ========
</TABLE>

   A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. At June 30,
2004, the Company had federal net operating loss


                                      F-27
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(16) INCOME TAXES -- (CONTINUED)

carryforwards of approximately $126.0 million and combined state net operating
loss carryforwards of approximately $122.0 million that will expire in the
years 2005 through 2021. The Company also has federal research and development
tax credit carryforwards of approximately $10.6 million for tax reporting
purposes, which expire in the years 2005 to 2021. In addition, the Company has
$1.8 million of state research and development tax credit carryforwards, which
will expire in the year 2010. The Company's ability to use the net operating
loss and research and development tax credit carryforwards are subject to
certain limitations due to ownership changes, as defined by rules pursuant to
Section 382 of the Internal Revenue Code of 1986, as amended.

   As of June 30, 2004, management believes that it is more likely than not that
the net deferred tax assets will be realized, including the net operating losses
from operating activities and stock option exercises, based on future
operations. The Company has maintained a valuation allowance of $16.5 million
and $12.9 million at June 30, 2004 and 2003, respectively. The net increase in
the valuation allowance for 2004 was due to the determination that it is more
likely than not that the Company may not realize the tax benefits attributable
to certain capital loss carryforwards, deductible temporary differences which
would result in a capital loss carryforward when realized, and federal research
and development credits at June 30, 2004. The Company will continue to reassess
the need for such valuation allowance in accordance with SFAS 109 based on the
future operating performance of the Company.

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

(17) SIGNIFICANT AGREEMENTS

 SCHERING AGREEMENT

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

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

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


                                      F-28
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(17) SIGNIFICANT AGREEMENTS -- (CONTINUED)

   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.

 AVENTIS AGREEMENT

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

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

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

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

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

   The settlement also called for a payment of $100,000 beginning in May 2000
and for each month that expired prior to the resumption of normal distribution
and labeling of this product by Aventis. During the quarter ended December 31,
2000, the FDA gave final approval to the Company's


                                      F-29
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(17) SIGNIFICANT AGREEMENTS -- (CONTINUED)

manufacturing changes, which were made to correct these problems, and all
previously imposed restrictions on ONCASPAR were lifted. This obligation was
terminated pursuant to the June 2002 amendment to the license agreement.
Payments as required were made through June 2002.

 MEDAC AGREEMENT

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

 NEKTAR ALLIANCE

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

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

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

   The Company has entered into a cross-license agreement with Nektar under
which each party has crosslicensed to the other party certain patents. The
Company also granted to Nektar the right to grant sub-licenses under certain
of the Company's PEG patents to third parties. The Company will receive a
royalty or a share of profits on final product sales of any products that use
its patented PEG technology. The Company anticipates that it will receive 0.5%
or less of Hoffmann-LaRoche's sales of PEGASYS, which represents equal profit
sharing with Nektar on this product. The Company retains the right to use all
of its PEG technology and certain of Nektar's PEG technology for its own
product portfolio, as well as those products it develops in co-
commercialization collaborations with third parties. This agreement expires
upon the later of the expiration of the last licensed patent or the date the
parties are no longer required to pay royalties. Either party may terminate
the agreement upon a material breach of the


                                      F-30
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(17) SIGNIFICANT AGREEMENTS -- (CONTINUED)

agreement by the other party that is not cured within 90 days of the receipt
of written notice from the non-breaching party or upon the declaration of
bankruptcy by the other party.

   The Company purchased $40 million of newly issued Nektar convertible
preferred stock in January 2002. The preferred stock is convertible into
Nektar common stock at a conversion price of $22.79 per share. In the event
Nektar's common stock price three years from the date of issuance of the
preferred stock or earlier in certain circumstances is less than $22.79, the
conversion price will be adjusted down, although in no event will it be less
than $18.23 per share. Conversion of the preferred stock into common stock can
occur anywhere from 1 to 4 years following the issuance of the preferred stock
or earlier in certain circumstances. Under the cost method of accounting,
investments are carried at cost and are adjusted only for other-than-temporary
declines in fair value, and additional investments. As a result of a continued
decline in the price of Nektar's common stock, which the Company determined
was other-than-temporary, during December 31, 2002 the Company recorded a
write-down of the carrying value of its investment in Nektar, which resulted
in a non-cash charge of $27.2 million. The adjustment was calculated based on
an assessment of the fair value of the investment. During the year ended
June 30, 2004, the Company converted the preferred stock into common stock and
sold approximately 50% of our investment in Nektar which resulted in a net
gain on investment of $11.0 million and cash proceeds of $17.4 million. (See
Note 23 for Write-Down of Investments.)

