UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-21481

Transkaryotic Therapies, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(617) 349-0200

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 per share

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 þ          No o

      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.     o

      Indicate by check mark whether the registrant is an accelerated filer as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended.     Yes þ          No o

      As of June 30, 2004, the approximate aggregate market value of the voting Common Stock held by non-affiliates of the registrant was $470,459,507 based on the last reported sale price of the registrant’s voting Common Stock on The Nasdaq National Market as of the close of business on June 30, 2004. There were 34,876,651 shares of Common Stock outstanding as of March 1, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

PART I

Overview

      Transkaryotic Therapies, Inc. (“TKT” or the “Company”) is a biopharmaceutical company researching, developing and commercializing therapeutics, primarily for the treatment of rare genetic diseases caused by protein deficiencies. TKT has approval to market and sell Replagal^tm(agalsidase alfa) (“Replagal”), its enzyme replacement therapy for the long-term treatment of Fabry disease, in 34 countries outside of the United States. The Company’s most advanced active clinical programs include iduronate-2-sulfatase (“I2S”), its enzyme replacement therapy for the treatment of Hunter syndrome, and Gene-Activated® glucocerebrosidase (“GA-GCB”), its enzyme replacement therapy for the treatment of Gaucher disease. The Company is currently conducting a Phase III clinical trial of I2S and a Phase I/ II clinical trial of GA-GCB. The Company is currently seeking to out-license a number of its other Gene-Activated products. In addition to its focus on rare genetic diseases, in the European Union, TKT also intends to commercialize Dynepo^tm (epoeitin delta) (“Dynepo”), its Gene-Activated erythropoietin product for anemia related to kidney disease that it developed with Aventis Pharmaceuticals, Inc. (“Aventis”), a subsidiary of Sanofi-Aventis SA, the successor to Aventis SA. The Company is seeking to enter into arrangements with a third party to distribute, market, and sell Dynepo outside the United States.

Recent Developments

      In October 2004, the Company completed the purchase of the 20% minority interest in TKT Europe AB, formerly known as TKT Europe-5S AB (“TKT Europe”), the Company’s sales and marketing subsidiary in Europe, held by the founding European executives of TKT Europe. With this purchase, TKT now owns 100% of TKT Europe. The purchase price, based on a predefined formula included in the stockholders’ agreement between the Company and the founding European executives, was $62.1 million.

      In March 2004, the Company regained from Aventis rights to Dynepo outside the United States. Dynepo is currently approved for commercial sale in the European Union for the treatment of anemia associated with kidney disease. The Company is currently seeking to enter into an arrangement with a third party to distribute, market, and sell Dynepo outside the United States. Several companies have shown interest in such a collaboration, and TKT expects to finalize the terms of a collaboration in the first half of 2005.

      In September 2004, Aventis granted the Company a license to clinical trial results from a previously completed controlled Phase III clinical trial conducted by Aventis evaluating Dynepo for the treatment of anemia in cancer patients treated with chemotherapy. The Company expects, based on information from Aventis, that top-line results of the clinical trial will be available in the first half of 2005. Aventis will conduct the clinical data analyses. If the data are positive, the Company expects that it or a collaborator will file an amendment to the marketing approval application (“MAA”) for Dynepo to seek to expand the approved indication to include anemia associated with chemotherapy.

      As a result of the Company’s patent litigation with Amgen Inc. (“Amgen”) described under “Item 3. Legal Proceedings — Dynepo Patent Litigation,” neither the Company nor any collaborator will be able to commercially launch Dynepo until manufacturing for Dynepo has been established outside the United States. Specifically, the Company will need to enter into arrangements with contract manufacturers, work with the contract manufacturers to set up and validate manufacturing processes, and obtain approval from the European Commission of variations to the existing approved MAA for Dynepo reflecting the new manufacturing sites.

      In August 2004, the Company entered into a manufacturing agreement with Lonza Biologics PLC (“Lonza”) under which Lonza has agreed to manufacture Dynepo bulk drug substance at Lonza’s production facility in Slough, United Kingdom. Lonza has advised the Company that this facility is compliant with current good manufacturing practices (“cGMP”). Lonza began production of the validation batches to support regulatory approval of its manufacturing sites in the fourth quarter of 2004 and finished manufacturing the validation batches in the first quarter of 2005. Lonza started manufacturing commercial batches in the first quarter of 2005. The Company is in discussions with a contract manufacturer for the formulation and packaging of Dynepo bulk drug substance into finished drug product at the manufacturer’s facility in Europe. The Company intends to file variations to the existing MAA for Dynepo for Lonza’s manufacturing facilities in the fourth quarter of 2005 with respect to bulk drug substance, and for another contract manufacturer’s facility in the first quarter of 2006 with respect to finished drug product. The Company expects that filings within this timeframe will allow for a commercial launch of Dynepo in Europe in the first half of 2006.

      In December 2003, TKT filed an investigational new drug application (“IND”) with the United States Food and Drug Administration (“FDA”) for human clinical trials of GA-GCB. This IND became effective in January 2004. In April 2004, the Company initiated a Phase I/ II clinical trial to evaluate the safety and clinical activity of GA-GCB in 12 patients. In this clinical trial, the Company is evaluating GA-GCB in 12 patients with Gaucher disease who will receive treatment for nine months. The Company expects the Phase I/ II trial to conclude in the second quarter of 2005 and intends to report top-line results from this clinical trial in the second half of 2005. In February 2005, the Company began enrolling patients that had completed nine months of treatment in an open-label extension of the Phase I/ II clinical trial evaluating the safety of GA-GCB in these patients over 24 months.

      In January 2005, Genzyme Corporation (“Genzyme”) filed suit against the Company in the District Court of Tel-Aviv-Jaffa, Israel, claiming that the Company’s Phase I/ II clinical trial in Israel evaluating GA-GCB for the treatment of Gaucher disease infringes one or more claims of Israeli Patent No. 100,715. In addition, Genzyme filed a motion for preliminary injunction, including a request for an ex parte hearing and relief on the merits, to immediately seize and destroy all GA-GCB being used to treat patients in the ongoing Phase I/ II clinical trial and to prevent the Company from submitting data generated from the clinical trial to regulatory agencies. In January 2005, the District Court rejected Genzyme’s request for ex parte relief. The Company filed reply briefs with the District Court in February 2005. In March 2005, the court refused to grant Genzyme’s motion for preliminary injunction.

      In January 2005, the Company announced a research program relating to familial hypercholesterolemia. The Company expects to complete research studies of TX-1501 (“TX-1501”), its recombinant LDL receptor-transferrin fusion protein for the treatment of familial hypercholesterolemia, and determine whether to begin preclinical development of the protein, in 2006.

      Familial hypercholesterolemia is an inherited genetic disorder caused by mutations in the low-density lipoprotein receptor (“LDLR”) gene. An absent or malfunctioning LDLR gene causes severe elevations in LDL-cholesterol levels. Familial hypercholesterolemia leads to premature thickening of fatty material along artery walls and may eventually block the arteries, resulting in heart attacks and premature death. The Company believes that reductions in LDL-cholesterol are mediated by TX-1501, a dual function protein engineered to bind to plasma LDL-cholesterol and to the transferrin receptor. The Company believes, based on research, that once injected into the circulation, TX-1501 will use these two binding properties to transport LDL-cholesterol from the blood to transferrin receptors which deposit the LDL-cholesterol into the target organs. The Company expects that the internalized LDL-cholesterol will then be metabolized and excess LDL-cholesterol excreted from the body.

      Familial hypercholesterolemia affects approximately 1 in 500 persons. Current treatments fail for a significant minority of these patients. The Company believes that a significant unmet medical need exists in this area.

      In January 2005, the Company announced that, in addition to its familial hypercholesterolemia research program, the Company is evaluating three additional protein replacement research programs outside the lysosomal storage disease area. The Company expects to determine whether to begin preclinical development for one or more of these programs in the second half of 2005.

Products

      Some rare genetic diseases are known to be caused by the deficiency of a single, well-characterized protein. The patient’s inability to produce sufficient amounts of the specified protein results in symptoms that can be debilitating and, ultimately, life-threatening. These diseases include Fabry disease, Hunter syndrome and Gaucher disease, which result from an inherited inability to produce an enzyme responsible for the breakdown of biomolecules such as fats and sugars. No effective treatment currently exists for most of these rare genetic diseases. The Company’s typical approach for treating rare genetic disorders is to manufacture the missing or deficient protein and deliver it to the patient, but as with TX-1501, the Company utilizes other approaches as well.

      The Company’s strategy for developing products to treat rare genetic diseases is to build on the Company’s core competencies in gene expression, cell culture, and protein purification and characterization to create protein replacement products for diseases which are characterized by the absence of certain proteins. The Company is commercially marketing and selling Replagal for Fabry disease in 34 countries outside the United States and is developing I2S for Hunter syndrome and GA-GCB for Gaucher disease.

      Although the primary focus of the Company’s research and development efforts in rare genetic diseases has been lysosomal storage disorders, TKT is researching and plans to begin development of treatments for other types of rare genetic diseases, including familial hypercholesterolemia.

      In addition, the Company has the results of several historical research and development programs for Gene-Activated versions of proteins which are already marketed.

      Fabry disease is a rare, inherited genetic disorder affecting both males and females with almost equal frequency. The underlying cause of the disease is a genetically inherited deficiency in the activity of the lysosomal enzyme alpha-galactosidase A. The signs and symptoms of Fabry disease, many of which begin during childhood, vary widely from patient to patient. However, the most common include severe pain of the extremities, impaired kidney function often progressing to full kidney failure, early heart disease, stroke and disabling gastrointestinal symptoms. Premature mortality, often in the fourth or fifth decade of life, is common and results primarily from advanced kidney failure, heart disease or stroke. Due to its rarity and wide range of signs and symptoms, making a precise diagnosis of Fabry disease is often difficult. The Company estimates that 8,000 to 10,000 patients worldwide are affected by Fabry disease. However, the number of actual patients is difficult to ascertain because many patients die from kidney or heart disease without the underlying cause of the kidney or heart disease being identified as Fabry disease.

      Replagal is a fully human alpha-galactosidase A protein produced using TKT’s proprietary gene activation technology. Replagal therapy replaces the deficient alpha-galactosidase A with active enzyme to stop or ameliorate the clinical manifestations of the disease.

      In August 2001, the European Commission granted marketing authorization for Replagal in the European Union. At the time, both TKT’s Replagal and Fabrazyme, Genzyme’s competing enzyme replacement therapy product for the treatment of Fabry disease, were granted co-exclusive orphan drug status in the European Union for up to 10 years. Since August 2001, TKT has received approval to market Replagal

in a number of other countries, the most recent of which was Canada in February 2004. Including Canada, Replagal is currently approved for commercial sale in a total of 34 countries outside of the United States. In 2004, TKT recorded $77.4 million in product sales for Replagal, principally in the European Union.

      The Company has established pricing and reimbursement for substantially all patients receiving Replagal in the European Union. Country-by-country pricing was initially established as the local currency equivalent of between approximately $165,000 and $175,000 per patient per year for an average patient weighing 70 kilograms. The price generally remains fixed in the local currencies and varies in United States dollars with exchange rate fluctuations. The Company is working to secure government reimbursement in Canada and Taiwan.

      As part of its approval of Replagal, the European Commission required the Company to conduct additional clinical trials of Replagal and to provide the European Commission with an annual reassessment of Replagal. The Company is currently conducting these trials and expects to submit the results of these trials in accordance with the requirements of the European Commission.

      TKT has not received approval to market and sell Replagal in the United States. In April 2003, Genzyme received marketing authorization in the United States for Fabrazyme. Because Fabrazyme had received orphan drug designation in the United States, Fabrazyme received orphan drug exclusivity upon its marketing approval. Once a product receives orphan drug exclusivity, the FDA may not approve another application to market the same drug for the same indication for a period of seven years, except in limited circumstances set forth under the Federal Food, Drug, and Cosmetic Act of 1938, as amended, and its implementing regulations (the “FDA Statute”). Because Fabrazyme received marketing approval in the United States before Replagal and received orphan drug exclusivity, the FDA may not approve Replagal and Replagal will be excluded from the United States market for seven years, until April 2010, unless the Company can demonstrate that Replagal satisfies the limited criteria for exceptions to orphan drug exclusivity set forth in the FDA Statute.