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

 MICROMET ALLIANCE

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

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

   In addition to the research and development collaboration, in 2002 the
Company also made an $8.3 million investment into Micromet in the form of a
note of Micromet, which was amended in June 2004. This note bears interest of
3% and is payable in March 2007. This note is convertible into Micromet Common
Stock at a price of 15.56 euros per share at the election of either party. The


                                      F-31
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(17) SIGNIFICANT AGREEMENTS -- (CONTINUED)

carrying value of the convertible note was written-down to zero in June 2004,
due to an other-than-temporary decline in the fair value of this investment.
(See Note 23 for Write-Down of Investments.)

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

 SKYEPHARMA AGREEMENT

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

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

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

   Either party may terminate the agreement early upon a material breach by the
other party, which breach the other party fails to cure within 60 days after
receiving notice thereof. Further, SkyePharma will be entitled to terminate
the agreement early if the Company fails to satisfy its Minimum Annual
Purchases. In addition, the Company will be entitled to terminate the
agreement early if a court or government agency renders a decision or issues
an order that prohibits the manufacture, use or sale of the product in the
U.S. If a therapeutically equivalent generic product enters the market and


                                      F-32
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(17) SIGNIFICANT AGREEMENTS -- (CONTINUED)

DEPOCYT's market share decreases, the Company will enter into good faith
discussions in an attempt to agree on a reduction in its payment obligations
to SkyePharma and a fair allocation of the economic burdens resulting from the
market entry of the generic product. If the Company is unable to reach an
agreement within 30 days, then either party may terminate the agreement, which
termination will be effective 180 days after giving notice thereof. After
termination of the agreement, the companies will have no further obligation to
each other, except the fulfillment of obligations that accrued prior thereto
(e.g., deliveries, payments, etc.). In addition, for six months after any such
termination, the Company will have the right to distribute any quantity of
product the Company purchased from SkyePharma prior to termination.

 FRESENIUS AGREEMENT

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

 INEX AGREEMENT

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

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

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


                                      F-33
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(17) SIGNIFICANT AGREEMENTS -- (CONTINUED)

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

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

 MEDEUS MANUFACTURING AGREEMENT

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

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


                                      F-34
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(17) SIGNIFICANT AGREEMENTS -- (CONTINUED)

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

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

 CEO SEPARATION AGREEMENT

   In connection with Mr. Higgins' departure as the Company's Chief Executive
Officer, the Board of Directors appointed a committee of four independent
directors (Dr. Rosina Dixon, Robert LeBuhn, Dr. David Golde and Robert
Parkinson) to review and approve the terms of Mr. Higgins departure. This
committee negotiated and approved a separation payment of $1.25 million, which
was paid to Mr. Higgins upon his departure in May 2004. Concurrent with Mr.
Higgins' departure as Chief Executive Officer in May 2004, the Company reversed
approximately $1.29 million of compensation expense previously recorded related
to restricted stock of the Company that was forfeited by Mr. Higgins as a result
of his departure as the Company's Chief Executive Officer. In the quarter ended
June 30, 2004, the Company reversed $1.18 million of compensation expense which
was previously recognized related to these restricted shares, including $764,000
which was recognized for the nine months ended March 31, 2004.

(18) RECENT ACCOUNTING PRONOUNCEMENTS

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

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


                                      F-35
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(18) RECENT ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)

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

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

(19) 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, which provides for
severance payments.

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

(20) LEASES

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

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

<TABLE>
<CAPTION>
                                                                       OPERATING
   YEAR ENDING JUNE 30,                                                  LEASES
   --------------------                                                ---------
<S>                                                                    <C>
   2005 ............................................................    $ 1,466
   2006 ............................................................      1,445
   2007 ............................................................      1,444
   2008 ............................................................      1,239
   2009 ............................................................        867
   Thereafter ......................................................      9,288
                                                                        -------
   Total minimum lease payments ....................................    $15,749
                                                                        =======
</TABLE>


                                      F-36
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(20) LEASES -- (CONTINUED)

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

(21) RETIREMENT PLANS

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

   In September 2003, the Board of Directors adopted the Executive Deferred
Compensation Plan (the "Plan"). The Plan is to aid the Company in attracting
and retaining key employees by providing a non-qualified compensation deferral
vehicle. To date no contributions have been made to this plan.

(22) BUSINESS AND GEOGRAPHICAL SEGMENTS

   The Company is managed and operated as one business segment. The entire
business is comprehensively managed by a single management team that reports
to the Chief Executive Officer. The Company does not operate separate lines of
business or separate business entities with respect to any of its products or
product candidates.

   Accordingly, the Company does not prepare discrete financial information
with respect to separate product areas or by location and does not have
separately reportable segments as defined by SFAS No. 131.