      In January 2004, the Company determined that it would cease its efforts to seek the approval of Replagal from the FDA and withdrew its biologic license application (“BLA”) for Replagal. TKT intends to continue to market and sell Replagal in countries where it is approved outside the United States and to continue the Company’s efforts to introduce Replagal in new countries. TKT also plans to continue to supply Replagal to patients in the United States in ongoing clinical trials and physician-sponsored INDs for the foreseeable future. The Company’s decision to cease its efforts to seek FDA approval of Replagal was based in part on the FDA’s response to the Company’s request for a Special Protocol Assessment. TKT submitted this request to the FDA in November 2003 in an effort to identify a regulatory approach that could lead to United States approval of Replagal. In its response to TKT’s request for a Special Protocol Assessment, the FDA indicated that it would expect TKT to conduct a head-to-head trial comparing Replagal to Fabrazyme in patients with Fabry disease as the method to demonstrate either superior safety or efficacy. Based on the limited availability of Fabry patients for clinical trials and the large number of patients necessary to conduct a meaningful head-to-head trial, the Company decided to focus its resources on expansion of the market for Replagal outside the United States and the development of other important programs.

      TKT is a party to an exclusive distrubution agreement with Sumitomo Pharmaceutical Co., Ltd. (“Sumitomo”), for the commercialization of Replagal in Japan, Korea, Taiwan, and China. In November 2002, Sumitomo submitted an application for marketing authorization for Replagal in Japan. Although Sumitomo and TKT continue their efforts to obtain approval of Replagal in Japan by late 2005, the Japanese regulatory process is such that the Company cannot estimate whether or when marketing authorization will be granted in Japan.

      TKT is developing its I2S enzyme replacement therapy for the treatment of Hunter syndrome, also known as mucopolysaccharidosis II (“MPS II”). Hunter syndrome is an inherited lysosomal storage disorder caused by a deficiency of the enzyme iduronate-2-sulfatase. As a result of this deficiency, complex carbohydrates accumulate in cells of the body, causing debilitating symptoms in the patient. Physical manifestations include skeletal deformities, obstructive airway disease, cardiac failure and central nervous

system (“CNS”) involvement. Many patients die during childhood. The Company believes that I2S enzyme replacement therapy could result in improvements in many of the non-CNS clinical manifestations associated with Hunter syndrome. Hunter syndrome is an inherited disorder (X-linked recessive) affecting predominantly males, although there have been reports of rare occurrences in females. Based on published literature, market research and data from the National MPS Society, Inc., TKT believes that there are approximately 2,000 patients worldwide afflicted with Hunter syndrome in jurisdictions where reimbursement may be possible, although the actual incidence is difficult to determine with certainty.

      The Company’s I2S product is a human iduronate-2-sulfatase produced by genetic engineering technology intended for long-term treatment of Hunter syndrome. The rationale for the therapy is that TKT’s I2S replaces an enzyme that is deficient in patients with Hunter syndrome, and therefore could potentially either stop or ameliorate the clinical manifestations of the disease. TKT’s I2S product has been designated an orphan drug in both the United States and the European Union. There is currently no effective therapy for Hunter syndrome, and the Company is not aware of any other products being developed to treat this disease.

      In March 2002, TKT completed a randomized, double-blind, placebo-controlled, dose-escalating Phase I/ II clinical trial to assess the safety, pharmacodynamic and pharmacokinetic profiles, and clinical activity of I2S in 12 patients with Hunter syndrome. In the study, I2S was generally well-tolerated and demonstrated evidence of clinical activity in several critical areas of Hunter syndrome, including reduction in liver and spleen mass and stabilized pulmonary function. The most common side effects from I2S treatment were infusion reactions characterized by flushing, rigors, dizziness and headaches. Infusion-related reactions occurred in five treated patients and were successfully managed by slowing the infusion rate and using premedications. In addition, one of the nine treated patients developed an IgG antibody to I2S, thereby possibly making the enzyme ineffective in treating the disease in this patient. With only three patients per dose group, the study was not designed to demonstrate statistical significance. All 12 patients are now enrolled in an open-label extension study of I2S, including nine patients who have received I2S for at least 28 months.

      In March 2004, TKT completed enrollment of 96 patients at nine sites around the world in a randomized, double-blind, placebo-controlled, clinical trial to evaluate the effect of I2S over 12 months in patients with Hunter syndrome. This clinical trial is referred to as the “Assessment of I2S in MPS II,” or “AIM” study. The Company expects to report top-line results from the AIM study in June 2005. If the results of this trial are positive, TKT expects to file applications for marketing approval of I2S in the United States and Europe in the second half of 2005. In September 2004, TKT began enrolling patients that had completed 12 months of treatment in an open-label extension of the AIM study which will evaluate the safety of I2S in these patients over 24 months.

      In October 2003, TKT and Genzyme entered into an agreement under which Genzyme agreed to develop and commercialize TKT’s I2S product in Japan and other Asia/ Pacific territories. Under the terms of the agreement, Genzyme paid TKT approximately $1.5 million in upfront payments and agreed to pay TKT up to an additional $8.0 million relating to the achievement of regulatory and commercial milestones, primarily related to a regulatory submission and approval in Japan. TKT has agreed to manufacture the I2S bulk drug substance for commercial sale in Genzyme’s territories in exchange for payments equal to approximately one-third of net sales in those territories. In addition, Genzyme has the option to obtain rights in Japan and other Asia/ Pacific territories to another research program being developed by TKT. TKT has retained all rights in North America, Europe, and South America, and intends to commercialize its I2S product directly in those territories. The Genzyme agreement has a term ending ten years after Genzyme begins selling I2S, unless terminated earlier by either party.

      In 2004, TKT advanced a second Hunter syndrome program into preclinical development. This program targets Hunter syndrome patients with CNS-related symptoms, and is designed to evaluate the dose, frequency and method of delivering I2S to the CNS. Research findings to date demonstrate that direct administration of I2S to the CNS of normal animals results in the delivery of enzyme to various CNS cells, including neurons. TKT expects to file an IND for its I2S CNS program in the first half of 2006.

      Gaucher disease is the most common of the inherited lysosomal storage diseases and is caused by a deficiency of the enzyme glucocerebrosidase. As a result of this deficiency, certain lipids accumulate in specific cells of the liver, spleen, and bone marrow causing significant clinical symptoms in the patient, including enlargement of the liver and spleen, hematologic abnormalities, and bone disease. The Company estimates that there are 9,000 patients worldwide affected by Gaucher disease who require treatment.

      TKT is developing a Gene-Activated glucocerebrosidase enzyme replacement therapy for the treatment of Gaucher disease. The Company’s GA-GCB product is a fully human glucocerebrosidase protein, produced using TKT’s proprietary gene activation technology. In December 2003, TKT filed an IND with the FDA for human clinical trials of GA-GCB. This IND became effective in January 2004. In April 2004, the Company initiated a Phase I/ II clinical trial to evaluate the safety and clinical activity of GA-GCB. In this clinical trial, the Company is evaluating GA-GCB in 12 patients with Gaucher disease who will receive treatment for nine months. The Company expects the Phase I/ II trial to conclude in the second quarter of 2005, and intends to report top-line results from this clinical trial in the second half of 2005. In February 2005, the Company began enrolling trial patients in an open-label extension of the Phase I/ II clinical trial evaluating the safety of GA-GCB in these patients over 24 months.

      Genzyme currently is marketing Cerezyme, its enzyme replacement therapy for Gaucher disease. Cerezyme and its predecessor drug have been on the market worldwide for over a decade, and Genzyme has reported worldwide sales of approximately $839 million for Cerezyme in 2004. If approved, GA-GCB would compete with Cerezyme. If approved, GA-GCB also would compete with Zavesca, a small molecule therapy developed by Celltech Plc, formerly Oxford GlycoSciences (“Celltech”), approved for the treatment of Gaucher disease.

      The Company is currently involved in patent litigation with Genzyme in Israel with respect to GA-GCB. A description of the GA-GCB litigation is set forth in “Item 3. Legal Proceedings — GA-GCB Litigation”.

      In collaboration with Aventis, TKT has developed Dynepo, a fully human erythropoietin for the treatment of anemia related to chronic renal failure. Erythropoietin, a circulating protein hormone that stimulates the differentiation of certain progenitor cells in the bone marrow, is produced in the kidney when the body requires additional red blood cells. When this protein is not produced or not produced in sufficient quantities, anemia develops in the patient.

      Under the collaboration, Aventis initially was responsible for obtaining regulatory approval and selling and marketing Dynepo throughout the world. In 2000, the Company regained from Aventis rights related to Dynepo in Japan. In March 2004, the Company regained from Aventis exclusive rights to Dynepo outside the United States.

      In March 2002, the European Commission granted marketing approval of Dynepo in the European Union for the treatment of anemia associated with chronic renal failure.

      In 2000, Aventis submitted a BLA to the FDA seeking marketing authorization for Dynepo in the United States. The FDA did not accept the BLA for filing and requested that Aventis provide additional manufacturing data. Aventis has not yet submitted the requested additional data to the FDA and the Company cannot predict whether or when it will do so.

      As a result of the Company’s patent litigation with Amgen, neither the Company nor any collaborator will be able to commercially launch Dynepo until manufacturing for Dynepo has been established outside the United States. Specifically, the Company will need to enter into arrangements with contract manufacturers, work with the contract manufacturers to set up and validate manufacturing processes and obtain approval from the European Commission of variations to the existing approved MAA for Dynepo reflecting the new manufacturing sites.

      In August 2004, the Company entered into a manufacturing agreement with Lonza under which Lonza has agreed to manufacture Dynepo bulk drug substance at Lonza’s production facility in Slough, United Kingdom. Lonza has advised the Company that this facility is cGMP compliant. Lonza began production of the validation batches to support regulatory approval of its manufacturing sites in the fourth quarter of 2004 and finished manufacturing the validation batches in the first quarter of 2005. Lonza started manufacturing commercial batches in the first quarter of 2005. The Company is in discussions with a contract manufacturer for the formulation and packaging of Dynepo bulk drug substance into finished drug product at the manufacturer’s facility in Europe. The Company intends to file variations to the existing MAA for Dynepo for Lonza’s manufacturing facilities in the fourth quarter of 2005 with respect to bulk drug substance, and for another contract manufacturer’s facility in the first quarter of 2006 with respect to finished drug product. The Company expects that filings within this timeframe will allow for the commercial launch of Dynepo in the European Union in the first half of 2006. The Company is currently seeking to enter into arrangements with a third party to distribute, market, and sell Dynepo outside the United States. Several companies have shown interest in such a collaboration, and TKT expects to finalize the terms of a collaboration in the first half of 2005.

      Several approved erythropoietin drugs are being marketed by large pharmaceutical companies with significantly greater resources than those of the Company. For instance, Dynepo would compete with a multitude of products, including products marketed in Europe by Amgen, Johnson & Johnson, F. Hoffmann-La Roche Ltd. (Boehringer Mannheim GmbH), and in Japan by Sankyo Company Ltd., Chugai Pharmaceutical Co., Ltd., and the pharmaceutical division of Kirin Brewery Co., Ltd. in Japan.

      In September 2004, Aventis granted the Company a license to clinical trial results from a previously completed controlled Phase III clinical trial conducted by Aventis evaluating Dynepo for the treatment of anemia in cancer patients treated with chemotherapy. The Company expects, based on information from Aventis, that top-line results of the clinical trial will be available in the first half of 2005. Aventis will conduct the clinical data analyses. If the data are positive, the Company expects that it or a collaborator will file an amendment to the MAA for Dynepo to seek to expand the approved indication to include anemia associated with chemotherapy.

      In January 2005, the Company announced a research program relating to familial hypercholesterolemia. The Company expects to complete research studies of TX-1501, its recombinant LDL receptor-transferrin fusion protein for the treatment of familial hypercholesterolemia, and determine whether to begin preclinical development of the protein in 2006.

      Familial hypercholesterolemia is an inherited genetic disorder caused by mutations in the LDLR gene. An absent or malfunctioning LDLR gene causes severe elevations in LDL-cholesterol levels. Familial hypercholesterolemia leads to premature thickening of fatty material along artery walls and may eventually block the arteries, resulting in heart attacks and premature death. The Company believes that reductions in LDL-cholesterol are mediated by TX-1501, a dual function protein engineered to bind to plasma LDL-cholesterol and to the transferrin receptor. The Company believes, based on research, that once injected into the circulation, TX-1501 will use these two binding properties to transport LDL-cholesterol from the blood to transferrin receptors which deposit the LDL-cholesterol into the target organs. The Company expects that the internalized LDL-cholesterol will then be metabolized and excess LDL-cholesterol excreted from the body.

      Familial hypercholesterolemia affects approximately 1 in 500 persons. Current treatments fail for a significant minority of these patients. The Company believes that a significant unmet medical need exists in this area.

      TKT’s gene activation technology is a proprietary approach to the development and large-scale production of therapeutic protein products. This approach is based on the activation of any cell’s own or endogenous genes encoding therapeutic proteins, as opposed to foreign or exogenous genes. Gene activation

does not involve the conventional method of cloning or copying an exogenous gene sequence and inserting the gene sequence into a cell. Under TKT’s approach, the endogenous gene encoding a protein, as it naturally exists in the cell, is activated through the insertion of a segment of DNA into the cell. The Company believes this technology could allow for the development and commercialization of a number of therapeutic proteins, including versions of proteins that would compete with proteins currently being marketed by third parties.

      The Company believes that its gene activation technology may be used to express a wide variety of therapeutically valuable proteins at levels suitable for large-scale manufacturing purposes. Since gene activation technology avoids certain technical limitations of conventional recombinant protein production technology and does not rely on manipulation of cloned genes, the Company believes that the gene activation technology is at least as efficient as, and may be more cost-effective than, conventional genetic engineering techniques for protein production.

      In addition to Replagal for Fabry disease, GA-GCB for Gaucher disease and Dynepo for anemia, the Company has the results of several historical research and development programs for other Gene-Activated versions of proteins, including the Company’s Gene-Activated human granulocyte colony stimulating factor (“GA-GCSF”) for the treatment of low white blood cell count, known as neutropenia, which often results from cancer chemotherapy or bone marrow transplantation, and for the treatment of other indications; the Company’s Gene-Activated follicle stimulating hormone (“GA-FSH”) to increase ovulation in patients participating in assisted reproductive technology programs and in certain infertile patients; and the Company’s Gene-Activated human growth hormone (“GA-hGH”) for the treatment of short stature associated with growth hormone deficiency and other indications. The Company is seeking to license all of these products, other than Replagal, GA-GCB and Dynepo, either to a single licensee or on an individual basis to several licensees.

      In connection with the Company’s restructuring efforts in the first quarter of 2003, the Company terminated internal development of its gene therapy programs. The Company would consider licensing this technology. Transkaryotic Therapy, the Company’s approach to gene therapy, is based on genetically modifying patients’ cells to produce and deliver therapeutic proteins. The Company believes it has developed the basic technologies required for treatment which is safe, cost-effective, and potentially clinically superior to conventional gene therapy approaches that rely on viral-based vectors.

      TKT believes its gene therapy system is broadly enabling and, accordingly, may be applicable to the treatment of a wide range of human diseases. For example, TKT believes its gene therapy may be well-suited to allow safe and long-term delivery of therapeutic proteins for the treatment of chronic protein deficiency states, including hemophilia A, diabetes, and anemia.

Collaborations

      In July 1998, the Company entered into an exclusive distribution agreement with Sumitomo for the commercialization of Replagal in Japan, Korea, Taiwan and China. Under the agreement, Sumitomo is responsible, at its own expense, for development and commercialization of Replagal in these territories. Sumitomo is required to purchase Replagal from the Company for sale in these territories for a transfer price calculated as a percentage of net sales. Under the agreement, TKT has received $3.0 million upon the achievement of regulatory milestones and is entitled to receive an additional $5.0 million upon Japanese marketing authorization of Replagal. Although Sumitomo and TKT continue their efforts to obtain approval of Replagal in Japan by late 2005, the Japanese regulatory process is such that the Company cannot estimate whether or when marketing authorization will be granted in Japan. The agreement expires on a country-by-country basis 15 years after Sumitomo begins selling Replagal in the respective country, subject to earlier termination by either party under specified circumstances, including a material breach of the agreement by either party.

      In October 2003, TKT and Genzyme entered into an agreement under which Genzyme agreed to develop and commercialize TKT’s I2S product in Japan and other Asia/ Pacific territories. Under the terms of the agreement, Genzyme paid TKT approximately $1.5 million in upfront payments and agreed to pay TKT up to an additional $8.0 million relating to the achievement of regulatory and commercial milestones, primarily related to a regulatory submission and approval in Japan. TKT has agreed to manufacture the I2S bulk drug substance for commercial sale in Genzyme’s territories in exchange for payments equal to approximately one-third of net sales in those territories. In addition, Genzyme has the option to obtain rights in Japan and other Asia/ Pacific territories to another research program being developed by TKT. TKT has retained all rights in North America, Europe, and South America, and intends to commercialize its I2S product directly in those territories. The Genzyme agreement has a term ending ten years after Genzyme begins selling I2S, unless terminated earlier by either party.

      TKT continues to sell Replagal for Fabry disease outside the United States in competition with Genzyme’s Fabrazyme, and is developing GA-GCB for Gaucher disease, which, if approved, would compete with Genzyme’s Cerezyme.

      TKT entered into an agreement with Aventis in May 1994 focused on the development of Dynepo. On March 26, 2004, the Company amended the license agreement with Aventis. Under the amended agreement, the Company regained exclusive rights to make, use and sell Dynepo outside of the United States and licensed from Aventis the Dynepo trademark. Under the amended agreement, the Company agreed to pay Aventis a single-digit percentage royalty on the Company’s net sales of Dynepo outside of the United States. This royalty obligation expires, on a country-by-country basis, on the later of the date 10 years after the first commercial sale of Dynepo in such country and the date of expiration of the last to expire of the patents covering Dynepo in such country.

      Under the amended agreement, Aventis retained its exclusive right to make, use and sell Dynepo in the United States and is obligated to pay the Company a low double-digit percentage royalty on Aventis’ net sales of Dynepo in the United States. Aventis also has agreed to pay the Company $8.0 million upon the achievement of a specified U.S. commercial milestone. The Company has granted to Aventis a one-year right of first refusal to purchase or license any of its gene therapy programs that it determines to sell or license. This right of first refusal will expire on March 26, 2005.

      The Company and Aventis have been involved in patent infringement actions within the United States with Amgen (the “US Litigation”), and with Kirin-Amgen, Inc. (“Kirin-Amgen”) in the United Kingdom (the “UK Litigation”) with respect to Dynepo. Under the amended license agreement, Aventis retained the right to control the US Litigation and agreed to assume responsibility for 100% of the litigation costs incurred with respect to both the US Litigation and the UK Litigation prior to March 26, 2004. Aventis is required to pay all US Litigation expenses incurred from and after March 26, 2004, but the Company is required to reimburse Aventis for 50% of these litigation costs. Aventis is entitled to deduct up to 50% of any royalties that Aventis may otherwise owe the Company with respect to the sale of Dynepo until Aventis has recouped the full amount of the Company’s share of the US Litigation costs. The Company has the right to control the UK Litigation and is responsible for all litigation costs incurred with respect to such litigation and any other litigation that might arise outside of the United States from and after March 26, 2004.

      In October 2004, with respect to the UK Litigation, the House of Lords upheld a decision by the Court of Appeals that Dynepo did not infringe Kirin-Amgen’s patent and also held that Kirin-Amgen’s patent is invalid. The Company does not expect to incur further significant costs related to the UK Litigation, and expects that, pursuant to U.K. fee-shifting rules, Kirin-Amgen will have to pay the Company a substantial percentage of the legal fees that the Company has incurred since March 26, 2004. The US Litigation is still pending, and the Company expects that there will be continuing, ongoing costs related to the US Litigation. A description of the Dynepo litigation is set forth in “Item 3. Legal Proceedings — Dynepo Patent Litigation”.

Research and Development

      For the years ended December 31, 2004, 2003 and 2002, the Company spent approximately $88.1 million, $74.1 million, and $81.3 million, respectively, on research and development activities. Collaborators funded $4.0 million, $4.6 million, and $1.8 million of these research and development expenses in 2004, 2003 and 2002, respectively. More information on research and development is set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations”.

Sales and Marketing

      TKT plans to market and sell the products for which it obtains marketing approval through a combination of establishing its own commercial capabilities and entering into sales, marketing and distribution arrangements with third parties.

      In the European Union, where sales of Replagal in 2004 accounted for substantially all of the sales of Replagal, TKT markets and sells Replagal through TKT Europe, a sales and marketing subsidiary that the Company established in 2000. In October 2004, the Company purchased the 20% minority interest in TKT Europe held by the founding European executives of TKT Europe, and the subsidiary became a wholly-owned subsidiary of the Company. This transaction is described in more detail in Note 3 to TKT’s consolidated financial statements included in this annual report on Form 10-K.

      In certain markets, including Australia, Canada and Israel, TKT has elected to sell Replagal through local companies that are familiar with the commercialization of specialty pharmaceutical products in those countries. In most cases, TKT sells Replagal to the distribution company at a price established by contract and the distribution company assumes responsibility for all the sales and marketing activities. In Canada, however, TKT has assumed responsibility for the sales and marketing activities and the third-party distribution company is responsible solely for distribution.

      Under the Company’s collaboration with Sumitomo, Sumitomo has agreed to market, sell and distribute Replagal in Japan, China, Korea and Taiwan.

      The Company expects that it will sell, market and distribute each product, such as I2S, that it develops for the treatment of a rare genetic disease through the Company’s existing sales infrastructure or through third-party distributors and collaborators, such as Genzyme, which has the right to market, distribute and sell I2S in Japan and other Asia/ Pacific countries.

      The Company is seeking to enter into an arrangement with a third party to distribute, market and sell Dynepo outside the United States.

      In anticipation of FDA approvals of the Company’s other products, including I2S, the Company has developed a small commercial infrastructure for the marketing and sales of its products in the United States. The Company intends to expand its commercial infrastructure in the United States, including the hiring of a sales force, in the event that the results from the AIM study are positive.

      The Company had three significant customers, Healthcare at Home Limited, the University of Mainz, and Globopharm AG, who accounted for 16%, 13% and 8% of the Company’s product sales in 2004. The same customers accounted for 18%, 12% and 12% of the Company’s product sales in 2003, and 8%, 22%, and 6% of the Company’s product sales in 2002.

Manufacturing

      TKT manufactures its therapeutic protein products using its proprietary gene activation technology as well as conventional recombinant protein production technology. TKT currently uses, and expects to continue to use in the future, internal manufacturing and contract manufacturing by third parties to meet its production requirements for preclinical testing, clinical trials, and commercial supply of its products and product candidates.

      The Company manufactures bulk drug substance for Replagal for commercial sale and clinical trials and bulk drug substance for I2S and GA-GCB for clinical trials at its Cambridge, Massachusetts manufacturing facility (the “Alewife Facility”). If and when I2S and GA-GCB are approved for commercialization, the Company expects that it will manufacture bulk drug substance for I2S and GA-GCB for commercial sale at the Alewife Facility. In July 2003, the European Commission approved the Alewife Facility for the commercial manufacture of bulk drug substance for Replagal. In October 2003, the Company began significant renovations to the Alewife Facility in order to expand its capacity and configure the facility for the production at a commercial scale of products other than Replagal, including I2S and GA-GCB. In anticipation of these renovations, in the third quarter of 2003, the Company ceased all manufacturing operations at the Alewife Facility. The Company completed these renovations, the appropriate regulatory authorities, including the European Commission, re-inspected and re-approved the Alewife Facility for compliance with cGMP, and the Company resumed manufacture of bulk drug substance for Replagal for commercial sale and clinical trials and of bulk drug substance for I2S and GA-GCB for clinical trials at the Alewife Facility in June 2004. The Company spent approximately $13.0 million for improvements to the Alewife Facility through the completion of the renovations in June 2004.

      The Company relies on contract manufacturing arrangements with third parties with respect to the other aspects of the manufacture of Replagal, I2S, and GA-GCB, including the formulation and packaging of TKT-manufactured bulk drug substance into finished product. The Company also relies on third parties for supplies and raw materials used in the manufacture of its products.

      The Company plans to use contract manufacturers to supply Dynepo bulk drug substance and to conduct the other aspects of the manufacture of Dynepo, including the formulation and packaging of Dynepo bulk drug substance into finished drug product. In August 2004, the Company entered into a manufacturing agreement with Lonza under which Lonza has agreed to manufacture Dynepo bulk drug substance at Lonza’s production facility in Slough, United Kingdom. Lonza has advised the Company that this facility is cGMP compliant. The Company is in discussions with a contract manufacturer for the formulation and packaging of Dynepo bulk drug substance into finished drug product. Neither the Company nor any collaborator will be able to commercially launch Dynepo until the contract manufacturers set up and validate manufacturing processes and the Company obtains the approval from the European Commission of variations to the approved MAA for Dynepo reflecting the contract manufacturer’s manufacturing sites.