   Revenues consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                              YEARS ENDED JUNE 30,
                                                                         ------------------------------
                                                                           2004       2003       2002
                                                                         --------   --------    -------
<S>                                                                      <C>        <C>         <C>
   Product sales, net
    ADAGEN ..........................................................    $ 17,113   $ 16,025    $13,441
    ONCASPAR ........................................................      18,050     12,432      8,742
    DEPOCYT .........................................................       5,029      2,458         --
    ABELCET .........................................................      67,730     28,349         --
                                                                         --------   --------    -------
      Total product sales............................................     107,922     59,264     22,183
                                                                         ========   ========    =======
    Manufacturing revenue ...........................................      12,911      8,742         --
    Royalties .......................................................      47,707     77,589     53,329
    Contract revenues ...............................................       1,031        811        293
                                                                         --------   --------    -------
      Total revenues.................................................    $169,571   $146,406    $75,805
                                                                         ========   ========    =======
</TABLE>

   During the years ended June 30, 2004, 2003 and 2002, the Company had export
sales and royalties recognized on export sales of $44.3 million, $40.2 million
and $26.3 million, respectively. Of these amounts, sales and royalties in
Europe and royalties recognized on sales in Europe were $34.7 million, $35.5
and $24.9 million during the years ended June 30, 2004, 2003 and 2002,
respectively.

   Outside the United States, the Company principally sells: ADAGEN(R) in
Europe, ONCASPAR in Germany, DEPOCYT(R) in Canada, and ABELCET in Canada.
Information regarding revenues attributable to the United States and to all
foreign countries collectively is stated below. The geographic classification
of product sales was based upon the location of the customer. The geographic


                                      F-37
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(22) BUSINESS AND GEOGRAPHICAL SEGMENTS -- (CONTINUED)

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>
                                                                              YEARS ENDED JUNE 30,
                                                                         ------------------------------
                                                                           2004       2003       2002
                                                                         --------   --------    -------
<S>                                                                      <C>        <C>         <C>
   Revenues:
    United States ...................................................    $125,268   $106,160    $49,503
    Foreign countries ...............................................      44,303     40,246     26,302
                                                                         --------   --------    -------
      Total revenues.................................................    $169,571   $146,406    $75,805
                                                                         ========   ========    =======
</TABLE>

(23) WRITE-DOWN OF INVESTMENTS

   In April 2002, the Company entered into a multi-year strategic collaboration
with Micromet and in June 2004, the Company amended this agreement and
extended the collaboration until September 2007. In 2002, the Company also
made an $8.3 million investment into Micromet in the form of a convertible
note due to Enzon, which was amended in June 2004. This note bears interest of
3% and is payable in March 2007. This note is convertible into Micromet Common
Stock at a price of 15.56 euros per share at the election of either party.
During the year ended June 30, 2004, the Company recorded a write-down of the
carrying value of the investment, which resulted in a non-cash charge of
$8.3 million. The write-down of the Company's investment in Micromet was due
to an other-than-temporary decline in the value of this investment.

   In January 2002, the Company entered into a broad strategic alliance with
Nektar Therapeutics to co-develop products utilizing both companies'
proprietary drug delivery platforms. As a part of this agreement, the Company
purchased $40 million of newly issued Nektar convertible preferred stock,
which is currently convertible into Nektar common stock at Enzon's option at a
conversion price of $22.79 per share. The investment represented approximately
3% of Nektar's equivalent common shares outstanding at the time of issuance.
Under the cost method of accounting, non-marketable equity investments are
carried at cost and are adjusted only for other-than-temporary declines in
fair value and additional investments.

   As a result of a continued decline in the price of Nektar's common stock,
which the Company determined was other-than-temporary, during December 31,
2002 the Company recorded a write-down of the carrying value of its investment
in Nektar, which resulted in a non-cash charge of $27.2 million. The
adjustment was calculated based on an assessment of the fair value of the
investment which was determined during the quarter ended December 31, 2002 by
multiplying the number of shares of common stock that would be received based
on the conversion rate in place as of the date of the agreement ($22.79 per
share) by the closing price of Nektar common stock on December 31, 2002, less
a 10% discount to reflect the fact that the shares were not convertible as of
December 31, 2002, the valuation date.

   As of June 30, 2004, the carrying value of the Nektar investment, which is
included in investments in equity securities and convertible note on the
accompanying Consolidated Balance Sheet, was $6.4 million ($7.27 per share).
The closing price of Nektar common stock was $19.96 per share on June 30,
2004.


                                      F-38
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(24) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

   As disclosed in Note 2, the Company has restated its 2004 consolidated
financial statements for the year and quarter ended June 30, 2004. The
following table presents summarized unaudited quarterly financial data (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED
                                 ---------------------------------------------------------------------
                                 SEPTEMBER 30,   DECEMBER 31,    MARCH 31,     JUNE 30,      JUNE 30,    FISCAL YEAR     FISCAL YEAR
                                     2003            2003          2004          2004          2004          2004           2004
                                 -------------   ------------    ---------   -----------    ----------   -----------     -----------
                                                                             (PREVIOUSLY                 (PREVIOUSLY
                                                                              REPORTED)     (RESTATED)    REPORTED)      (RESTATED)
<S>                              <C>             <C>             <C>         <C>            <C>          <C>             <C>
Revenues.....................       $40,644         $41,698       $44,379      $42,850        $42,850      $169,571       $169,571
Gross Profit (1).............        15,653          18,074        20,570       19,550         19,550        73,847         73,847
Tax Provision (Benefit)......         1,634           1,180        (5,505)       4,283          4,283         1,592          1,592
Net income (loss)............       $ 2,804         $ 2,319       $ 5,066      $(7,312)       $(8,276)     $  2,877       $  1,913
                                    =======         =======       =======      =======        =======      ========       ========
Net income (loss) per common
  share:
 Basic.......................       $  0.06         $  0.05       $  0.12      $ (0.17)       $ (0.19)     $   0.07       $   0.04
 Diluted.....................       $  0.06         $  0.05       $  0.12      $ (0.17)       $ (0.19)     $   0.07       $   0.04
Weighted average number of
  shares of common stock
  outstanding-basic..........        43,290          43,307        43,368       43,394         43,394        43,350         43,350
Weighted average number of
  shares of common stock and
  diluted potential common
  shares.....................        43,629          43,586        43,817       43,394         43,394        43,522         43,522
</TABLE>




                                      F-39
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(24) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                                 THREE MONTHS ENDED
                                                                -----------------------------------------------------
                                                                SEPTEMBER 30,   DECEMBER 31,    MARCH 31,    JUNE 30,   FISCAL YEAR
                                                                    2002            2002           2003        2003         2003
                                                                -------------   ------------    ---------    --------   -----------
<S>                                                             <C>             <C>             <C>          <C>        <C>
   Revenues.................................................       $25,067        $ 31,497       $43,163     $46,679      $146,406
   Gross Profit (1).........................................         4,144           4,187        15,556      15,598        39,485
   Tax Provision (Benefit)..................................           261             245           156        (439)          223
   Net income (loss)........................................       $12,784        $(15,244)      $ 7,634     $40,552      $ 45,726
                                                                   =======        ========       =======     =======      ========
   Net income (loss) per common share:
    Basic...................................................       $  0.30        $  (0.35)      $  0.18     $  0.94      $   1.06
    Diluted.................................................       $  0.29        $  (0.35)      $  0.17     $  0.93      $   1.05
   Weighted average number of shares of common stock
    outstanding-basic.......................................        42,980          43,011        43,192      43,264        43,116
   Weighted average number of shares of common stock and
    diluted potential common shares.........................        43,681          43,011        43,634      43,609        43,615
</TABLE>

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


                                      F-40
<PAGE>
                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                ADDITIONS
                                                                     ------------------------------
                                                       BALANCE AT    CHARGED TO       CHARGED TO
                                                      BEGINNING OF    COSTS AND    OTHER ACCOUNTS -    DEDUCTIONS -     BALANCE AT
                                                         PERIOD       EXPENSES         DESCRIBE          DESCRIBE     END OF PERIOD
                                                      ------------   ----------    ----------------    ------------   -------------
<S>                                                   <C>            <C>           <C>                 <C>            <C>
Year ended June 30, 2004
 Allowance for chargebacks,
   returns and cash discounts.....................       $8,111          --             $53,392(1)       $(51,963)(2)     $9,540
Year ended June 30, 2003
 Allowance for chargebacks,
   returns and cash discounts.....................           --          --             $18,997(1)       $(10,886)(2)     $8,111
</TABLE>

---------------
(1) Amounts are recognized as a reduction from gross sales.
(2) Chargebacks, returns and cash discounts processed.


                                      F-41
<PAGE>
                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT                                                                                                                        PAGE
NUMBERS                                                        DESCRIPTION                                                   NUMBER
-------                                                        -----------                                                   ------
<S>               <C>                                                                                                     <C>
12.1              Computation of Ratio of Earnings to Fixed Charges                                                            E-41
23.0              Consent of KPMG LLP                                                                                          E-42
31.1              Certification of Principal Financial Officer and Principal Executive Officer
                  pursuant to Section 302 of the Sarbanes -- Oxley Act of 2002                                                 E-43
32.1              Certification of Principal Financial Officer and Principal Executive Officer
                  Pursuant to Section 906 of the Sarbanes -- Oxley Act of 2002                                                 E-44
</TABLE>