      Under the Lonza agreement, the Company incurred expenses of approximately $4.9 million in 2004 for initial start-up and development work, and has agreed to pay Lonza an additional approximately $13.6 million related to capital improvements to the Slough facility and initial start-up and manufacturing costs for Dynepo bulk drug substance. The Company may terminate the agreement upon at least 30 days notice to Lonza. However, even if the Agreement is terminated, the Company will be responsible for the amounts due Lonza for work to be performed over the next 12 months. Furthermore, if the Company terminates the agreement upon notice to Lonza that is less than 12 months prior to Lonza’s estimated start date for any services relating to a binding order for the manufacture of Dynepo bulk drug substance, the Company will be required to pay Lonza for that binding order. Each party has the right to terminate the agreement upon the occurrence of a material uncured breach by another party.

Patents, Proprietary Rights, Trade Secrets, and Licenses

      The Company believes that protection of the proprietary nature of its products and technology is important to its business. Accordingly, it has adopted and plans to maintain a vigorous program to secure and maintain such protection. The Company’s practice is to file patent applications with respect to technology, inventions, and improvements that are important to its business. The Company also relies upon trade secrets,

unpatented know-how, continuing technological innovation, and the pursuit of licensing opportunities to develop and maintain its competitive position.

      The Company’s overall patent strategy with respect to its gene activation technology and its protein products made using its gene activation technology is to attempt to obtain patent coverage for gene activation of the gene that encodes the product, the composition of matter of the product, the method of making the product, cells or cell lines capable of expressing the product, and the genetic constructs used to obtain the product. The Company has been unable to obtain patent claims in all categories with respect to all of its Gene-Activated protein products.

      As of February 2005, TKT owned or exclusively licensed approximately 55 issued United States patents, approximately 32 pending United States patent applications, approximately 118 corresponding issued foreign patents, and approximately 245 corresponding pending foreign patent applications.

      The expiration dates for the patents and patent applications owned or licensed by TKT and covering its principal products are described below:

      For many currently marketed proteins, the product manufactured using conventional genetic engineering techniques does not represent the first time the protein was isolated and purified. As such, it is generally not possible to obtain a broad composition of matter patent for many of the currently marketed proteins. In contrast, the isolated and purified DNA sequences encoding these proteins, various vectors used to insert such DNA sequences into production cell lines, cell lines modified by the insertion of such DNA sequences, and corresponding methods, including methods of producing proteins using this approach, led to issued patents in many cases. While every patent must be analyzed on a claim-by-claim basis, TKT believes that, in many instances, its technology does not infringe claims based on isolated and purified DNA sequences encoding proteins of commercial interest because gene activation technology does not rely on the manipulation of cloned genes. The Company, however, is involved in patent litigation in the United States, along with Aventis, with Amgen relating to Dynepo, in the United States with Applied Research Systems ARS Holding N.V., a wholly-owned subsidiary of Serono (“Serono”) relating to certain methods of gene activation, and in Israel with Genzyme relating to GA-GCB. A description of these litigation matters is set forth in “Item 3. Legal Proceedings — GA-GCB Litigation.”

      To further protect its trade secrets and other proprietary property, the Company requires all employees, consultants, and collaborators having access to such proprietary property to execute confidentiality and invention rights agreements before beginning their relationship with the Company. While such arrangements are intended to enable the Company to better control the use and disclosure of its proprietary property and provide for the Company’s ownership of proprietary technology developed on its behalf, they may not provide

meaningful protection for such property and technology in the event of unauthorized use or disclosure, or in the event that such trade secrets or other proprietary property are independently developed by a third party.

      In June 2002, the Company obtained an exclusive license to certain patents and patent applications from Cell Genesys, Inc. (“Cell Genesys”) related to Cell Genesys’ approach to gene activation. In consideration for the license, the Company initially paid Cell Genesys $11.0 million in cash and issued to Cell Genesys $15.0 million of shares of the Company’s common stock. In January 2003, the Company and Cell Genesys renegotiated the consideration paid for the license, and the Company repurchased the shares of stock issued to Cell Genesys for $15.0 million in cash. Under the agreement, Cell Genesys also has the potential to receive certain milestone payments contingent upon the outcome of related patent matters under the license agreement. If all of the milestones occur, the Company will be obligated to pay Cell Genesys an aggregate of $17.0 million payable in part in cash and in part in stock. The Company is not required to make royalty payments to Cell Genesys. The agreement terminates on the termination date of the last-to-expire patent right subject to the agreement, but is subject to earlier termination by either party in the event of a breach of the agreement by the other party. The Company believes the last-to-expire patent expires in 2016.

      The Company has an exclusive worldwide license to pending and issued patents from Women’s and Children’s Hospital, North Adelaide, Australia related to certain mucopolysaccharidosis diseases, a type of lysosomal storage disorder, including Hurler and Scheie syndromes or MPS I, Hunter syndrome or MPS II, and Sanfilippo syndrome or MPS III. Under this license, TKT is obligated to pay royalties on net sales of products covered by a valid claim of a patent or patent application licensed to TKT, including sales of I2S. The license also imposes various commercialization, insurance and other obligations on the Company. The Company’s failure to comply with these obligations could result in the termination of the license or the conversion of the license from an exclusive license to a non-exclusive license. The license terminates upon the expiration of the last to expire of the patents covered by the license.

Competition

      The biotechnology industry is highly competitive and characterized by rapid and significant technological change. The Company believes that the primary competitive factors relating to the products that it is marketing and developing include safety and efficacy compared to competitive products, distribution channels, price and the availability of reimbursement.

      In general, the Company believes that rare genetic diseases have markets that are too small to attract the resources of most larger pharmaceutical and biotechnology companies. As a result, the Company believes that the primary competition with respect to its products for rare genetic diseases is from smaller pharmaceutical and biotechnology companies. For example, competitors for lysosomal storage disorders include BioMarin Pharmaceutical Inc., Actelion Ltd., and Genzyme. Specifically, Replagal competes with Genzyme’s Fabrazyme, and, if approved, GA-GCB would compete with Genzyme’s Cerezyme. TKT does not know of any party developing an enzyme replacement therapy for the treatment of Hunter syndrome.

      The markets for some of the potential products for rare genetic diseases caused by protein deficiencies are quite small. As a result, if competitive products exist, the Company may not be able to successfully commercialize its products. Some jurisdictions, including Europe and the United States, may designate drugs for relatively small patient populations as “orphan drugs”. Generally, if a product that has an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity means that applications

to market the same drug for the same indication may not be approved, except in limited circumstances, for a period of up to 10 years in Europe and for a period of seven years in the United States.

      Both Replagal and Fabrazyme were granted co-exclusive orphan drug status in the European Union for up to 10 years. Genzyme has orphan drug exclusivity for Fabrazyme in the United States until April 2010. I2S has orphan drug designation in the United States and Europe.

      TKT is developing Gene-Activated protein products that would compete with proteins currently being marketed by third parties. For instance, in the case of Dynepo, competing products are marketed by Amgen, Johnson & Johnson, F. Hoffmann-La Roche Ltd. (Boehringer Mannheim GmbH), Sankyo Company Ltd., Chugai Pharmaceutical Co., Ltd., and the pharmaceutical division of Kirin Brewery Co., Ltd. in Japan.

      Many of the protein products against which the Company’s Gene-Activated proteins would compete have well-known brand names, have been promoted extensively, and have achieved market acceptance by third-party payors, hospitals, physicians and patients. In addition, many of the companies that produce these protein products have patents covering techniques used to produce these products, which have served as effective barriers to entry in the therapeutic proteins market. As with Amgen and its erythropoietin product, these companies may seek to block TKT’s entry into the market by asserting that the Company’s Gene-Activated proteins infringe their patents. However, because many of these patents are expected to expire in the next few years, some of these companies are seeking to develop and commercialize new or potentially improved versions of their proteins to extend the patent protection on their products. If these companies are not successful in extending patent protections, some of their products may become genericized.

United States Government Regulation

      The testing, manufacturing, labeling, advertising, promotion, export, and marketing, among other things, of TKT’s products are extensively regulated by governmental authorities in the United States. In the United States, the FDA regulates pharmaceutical products under the FDA Statute, and other laws, including, in the case of biologics, the Public Health Service Act. TKT believes that most of its products will be regulated by the FDA as biologics. TKT cannot market a biologic or drug until it has submitted an application for marketing authorization to the FDA, and the FDA has approved it. Both before and after approval is obtained, violations of regulatory requirements may result in various adverse consequences, including the FDA’s delay in approving or refusal to approve a product, suspension or withdrawal of an approved product from the market, operating restrictions, and the imposition of civil or criminal penalties.

      The steps required before a product may be approved for marketing in the United States generally include:

      Preclinical tests include laboratory evaluation of the product, as well as animal studies to assess the potential safety and efficacy of the product. The results of the preclinical tests, together with chemistry, manufacturing, and control data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may be commenced. The IND will automatically become effective 30 days after its receipt by the FDA, unless the FDA before that time raises concerns or questions about the conduct of the

trials as outlined in the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. TKT cannot be sure that a submitted IND will become effective thereby allowing initiation of a clinical trial for the product in question.

      Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be combined, and certain phases may not be necessary for a particular product.

      The Company or the FDA may suspend clinical trials at any time on various grounds, including a finding that the patients are being exposed to an unacceptable health risk.

      The results of the preclinical and clinical studies, together with other detailed information, including information on the manufacture and composition of the product, are submitted to the FDA in the form of an application for marketing authorization. If the application for marketing authorization contains all pertinent information and data, the FDA will formally accept the file for review. The FDA may refuse to file the application for marketing authorization if it does not contain all pertinent information and data. In that case, the applicant may resubmit the application for marketing authorization when it contains the missing information and data. Before approving an application for marketing authorization, the FDA will inspect the facilities at which the product is manufactured, and will not approve the product unless cGMP compliance is satisfactory. The FDA often requests a review of an application for marketing authorization or parts of an application for marketing authorization by an advisory committee of outside experts. The FDA is free to accept or reject the advisory committee’s recommendations. The FDA may refuse to approve an application for marketing authorization if applicable regulatory criteria are not satisfied, require additional testing or information, or require post-marketing testing and surveillance to monitor the safety or efficacy of a product. The testing and approval process require substantial time, effort, and financial resources, and TKT cannot be certain that any of its products will be approved on a timely basis, if at all. If a product is approved, and we seek to make certain changes to the product, such as promoting or labeling the product for a new indication, making certain manufacturing changes, or changing suppliers of ingredients, we will need FDA review and approval before the change can be implemented. Also, new federal, state, or local government requirements may be established that could delay or prevent regulatory approval of its products under development.

      The FDA sometimes approves biologics and drugs under its accelerated approval regulations. These approvals may be issued when, among other circumstances, clinical studies establish that the biological product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. When approval is granted under the accelerated approval regulations, the holder of the regulatory approval must conduct additional studies after approval to demonstrate the clinical benefit of the product. Failure to conduct the required studies, or to comply with other accelerated approval requirements, may result in the FDA’s withdrawing or modifying the approval.

      Once the FDA approves a product, TKT and any third-party manufacturers are required to comply with a number of post-approval requirements. For example, TKT will be required to report certain adverse events to the FDA, and to comply with certain requirements concerning advertising and promotional labeling of the products. Also, quality control and manufacturing procedures must continue to conform to cGMP regulations after approval, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance. In addition, discovery of problems may result in restrictions on a product, manufacturer, or holder of marketing approval, including withdrawal of the product from the market.

      The FDA may grant orphan drug designation to drugs intended to treat a “rare disease or condition” that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an application for marketing authorization. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity. Also, competitors may receive approval of other different drugs or biologics for the indications for which the orphan product has exclusivity.

      In addition to regulations enforced by the FDA, TKT is also subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other present and potential future federal, state, or local regulations. TKT’s research and development activities involve the controlled use of hazardous materials, chemicals, biological materials, and various radioactive compounds. Although TKT believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, TKT could be held liable for any damages that result and any such liability could exceed TKT’s resources.

European Union Government Regulation

      In the European Union, TKT’s products are subject to extensive regulation by the European Union and the individual member states of the European Union. Preclinical testing must be carried out in accordance with principles of good laboratory practice and is subject to inspections by national authorities. Certification of compliance is required in applications for approval to conduct clinical trials and in marketing authorization applications. Clinical trials are subject to national regulation and are also expected to be carried out in compliance with detailed requirements for good clinical practice. A European Union directive which became effective in May 2004 will harmonize requirements for regulation of clinical trials but will likely also impose a greater bureaucratic burden on sponsors. Additional requirements include a data-base of trials across the European Union, special provisions for notification or approval of trials relating to biotechnology products, and inspections by government authorities to insure compliance with good clinical practice. All trials, including those in healthy volunteers, will be regulated in this way. Medicinal products to be used in clinical trials will be required to be manufactured to the same standard as those applicable to commercial products. At the present time, the Company does not believe the European Union’s new directives will materially affect clinical operations.

      Medicinal products intended for commercial distribution in the European Union must be subject to a marketing authorization. For new biotechnology products, marketing authorization applications must be submitted to the European Agency for the Evaluation of Medicinal Products (the “EMEA”). They are reviewed by scientific experts in the Committee for Medicinal Products for Human Use (the “CHMP”), which issues an opinion that is referred to the Commission of the European Communities for a final decision, taken in conjunction with representatives of the member states. Marketing authorization applications must be supported by technical dossiers containing detailed information (including reports of preclinical studies and clinical trials and manufacturing information) demonstrating that the medicinal product will be safe, effective and of satisfactory quality. In exceptional circumstances for rare diseases, less-than-complete clinical data may be accepted such as when the authorities determine that it would be impractical or unethical to carry out full-scale pivotal clinical trials. Specific obligations are imposed on the granting of such approvals. These obligations form part of the formal marketing authorization issued by the European Commission and must be reviewed at the intervals specified, minimally on an annual basis. The annual review includes a reassessment of the overall benefit/risk ratio. If specific obligations are not fulfilled the marketing authorization can be varied, suspended or withdrawn by the agency. Upon completion of all requirements, these conditions are removed.

      The European Union marketing authorization review process is time-consuming, often lasting one to two years or longer. The review process is suspended whenever the applicant is requested to provide additional information; the applicant may be required to withdraw the application and resubmit it at a later date if additional tests are necessary to provide requested information. European Union and national procedures ordinarily make provision for hearings and appeals, but in practice determinations by the authorities on scientific and medical questions relating to the authorization of medicinal products are often conclusive.

      All patient information, including the Summary of Product Characteristics, Package Leaflet and label and carton texts must be translated into all the languages of the European Union before approval. Since May 2004, an additional 10 countries have joined the European Union, bringing the number of languages up to 22.

      Establishments located within the European Union in which medicinal products are manufactured must be authorized by national authorities and inspected for compliance with cGMP. European Union authorities also currently inspect establishments in the United States or other non-European Union countries that manufacture medicinal products for European Union markets. Each batch of a medicinal product that is imported to the European Union must be tested for compliance with applicable specifications and certified by a qualified person in the European Union. Although the United States and the European Union have agreed in principle to mutual recognition of cGMP inspections, the details have not been worked out in practice, and it is uncertain when, or whether, actual mutual recognition will be achieved.

      Advertising and promotion of medicinal products are regulated by national authorities pursuant to broadly harmonized provisions in European Union directives. Interpretation and enforcement vary from country to country, but many European Union member states impose strict requirements concerning inducements and honoraria paid to physicians and other promotional activities. Prescription medicinal products may not be advertised to patients or the general public in the European Union. Some member states restrict or prohibit co-promotion of the same medicinal product by different pharmaceutical companies.

      Marketing authorization holders are required to maintain pharmacovigilance systems for collecting and reporting information concerning suspected adverse reactions. In response to pharmacovigilance reports, authorities may initiate proceedings to revise the prescribing information for medicinal products or to suspend or revoke marketing authorizations. Procedural safeguards are often limited, and marketing authorizations can be suspended with little or no advance notice.

      Most European Union member states maintain public health systems in which many medicinal products are paid for at least in part by government authorities, insurers or other third parties. Nearly every member state has introduced one or more systems to control the cost of medicines supplied under these programs. Member states fix the prices of medicinal products, impose reimbursement limits, establish positive or negative formularies, encourage prescribing or dispensing of generic substitutes for innovative products, and regulate the profitability of the pharmaceutical industry. Wholesalers often purchase medicinal products in low-price member states and sell them in higher-price member states, so that there is general downward pressure on prices throughout the European Union.

      European Union medicines laws establish certain protections in addition to patents that are intended to encourage investment in research and development of medicinal products. European Union law includes special provisions for “orphan medicines” that are intended to treat rare diseases or conditions. Criteria for designation are similar but somewhat different from those in the United States. Orphan medicines are entitled to ten years of market exclusivity except under certain limited circumstances comparable to United States law. During this period of market exclusivity, no “similar” product, whether or not supported by full safety and efficacy data, will be approved. This period may also be reduced to six years if the conditions that originally justified orphan designation change or the sponsor makes excessive profits.

      Provisions for data and market exclusivity only protect against the grant of marketing authorizations. Many European Union member states maintain alternative procedures that permit commercial distribution of medicinal products without marketing authorizations on a compassionate or “named-patient” basis. Procedures differ from country to country, but all member states forbid advertising of such products and some countries prohibit or discourage named-patient distribution after a suitable licensed product is on the market.

Additional Foreign Regulation

      In addition to regulations in the United States and Europe, TKT will be subject to a variety of foreign regulations governing clinical trials and sales of TKT’s products, including Replagal, I2S, GA-GCB and Dynepo. Whether or not United States or European approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained prior to the commencement of clinical trials and marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that required for United States or European approval. For marketing outside the United States and Europe, the Company also is subject to foreign regulatory requirements governing human clinical trials and marketing approval for products. The requirements governing the conduct of clinical trials, product licensing, pricing, and reimbursement vary greatly from country to country.

Reimbursement

      In the United States, the European Union and elsewhere, sales of prescription pharmaceuticals depend in part on the availability of reimbursement from third-party payors, such as government health administrative authorities, managed care providers and private insurance plans.

      In certain countries, including the countries of the European Union, Australia, and Canada, where the availability of reimbursement is subject to government control, it can take an extended period of time to establish and obtain reimbursement, and reimbursement approval may be required at the individual patient level, which can lead to further delays.

      Third-party payors continually attempt to contain or reduce the costs of health care by challenging the prices charged for medical products and services. Governmental and reimbursement authorities or third-party payors in other countries may attempt to control costs by limiting access to pharmaceutical products such as Replagal and other products the Company is developing or by narrowing the class of patients for which a pharmaceutical product such as Replagal or the other products the Company is developing may be prescribed. In Germany, the reimbursement authority unilaterally reduced the price that it would reimburse for all pharmaceutical products, including Replagal, by six percent in 2003 and an additional 10 percent in 2004. In addition, in Australia, the reimbursement authorities have limited their overall budget for the purchase of enzyme replacement therapy for Fabry disease, including both Replagal and Fabrazyme, to $10 million Australian dollars. In Canada, the Company is seeking reimbursement from provincial authorities. The federal reimbursement authority in Canada, which is only authorized to make recommendations regarding reimbursement to provincial authorities, issued a non-binding recommendation that the provincial governments not provide reimbursement for Replagal in Canada.

Employees

      As of March 1, 2005, TKT had approximately 400 full-time employees world-wide.

Trademarks

      Gene-Activated®, and TKT® are registered trademarks and Transkaryotic Therapy^tm and Replagal^tm are trademarks of the Company. Dynepo^tm is a trademark of Aventis. All other trademarks, service marks or trade names referenced in this quarterly report are the property of their respective owners.

Available Information

      TKT maintains a website with the address www.tktx.com. TKT’s website includes links to its Corporate Governance Guidelines, Code of Business Conduct and Ethics, Audit Committee Charter, Compensation Committee Charter, and Nominating and Corporate Governance Committee Charter. TKT is not including the information contained in its website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. TKT makes available, free of charge, through its website its Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as

reasonably practicable after TKT electronically files these materials with, or otherwise furnishes them to, the Securities and Exchange Commission.

      TKT owns or leases a total of approximately 400,000 square feet of office, manufacturing and laboratory space in Massachusetts. The Company occupies the material properties set forth in the table below:

      In addition to the properties the Company currently occupies, the Company is seeking to sell or sublease the material properties set forth in the table below:

      The Company is a party to a number of legal proceedings. The Company can provide no assurance as to the outcome of any of these proceedings. A decision by a court in the United States or in any other jurisdiction in a manner adverse to the Company could have a material adverse effect on the Company’s business, financial condition and results of operations.

      In January 2005, Genzyme filed suit against the Company in the District Court of Tel-Aviv-Jaffa, Israel, claiming that the Company’s Phase I/ II clinical trial in Israel evaluating GA-GCB for the treatment of Gaucher disease infringes one or more claims of Israeli Patent No. 100,715. In addition, Genzyme filed a motion for preliminary injunction, including a request for an ex parte hearing and relief on the merits, to immediately seize and destroy all GA-GCB being used to treat patients in the ongoing Phase I/ II clinical trial and to prevent the Company from submitting data generated from the clinical trial to regulatory agencies. In January 2005, the District Court rejected Genzyme’s request for ex parte relief. The Company filed reply briefs with the District Court in February 2005. In March 2005, the court refused to grant Genzyme’s motion for preliminary injunction. The Company expects that the costs related to this suit will be significant.

      In April 1997, Amgen commenced a patent infringement action against the Company and Aventis in the United States District Court of Massachusetts. In January 2001, the United States District Court of Massachusetts concluded that Dynepo infringed eight of the 18 claims of five patents that Amgen had asserted. Amgen did not seek and was not awarded monetary damages. This decision was subsequently appealed to the United States Court of Appeals for the Federal Circuit.

      In January 2003, the United States Court of Appeals for the Federal Circuit issued a decision affirming in part and reversing in part the decision of the United States District Court of Massachusetts and remanded the action to the United States District Court of Massachusetts for further proceedings. In particular, the United States Court of Appeals for the Federal Circuit:

      As part of the United States Court of Appeals for the Federal Circuit’s ruling, it remanded the case to the United States District Court of Massachusetts and instructed it to reconsider the validity of Amgen’s patents in light of potentially invalidating prior art. The United States District Court of Massachusetts concluded the remand proceedings in July 2003. In October 2004, the United States District Court of Massachusetts issued a decision on the remanded issues, finding that certain claims related to four patents held by Amgen are valid and infringed, either literally or under the doctrine of equivalents, by the Company. In January 2005, the Company and Aventis appealed the decision of the United States District Court of Massachusetts to the United States Court of Appeals for the Federal Circuit.

      If the Company and Aventis are not successful in the Dynepo litigation at the appellate level, the Company and Aventis would be precluded from making, using and selling Dynepo in the United States until the expiration of the relevant patents. The Company is required to reimburse Aventis, which controls the litigation and is paying the litigation expenses, for 50% of the expenses incurred in connection with the litigation from and after March 26, 2004. Aventis is entitled to deduct up to 50% of any royalties that Aventis may otherwise owe to the Company with respect to the sale of Dynepo until Aventis has recouped the full amount of the Company’s share of the litigation expenses. The Company has the right to control any other litigation that might arise outside of the United States and is responsible for all litigation expenses incurred in connection with such litigation from and after March 26, 2004.

      In 1996, Serono and Cell Genesys became involved in a patent interference involving Serono’s U.S. Patent No. 5,272,071 (the “‘071 patent”) which purportedly covers certain methods of gene activation. In June 2004, the Board of Patent Appeals and Interferences of the U.S. PTO held that both Serono and Cell Genesys were entitled to certain claims in their respective patent and patent application, and Serono and Cell Genesys each appealed the decision of the interference to the U.S. District Court of Massachusetts and the U.S. District Court of the District of Columbia, respectively. The Company was not a party to this interference.

      In August 2004, Serono served the Company with an amended complaint in the appeal of the PTO decision that was filed in the U.S. District Court of Massachusetts. The amended complaint alleges that the Company infringes Serono’s ‘071 patent. In October 2004, the Company filed a motion to dismiss the amended complaint. This motion is pending before the U.S. District Court of Massachusetts.

      The Company expects that if this suit is not dismissed, the costs associated with this suit could be significant.

      In January and February 2003, various parties filed purported class action lawsuits against the Company and Richard Selden, the Company’s former Chief Executive Officer, in the United States District Court for

the District of Massachusetts. The complaints generally allege securities fraud during the period from January 2001 through January 2003. Each of the complaints asserts claims under Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, and alleges that the Company and its officers made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of the Company’s Replagal product to treat Fabry disease during that period.

      In March 2003, various plaintiffs filed motions to consolidate, to appoint lead plaintiff, and to approve plaintiff’s selections of lead plaintiffs’ counsel. In April 2003, various plaintiffs filed a Joint Stipulation and Proposed Order of Lead Plaintiff Applicants to Consolidate Actions, To Appoint Lead Plaintiffs and to Approve Lead Plaintiffs’ Selection of Lead Counsel, Executive Committee and Liaison Counsel. In April 2003, the Court endorsed the Proposed Order, thereby consolidating the various matters under one matter: In re Transkaryotic Therapies, Inc., Securities Litigation, C.A. No. 03-10165-RWZ.

      In July 2003, the plaintiffs filed a Consolidated and Amended Class Action Complaint (the “Amended Complaint”) against the Company; Dr. Selden; Daniel Geffken, the Company’s former Chief Financial Officer; Walter Gilbert, Jonathan S. Leff, Rodman W. Moorhead, III, and Wayne P. Yetter, members of the Company’s board of directors; William R. Miller and James E. Thomas, former members of the Company’s board of directors; and SG Cowen Securities Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities, Inc. and Leerink Swann & Company, underwriters of the Company’s common stock in prior public offerings.

      The Amended Complaint alleges securities fraud during the period from January 4, 2001 through January 10, 2003. The Amended Complaint alleges that the defendants made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of Replagal during that period. The Amended Complaint asserts claims against Dr. Selden and the Company under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and against Dr. Selden under Section 20(a) of the Exchange Act. The Amended Complaint also asserts claims based on the Company’s public offerings of June 29, 2001, December 18, 2001 and December 26, 2001 against each of the defendants under Section 11 of the Securities Act of 1933 and against Dr. Selden under Section 15 of the Securities Act; against SG Cowen Securities Corporation, Deutsche Bank Securities, Pacific Growth Equities, Inc., and Leerink Swann & Company under Section 12(a)(2) of the Securities Act. The plaintiffs seek equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs.

      In September 2003, the Company filed a motion to dismiss the Amended Complaint. In May 2004, the United States District Court for the District of Massachusetts issued a Memorandum of Decision and Order denying in part and granting in part the Company’s motion to dismiss the purported class action lawsuit. In the Memorandum, the Court found several allegations against the Company arose out of forward-looking statements protected by the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The Court dismissed those statements as falling within the PSLRA’s safe harbor provisions. The Court also dismissed claims based on the public offerings of June 29, 2001 and December 18, 2001 because no plaintiff had standing to bring such claims. The Court allowed all other allegations to remain.

      In July 2004, the plaintiffs voluntarily dismissed all claims based on the December 26, 2001 offering because no plaintiff had standing to bring such claims.

      The plaintiffs subsequently filed a motion seeking permission to notify certain TKT investors of the dismissal of the claims based on the offerings, and to inform those investors of their opportunity to intervene in the lawsuit. TKT filed an opposition to this motion in July 2004. The Court has not yet ruled on this motion. The Company filed an answer to the Amended Complaint in July 2004. The plaintiffs then filed a motion for class certification in July 2004. The Company expects to file an opposition to this motion in March 2005. A hearing on class certification is scheduled to be held in April 2005.

      In April 2003, South Shore Gastrointerology UA 6/6/1980 FBO Harold Jacob, and Nancy R. Jacob Ttee filed a Shareholder Derivative Complaint against Dr. Selden; against the following members of the Company’s board of directors: Jonathan S. Leff, Walter Gilbert, Wayne P. Yetter, Rodman W. Moorhead III; against the following former members of the Company’s board of directors: James E. Thomas, and William Miller; and against the Company as nominal defendant, in Middlesex Superior Court in the Commonwealth of Massachusetts, Civil Action No. 03-1669. On May 29, 2003, the parties moved to transfer venue to the Business Litigation Session in Suffolk Superior Court in the Commonwealth of Massachusetts. The parties’ motion was allowed, and in June 2003 the matter was accepted into the Business Litigation Session as Civil Action No. 03-02630-BLS.

      The complaint alleges that the individual defendants breached fiduciary duties owed to the Company and its stockholders by disseminating materially false and misleading statements to the market and causing or allowing the Company to conduct its business in an unsafe, imprudent and unlawful manner. The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, and to assert a claim for contribution and indemnification on behalf of the Company for any liability the Company incurs as a result of the individual defendants’ alleged misconduct. The complaint seeks declaratory, equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs.

      In August 2003, the plaintiff filed its Verified Amended Derivative Complaint (the “Amended Derivative Complaint”). The Amended Derivative Complaint alleges that the individual defendants breached fiduciary duties owed to the Company and its stockholders by causing the Company to issue materially false and misleading statements to the public, by signing the Company’s Form  10-Ks for the years 2000 and 2001 and by signing a registration statement. The Amended Derivative Complaint also alleges that defendant Dr. Selden sold the Company’s stock while in possession of material non-public information. The plaintiffs seek declaratory, equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs.

      In September 2003, the Company filed a motion to dismiss the Amended Derivative Complaint. In May 2004, the Court granted the Company’s motion to dismiss. In June 2004, the plaintiff filed a Notice of Appeal appealing the dismissal of the Amended Derivative Complaint to the Massachusetts Court of Appeals.

      In May 2003, the Company received a copy of a formal order of investigation by the Securities and Exchange Commission. The order of investigation relates to the Company’s disclosures and public filings with regard to Replagal and the status of the FDA’s approval process for Replagal, as well as transactions in the Company’s securities.

      In July 2004, the Company and Dr. Selden, its former Chief Executive Officer, received “Wells” notices from the staff of the SEC, in connection with the SEC investigation. The Wells notices state that the SEC staff has preliminarily determined to recommend that the Commission bring a civil action for possible violations of the federal securities laws in which it may seek an injunction and civil penalties against TKT, and an injunction, disgorgement, and an officer and director bar as to Dr. Selden. The Company intends to continue to cooperate fully with the SEC in the investigation.

      No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

Executive Officers

      As of March 1, 2005, the executive officers of the Company were as follows:

      Each officer’s term of office extends until the first meeting of the Board of Directors following the next annual meeting of stockholders and until a successor is elected and qualified.

      Michael J. Astrue joined the Company as President and Chief Executive Officer in February 2003. Prior to rejoining TKT in February 2003, Mr. Astrue served as TKT’s Senior Vice President and General Counsel from April 2000 to January 2003, after which he served briefly as a Visiting Fellow at the Hudson Institute, a research organization. From 1993 to 1999, he served as Vice President, Secretary and General Counsel of Biogen, Inc. (“Biogen”), a biotechnology company. Mr. Astrue received a B.A. from Yale University and a J.D. from Harvard Law School.

      David D. Pendergast, Ph.D., has served as Executive Vice President and Chief Operating Officer since October 2003. Prior to October 2003 and since joining TKT in December 2001, Dr. Pendergast has served in a number of senior quality and operations roles at TKT, including Executive Vice President, Operations. Prior to joining TKT, Dr. Pendergast was employed by Biogen from April 1996 through August 2001, most recently serving as Vice President, Product Development and Quality Assurance. Dr. Pendergast received a B.S. in Chemistry from Western Michigan University and a Ph.D. in Pharmaceutics from the University of Wisconsin.

      Renato Fuchs, Ph.D., joined the Company as Senior Vice President, Manufacturing and Operations, in March 2002. Prior to joining TKT, Dr. Fuchs was employed by Chiron Corporation, a pharmaceutical company, from 1993 through February 2002, most recently serving as Senior Vice President, BioPharmaceuticals. Dr. Fuchs received a B.S. in Chemical Engineering from University of Valle and a Ph.D. in Biochemical Engineering from the Massachusetts Institute of Technology.

      Neil Kirby, Ph.D., has served as Senior Vice President, Strategic Product Development since November 2004. From January 2002, when he joined the Company, to November 2004, Dr. Kirby served as Vice President, Regulatory Affairs. Prior to joining TKT, Dr. Kirby served as Program Executive for Vertex Pharmaceuticals’ commercial and clinical HIV products from November 1999 to December 2001. Prior to joining Vertex, Dr. Kirby served as Project Director, Hemophilia Products at Genetics Institute, a biotechnology company. Dr. Kirby also has held a variety of regulatory appointments at Biogen. Dr. Kirby received a B.Pharm and a Ph.D. from the University of London.

      Gregory D. Perry has served as Senior Vice President and Chief Financial Officer since November 2004. From May 2003, when he joined the Company, to November 2004, Mr. Perry served as Vice President, Finance, and Chief Financial Office. From September 1998 to November 2002, Mr. Perry was employed by PerkinElmer, Inc. where he most recently served as Senior Vice President, Finance and Business Development, Life Sciences. Prior to joining PerkinElmer, Mr. Perry was Chief Financial Officer of the Automotive Aftermarket Products Group at Honeywell International Incorporated from March 1997 to September 1998. Mr. Perry also held numerous positions of increasing responsibility in finance and business development at General Electric Company, including Chief Financial Officer of GE Medical Systems, Europe, headquartered in Paris, France. Mr. Perry received a B.A. from Amherst College.

PART II

      The Company was incorporated in Delaware in 1988 and the Company’s Common Stock trades on The Nasdaq National Market under the symbol “TKTX.” As of March  1, 2005, there were approximately 80 holders of record of the Company’s Common Stock.

      The following table sets forth for the fiscal periods indicated the range of high and low bid prices for the Company’s Common Stock on The Nasdaq National Market. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

      The Company has never declared or paid any cash dividends on its capital stock. The Company currently anticipates that it will retain all future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future.

      The following selected consolidated financial data of the Company for the five years ended December 31, 2004 are derived from the consolidated financial statements of the Company. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included as Item 7 and the consolidated financial statements and related footnotes included as Item 8 in this Form 10-K.

Statement of Operations Data

Balance Sheet Data

Overview

      TKT is a biopharmaceutical company researching, developing and commercializing therapeutics, primarily for the treatment of rare genetic diseases caused by protein deficiencies. TKT has approval to market and sell Replagal (agalsidase alfa), its enzyme replacement therapy for the long-term treatment of patients with Fabry disease, in 34 countries outside of the United States. The Company recorded $77,372,000, $57,225,000 and $34,682,000 of product sales for the years ended December 31, 2004, 2003 and 2002, respectively. The Company’s most advanced active clinical programs include I2S, its enzyme replacement therapy for the treatment of Hunter syndrome, and GA-GCB, its enzyme replacement therapy for the treatment of Gaucher disease. The Company is currently conducting a Phase III clinical trial of I2S and a Phase I/ II clinical trial of GA-GCB. TKT is currently seeking to out-license a number of its other Gene-Activated products. In addition to its focus on rare genetic diseases, in the European Union, TKT also intends to commercialize Dynepo (epoeitin delta), its Gene-Activated erythropoietin product for anemia related to kidney disease that it developed with Aventis. The Company is seeking to enter into arrangements with a third party to distribute, sell and market Dynepo outside the United States.

      With the exception of 1995, the Company has incurred substantial annual operating losses since inception. The Company expects to incur significant operating losses until substantial product sales are generated. Until such time, the Company is dependent upon product sales, collections of accounts receivable, existing cash resources, interest income, external financing from equity offerings, debt financings, and collaborative research and development alliances to finance its operations. At December 31, 2004, the Company’s accumulated deficit was $506,542,000. The Company expects, based on its current operating plan, that its existing capital resources, and anticipated proceeds from collections on existing accounts receivable and on future accounts receivable from future product sales, anticipated cash payments under collaborative agreements, and interest income, will be sufficient to fund its operations into 2006.

      The Company’s results of operations may vary significantly from period to period depending on, among other factors:

      In April 2000, the Company established TKT Europe for the purpose of marketing, selling and distributing Replagal in Europe. The Company owned an 80% equity interest in TKT Europe and a team of European pharmaceutical executives with experience in marketing and selling pharmaceutical products in Europe owned the remaining 20% minority interest in TKT Europe. Under the stockholders’ agreement with TKT Europe, the Company was entitled to purchase the European stockholders’ 20% minority interest in TKT Europe in October 2004, for a price determined in accordance with a formula. The Company exercised that right in September 2004. On October 22, 2004, the Company completed the purchase of the 20% minority interest in TKT Europe for a purchase price of $62,142,000. With this purchase, the Company now owns 100% of TKT Europe.

Critical Accounting Policies and Significant Judgments and Estimates

      The discussion and analysis of TKT’s financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires TKT to make estimates and judgments that affect its reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from these estimates under different assumptions or conditions.

      The Company regards an accounting estimate underlying its financial statements as a “critical accounting estimate” if the accounting estimate requires the Company to make assumptions about matters that are highly uncertain at the time of estimation and if different estimates that reasonably could have been used in the current period, or changes in the estimate that are reasonably likely to occur from period to period, would have had a material effect on the presentation of financial condition, changes in financial condition, or results of operations.

      While TKT’s significant accounting policies are more fully described in Note 2 to TKT’s consolidated financial statements included in this annual report on Form 10-K, TKT regards the following accounting policies as critical accounting estimates.

      Product Sales. The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition, when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured. The Company determines that collection is reasonably assured in Europe and in some other countries outside of the United States, once reimbursement agreements and pricing arrangements are established and formalized, as these agreements establish the relevant governmental agency’s intent to pay, once there are legally binding purchase agreements between a hospital and the Company, or once approval has been granted by the relevant governmental agency for the reimbursement of cost for individual patients. The Company only records revenues from product sales where one of the conditions set forth in the previous sentence has been met. If any of the above circumstances were to change, it could affect the Company’s revenue recognition in future periods.

      In the European pharmaceutical industry, it is common practice that customers, principally hospitals, have a general right of return on purchases of product. To date, the Company has not had any sales returns. The Company generally ships small quantities of Replagal to customers on the basis of firm purchase orders. The customers generally order Replagal for specific patients, and the drug is typically utilized within one month of receipt. In part due to the price of the drug, customers maintain small inventories, typically less than a one month supply. Because of these circumstances, the Company expects that it will have no or minimal returns in the future and, accordingly, has not recorded a reserve for sales returns and allowances in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 48, Revenue Recognition When Right-of-Return Exists. If any product is returned, the Company may need to begin to record reserves for sales returns and allowances and incur charges to revenues in future periods.

      License and Research Revenues. The Company records contract revenue for research and development as it is earned based on the performance requirements of the contract. Nonrefundable contract fees for which there are neither performance obligations nor continuing involvement by the Company, are recognized on the earlier of when the payments are received or when collection is assured. The Company recognizes revenue from non-refundable up-front license fees and milestone payments where there is continual involvement through development collaboration or an obligation to supply product, as the obligation is fulfilled or ratably over the development period or the period of the manufacturing obligation, as appropriate. The Company recognizes revenue associated with substantive performance milestones based upon the achievement of the milestones, as defined in the respective agreements. Advance payments received in excess of amounts earned are classified as deferred revenue.

      For multiple-element arrangements, the Company applies Emerging Issues Task Force (“EITF”) Issue 00-21, Revenue Arrangements with Multiple Deliverables. The Company evaluates such arrangements to determine if the deliverables are separable into units of accounting and then applies applicable revenue recognition criteria to each unit of accounting. In 2003, the Company entered into an agreement with Genzyme to distribute I2S in Japan and certain other territories as well as to settle outstanding litigation. The Company has estimated the term of the Genzyme distribution agreement to be 13 years, which represents the period under which the Company will supply bulk drug substance to Genzyme. If this estimate changes, the Company may need to adjust revenue recognition in future periods.

      In certain European countries, such as Italy, Spain and Belgium, customary payment terms on accounts receivable are significantly longer than in the United States, particularly for products treating orphan drug indications. In these countries, the Company historically has received and expects to continue to receive, payments approximately one year from the invoice date. Accounts receivable balances for Italy, Spain and Belgium were 71% and 66% of total accounts receivable at December 31, 2004 and 2003, respectively. The Company monitors its days’ sales outstanding and collections in these countries. To date, customers in these countries have been paying within the customary payment terms. If collections and days’ sales outstanding in these countries deteriorate in the future, the Company may need to discount those receivables.

      We also have exposure to foreign currency risk for accounts receivable in Europe. There are often significant delays in our European customers making payments to us. If the US dollar strengthens relative to European currencies during such periods of delay, the amount of money that we collect in terms of US dollars would be adversely affected.

      Inventories are stated at the lower of cost or market, with cost determined under the first-in, first-out (FIFO) method. Inventories are reviewed periodically for slow-moving or obsolete status based on sales activity, both projected and historical.

      Inventory balances as of December 31, 2004, consist of raw materials, work in process and finished goods for both Replagal and Dynepo. Dynepo related inventory for raw materials and work in process was $2,415,000 at December 31, 2004. The remainder of the inventory balance relates to Replagal. In general, the Company’s manufacturing process for both products consists of two distinct phases: the manufacture of bulk drug substance and the formulation and packaging of bulk drug substance into finished product. There are shelf lives associated with both bulk drug substance and finished drug product. The Company’s estimates relating to the current demand for Replagal and Dynepo and future sales projections indicate that all of the inventory will be utilized within the designated shelf lives of both bulk drug substance and finished goods vials. If actual product sales differ from the Company’s projections, inventory may not be fully utilized. As a result, the Company would need to write-down the value of such inventory to its net realizable value. This write-down would be recorded as additional cost of goods sold.

      The Company recorded the acquisition of the 20% minority interest in TKT Europe using the purchase method in accordance with SFAS No. 141, Business Combinations. The Company allocated the purchase price to the tangible and identified intangible assets and liabilities acquired with the excess cost being recorded as goodwill. Intangible assets with finite lives are amortized to expense over their estimated useful lives. See Note 3 to the consolidated financial statements included in this annual report on Form 10-K for a further discussion of the transaction. The majority of the purchase price was allocated to identified intangible assets and goodwill, which increases future amortization expense of identified intangible assets and the potential for impairment charges. Accordingly, the allocation of the purchase price to intangible assets may have a significant impact on the Company’s future operating results. In addition, the allocation of the purchase price requires that the Company make significant assumptions and estimates, including estimates of future cash flows expected to be generated by the acquired assets. Should different conditions prevail, the Company may have to record impairment charges, which may have a significant impact on its consolidated financial statements.

      The Company accounts for goodwill and other intangible assets in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized to expense and must be reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company evaluates the carrying value of long-lived assets and acquired intangibles including goodwill on an annual basis, or more frequently if impairment indicators arise. The Company performs the two step tests in accordance with SFAS No. 142 and records impairment charges when appropriate. The Company completed its annual goodwill impairment assessments as of December 31, 2004. Goodwill was not impaired and no impairment charge was recorded.

      In 2003, the Company announced a major reorganization in an effort to reduce costs and narrow the scope of the Company’s research initiatives. The reorganization included reduction in workforce, consolidation of facilities and disposal of certain assets. These restructuring charges were accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, and included a net facilities

charge. In determining the net facilities charge, various assumptions were made, with respect to sublease terms and expected sublease rates. These estimates are updated based on a periodic review of the current sublease environment and acquired market quotes. Should operating lease rental rates decline or should it take longer than expected to find suitable tenants to sublease the facilities, adjustments to the net present value of remaining lease obligations may be necessary in future periods based upon the future events and circumstances. See “Results of Operations” below and Note 5 to the consolidated financial statements included in this annual report on Form 10-K for a further discussion of the Company’s restructuring actions.

      The Company reviews its long-lived assets for impairment indicators at each reporting period in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In the fourth quarter of 2002, the Company concluded that an impairment indicator existed with respect to a manufacturing facility. An undiscounted cash flow analysis confirmed the impairment, and the Company obtained an appraisal of the manufacturing facility to determine its fair market value. Accordingly, the Company recorded an impairment charge of $16,069,000 at December 31, 2002, based upon the difference between the fair market value of the facility and its carrying value at such date. The Company obtains an annual appraisal of the facility to assess impairment of the carrying value. No impairment indicators existed during 2004. The Company is actively seeking a buyer for this facility. Upon a sale of the facility, any difference between the sales price and the carrying value of the facility will be recognized as an impairment charge, or credit, in the period of the sale.

Results of Operations

      The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto.

      Revenues for 2004, 2003 and 2002 were:

      The majority of Replagal product sales were in Europe. The increase in product sales in 2004 reflects an overall increase in unit sales over 2003, and the favorable effects of foreign currency fluctuations as described below. Unit sales increased due primarily to additional patients commencing therapy. In addition, a reversal of a 2003 price rebate accrual during the first quarter of 2004 contributed approximately $481,000 to product sales in 2004 as the Company determined it was no longer probable that it would be required to pay this amount to customers. The increase in product sales in 2003 also reflects an overall increase in unit sales over 2002 and the favorable effects of foreign currency fluctuations as described below.

      The Company prices Replagal in the functional currency of the country into which it is sold. While overall price levels in local currencies have generally remained consistent period over period, foreign exchange fluctuations caused an increase in the United States dollar equivalent average selling prices. Substantially all of the Company’s manufacturing costs are in United States dollars. Therefore, any fluctuation in the value of the payment currencies relative to the United States dollar is likely to impact gross margins since the Company’s manufacturing costs would remain approximately the same while its revenue in terms of United States dollars would change.

      Foreign currency fluctuations increased sales and gross margins by approximately $6,543,000, or 11%, in 2004 and $9,443,000, or 27%, in 2003. The Company’s gross margin will continue to be affected by currency fluctuations in the future. Product sales and gross margins will be negatively affected if the United States dollar strengthens against currencies in which the Company sells Replagal. The Company currently does not engage in foreign currency hedging activities with respect to product sales.

      Due to an unpredictable rebate process mandated by the Australian government agency, the Company has recorded approximately $1,338,000 in deferred revenue for shipments to Australia. The Company will record sales when price is fixed or determinable. The Company expects the rebate amounts to be finalized in the second half of 2005.

      The Company expects continued sales growth in Europe and the rest of the world, excluding the United States, as additional countries approve Replagal and reimbursement is established.

      The Company earned substantially all of its license and research revenues in 2004, 2003, and 2002 under its collaborative agreements with Genzyme, Sumitomo, and Wyeth, which succeeded Genetics Institute, Inc. (“Wyeth”). The decrease in license and research revenues in 2004 reflects a non-recurring payment of $500,000 in connection with the termination of the Company’s Factor VIII gene therapy collaboration with Wyeth that was recorded in 2003. The decrease in license and research revenue was also due to a decrease in revenues under the Company’s collaborative agreement for Replagal with Sumitomo for Replagal clinical materials. This decrease was offset by $252,000 in license and research revenues that the Company recorded in 2004 related to the global legal settlement and distribution agreement that the Company executed with Genzyme in the fourth quarter of 2003. Revenues related to these agreements are being recognized ratably over a thirteen year period, representing the term over which the Company has agreed to supply bulk drug substance to Genzyme under the distribution agreement. As of December 31, 2004, the Company’s deferred revenue related to these agreements with Genzyme amounted to $2,761,000.

      The 2003 decrease primarily reflects a decrease in revenues from Wyeth due to the termination of research and development fees from Wyeth in 2003. This decrease was offset by the $500,000 fee that Wyeth paid to TKT in connection with the termination of the collaboration agreement in 2003.

      Components of cost of goods sold for 2004, 2003 and 2002 are as follows:

      Cost of goods sold consists of expenses incurred in connection with the manufacture of Replagal. The increase in cost of goods sold in 2004 primarily reflects costs associated with increased unit sales. The decrease in cost of goods sold as a percentage of sales period over period reflects continuing improvements in manufacturing and production efficiencies as well as the contribution of favorable foreign currency fluctuations on product sales. During the fourth quarter of 2004, the Company recorded a charge of $2,921,000, or 4% of product sales, associated with recommencement of Replagal production at the Company’s Alewife Facility which went through renovation and improvements for capacity and scale expansion. In 2003, the Company

incurred non-recurring charges of $2,590,000, or 5% of product sales, related to excess capacity at the terminated contract manufacturer of bulk drug substance of Replagal. Cost of goods sold in 2004 reflects a mix of full production costs with respect to inventory produced by the former contract manufacturer, and partial production costs with respect to inventory manufactured at the Alewife Facility as the majority of such costs were incurred prior to the approval of the Alewife Facility and were previously expensed as research and development costs. All costs to manufacture Replagal prior to this approval were expensed as research and development costs. In 2003, cost of goods sold essentially reflects full production costs for inventory produced by the former contract manufacturer.

      Prior to July 2003, the Company historically had relied on contract manufacturing arrangements with third parties for the production of Replagal bulk drug substance for commercial sale, as well as contract packaging and labeling services. In January 2003, the Company terminated its agreement with a third party manufacturer of the bulk drug substance of Replagal, effective in July 2003. In July 2003, the European Commission approved the Company’s Alewife Facility for the commercial manufacture of bulk drug substance for Replagal. In June 2004, the Company completed significant renovations to its manufacturing facility in the Alewife Facility which expanded its manufacturing capacity and configured the facility for the production on a commercial scale of products other than Replagal. The Company recommenced manufacturing operations in June 2004. The Company intends to continue to rely on third-party manufacturers for formulation and packaging of Dynepo bulk drug substance into finished product.

      Research and development expenses totaled $88,148,000 in 2004, as compared to $74,062,000 in 2003 and $81,309,000 in 2002. The increase in 2004 of $14,086,000, or 19%, was primarily due to increased clinical trial and manufacturing costs related to the Company’s I2S and GA-GCB clinical programs. These programs contributed approximately $15,912,000 to the increase. These increases were partially offset by a decrease in research and development expenses related to Replagal. The Company expects its research and development costs will continue to increase in 2005, primarily as the Company continues the ongoing I2S open-label extension study and the GA-GCB clinical trials, as well as anticipated expenditures related to the planned filing of a BLA and an MAA for I2S.

      The decrease in 2003 from 2002 of $7,247,000, or 9%, was primarily due to decreases in research and development staffing, outside testing and supplies costs in connection with the Company’s restructuring plan. This decrease also reflected $5,500,000 in non-recurring expenditures related to set-up and technology transfer fees paid to the contract manufacturer of Replagal bulk drug substance in 2002. The overall decrease in research and development costs was partially offset by increases in both clinical trial costs associated with the commencement of the I2S pivotal clinical trial of $1,478,000, and research and development occupancy costs of $3,264,000 primarily related to the Company’s occupancy of its new corporate headquarters for a full year in 2003.

      The Company’s four primary development programs, Replagal, I2S, GA-GCB and Dynepo, represent the majority of the Company’s research and development spending. Expenses associated with the Company’s preclinical and clinical programs related to the Company’s products for the treatment of other rare genetic diseases, and other protein products, accounted for the balance of the Company’s research and development

expenses for 2004. The following table details the recorded expenses for each of the Company’s four primary research and development programs:

      The decrease in 2004 was primarily due to the Company’s decision in January 2004 to cease efforts to seek marketing approval of Replagal in the United States. The Company expects that substantially all of future Replagal research and development expenses will relate to the conditions associated with the Company’s European and Canadian approvals of Replagal. These conditions require the Company to conduct additional clinical trials and to submit an annual assessment of Replagal for review by the European regulatory agency and to conduct additional clinical studies in Canada. The decrease of $18,944,000, or 47%, in 2003 primarily reflects the conclusion of certain Replagal clinical trials prior to the beginning of the 2003 period as well as decreased expenses incurred in connection with producing clinical materials, and set up and technology transfer fees totaling $5,500,000 paid to the contract manufacturer of Replagal bulk drug substance in 2002.

      The increases in research and development expenses for I2S in 2004 and 2003 were due to increased expenditures related to the Company’s ongoing I2S pivotal trial and costs to manufacture I2S for this study. In March 2004, TKT completed enrollment of 96 patients at nine sites around the world in the AIM study, a randomized, double-blind, placebo-controlled, clinical trial to evaluate the effect of I2S over 12 months in patients with Hunter syndrome. The Company expects to report top-line results from the AIM study in June 2005. If the results of this trial are positive, TKT expects to file applications for marketing approval of I2S in the United States and Europe in the second half of 2005. In September 2004, TKT began enrolling patients that had completed 12 months of treatment in an open-label extension of the AIM study which will evaluate the safety of I2S in these patients over 24 months.

      Future research and development costs for the I2S program are not reasonably certain because such costs are dependent on a number of variables, including the cost and design of any additional clinical trials, the timing of the regulatory process, the success of the pivotal trial, and the costs associated with commercial manufacture of I2S. The Company expects that expenses related to the extension study will continue to be significant.

      The increases in research and development expenses for GA-GCB in 2004 and 2003 were due to increased expenditures related to the Company’s ongoing GA-GCB Phase I/ II trial, and costs to manufacture GA-GCB for this study.

      In April 2004, the Company initiated a Phase I/ II clinical trial to evaluate the safety and clinical activity of GA-GCB. In this clinical trial, the Company is evaluating GA-GCB in 12 patients with Gaucher disease who will receive treatment for nine months. The Company expects the Phase I/ II trial to conclude in the

second quarter of 2005, and intends to report top-line results from this clinical trial in the second half of 2005. In February 2005, the Company began enrolling these patients in an open-label extension of the Phase I/ II clinical trial evaluating the afety of GA-GCB in these patients over 24 months.

      Future research and development costs for the GA-GCB program are not reasonably certain because such costs are dependent on a number of variables, including the cost and design of any additional clinical trials, uncertainties in the timing of the regulatory process, and the costs associated with developing a large-scale manufacture process. The Company expects that expenses related to the phase I/ II, extension and subsequent pivotal trials will continue to be significant.

      The significant majority of expenses relating to Dynepo in 2004 were incurred in connection with a manufacturing agreement that the Company entered into with Lonza in August 2004 under which Lonza has agreed to manufacture Dynepo bulk drug substance at Lonza’s production facility in Slough, United Kingdom. The Company incurred $4,948,000 in 2004 for initial start-up and development work under the manufacturing agreement. The Company expects that expenses related to development and manufacturing of the Dynepo product, including expenses associated with third-party manufacturers for formulation and packaging of Dynepo bulk drug substance into finished product, will continue to increase in 2005. At December 31, 2004, the Company has committed to pay Lonza approximately $13,595,000 related to manufacturing costs of Dynepo bulk drug substance through 2006, which will be recorded primarily as inventory. The Company expects that all of this work will be performed over the next 12 months. Future research and development costs for Dynepo are not reasonably certain because such costs are dependent on a number of variables, including costs related to technology transfer, costs associated with the start-up of Dynepo manufacturing, including fill finish processes, and the timing and approval of the manufacturing facilities of the Company’s contract manufacturers and processes by the appropriate regulatory authorities.

      In September 2004, Aventis granted the Company a license to clinical trial results from a previously completed controlled Phase III clinical trial conducted by Aventis evaluating Dynepo for the treatment of anemia in cancer patients treated with chemotherapy. The Company expects, based on information from Aventis, that top-line results of the clinical trial will be available in the first half of 2005. Aventis will conduct the clinical data analyses. If the data are positive, the Company expects that it or a collaborator will file an amendment to the MAA for Dynepo to seek to expand the approved indication to include anemia associated with chemotherapy.

      The Company’s components of selling, general and administrative expenses for 2004, 2003, and 2002 were as follows:

      The increase in selling, general and administrative costs in 2004 primarily reflects increased sales and marketing costs, including incentive compensation paid to sales managers at TKT Europe of $4,359,000, as well as costs incurred in connection the Company’s ongoing Sarbanes-Oxley internal control compliance efforts. The increase was partially offset by non-recurring executive severance charges incurred in 2003.

      Selling, general and administrative expenses increased 18% in 2003 from 2002. Contributing to this increase were legal costs incurred in connection with the Company’s shareholder lawsuits and SEC

investigation which amounted to $2,400,000, ongoing Replagal sales and marketing initiatives in Europe and other countries, executive severance charges of $1,104,000, and occupancy costs related to the Company’s new corporate headquarters of $1,184,000.

      The Company expects selling, general and administrative expenses related to selling and marketing expenses to continue to increase in 2005 as the Company establishes infrastructure and distribution capabilities to support commencement of Replagal product sales in additional countries outside of the European Union and, subject to regulatory approval, an anticipated product approval and launch of I2S. The Company expects that selling, general and administrative costs will increase in 2005 in connection with the Serono litigation and the Company’s ongoing shareholder lawsuits. In addition, the Company expects to incur integration costs related to the buyout of the minority interest in TKT Europe that it completed in October 2004.

      The Company plans to commercialize Dynepo by entering into arrangements with a third party for the distribution, marketing and sale of Dynepo outside the United States. As a result, the Company does not expect future selling, general and administrative costs for Dynepo to be significant.

      In February 2003, TKT announced a major reorganization in an effort to reduce costs and narrow the scope of the Company’s research initiatives. Under this reorganization, TKT refocused its research, development, and commercialization efforts primarily on therapeutics for the treatment of rare genetic diseases caused by protein deficiencies. The Company is seeking to license programs outside of its core focus, including certain of its Gene-Activated protein products. During 2003, TKT reduced its United States headcount by approximately 100 positions and further reduced its headcount through attrition. As of December 31, 2003, following the restructuring, TKT had 321 full-time United States employees. TKT also vacated four facilities as part of the restructuring in 2003. The Company’s employee-related and facility consolidation restructuring actions were substantially completed as of December 31, 2003.

      As a result of the restructuring, the Company recorded charges of $12,461,000 in 2003, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. These charges consisted of costs related to employee severance and outplacement services costs for 74 employees, primarily in research and development, remaining lease obligations for the four facilities that the Company vacated, and a write-down of leasehold improvements for some of the facilities which were vacated. On a cumulative basis since February 2003, the Company has recorded $1,319,000 related to employee severance and outplacement services costs, $14,514,000 related to lease obligations and $598,000 for write-off of fixed assets.

      The Company recorded restructuring charges of $3,970,000 in 2004 related to ongoing lease obligations for the vacated facilities that have not yet been sublet. The Company expects to continue to record restructuring charges related to vacated facility expenses during the remainder of the lease terms until such facilities are sublet. The last to expire lease term expires in 2011. The remaining lease obligation costs are included in restructuring charges in the statements of operations and in accrued expenses on the balance sheet at December 31, 2004. The following table displays the restructuring activity and liability balance included in accrued restructuring expenses:

      In 2004, the Company recorded $509,000 related to the amortization of certain identified intangible assets acquired in conjunction with the purchase of the minority interest in TKT Europe. See Note 3 to the consolidated financial statements included in this annual report on Form 10-K for further discussion of the transaction. The intangible assets identified will be amortized over their estimated useful lives which range from one to eleven years.

      In June 2002, the Company obtained an exclusive license to certain patents and patent applications from Cell Genesys related to Cell Genesys’ approach to gene activation. In consideration for the license, the Company initially paid Cell Genesys $11,000,000 in cash and issued to Cell Genesys shares of the Company’s common stock worth $15,000,000 as of the date of the agreement.

      Under the license agreement, the Company agreed that the number of shares of common stock initially issued to Cell Genesys would be adjusted at the time the Company registered such shares for resale under the Securities Act of 1933, as amended, if the market value of such shares at that time was greater or less than $15,000,000. Pursuant to the agreed upon formula, at December 31, 2002, with the closing price of the Company’s common stock at $9.90 per share, the Company would have been required to issue to Cell Genesys an additional 1,148,000 shares of common stock. As a result, the Company recorded an additional non-cash license fee expense of $8,660,000 in the fourth quarter of 2002.

      On January 15, 2003, the Company and Cell Genesys renegotiated the consideration paid for the license, and the Company repurchased the shares of stock issued to Cell Genesys for $15,000,000 in cash. The Company incurred an additional license expense in the first quarter of 2003 of $1,350,000, which represents the further decline in the market value of the Company’s common stock from December 31, 2002 to January 15, 2003. The repurchased shares have been recorded as treasury stock.

      Under the license agreement, Cell Genesys also has the potential to receive certain milestone payments from the Company contingent upon the outcome of related patent matters under the license agreement. If all of the milestones are achieved, the Company will be obligated to pay Cell Genesys an aggregate of $17,000,000 payable in part in cash and in part in stock. The Company cannot predict when those milestones will become due, if ever. The Company is not required to make royalty payments to Cell Genesys.

      For the years ended December 31, 2004 and 2003, the Company recorded minority interest of $55,000 in the net loss and $413,000 in the net income, respectively, related to the Company’s 80% interest in the cumulative net income/loss of TKT Europe. The Company consolidated 100% of TKT Europe’s losses in 2002.

      In October 2004, the Company completed the purchase of the 20% minority interest in TKT Europe held by the founding European executives of TKT Europe.

      Interest income totaled $2,938,000 in 2004, as compared to $2,704,000 in 2003 and $7,516,000 in 2002. Interest income increased $234,000, or 9% in 2004 primarily due to a higher rate of return relative to 2003. The average cash and marketable securities balances were $189,326,000 in 2004 compared to $203,876,000 in 2003 and $328,940,000 in 2002. Decrease in interest income in 2003 from 2002 was primarily due to the decrease in cash and marketable securities balances and lower rates of return. The Company expects the cash and marketable securities balance to decrease based on normal operations.

      During the second quarter of 2004, the Company sold $94,000,000 of 1.25% senior convertible notes (the “Notes”) and received net proceeds of $90,859,000 from the sale. As a result of the offering of the Notes, the Company recorded $1,061,000 for interest expense and amortization of deferred issuance costs in 2004. The Company had no interest expense in 2003 or 2002.

      Gains and losses on intercompany foreign currency transactions that are of a long-term investment nature are included in accumulated other comprehensive income. The Company determined in the fourth quarter of 2004 that certain long term intercompany receivables from TKT Europe should be accounted for as short term in nature as settlement was planned and anticipated in the foreseeable future. As a result, the Company recorded a gain of $7,702,000 related specifically to remeasurement of intercompany balances denominated in a currency other than functional currency and transaction gains in the fourth quarter of 2004. Total foreign currency remeasurement and transaction gains included in the Company’s results of operations were $7,685,000 and $943,000 in 2004 and 2003, respectively. In 2002, foreign currency remeasurement and transaction gains and losses were not material to the consolidated financial statements.

      The Company recorded losses on disposals of fixed assets amounting to $431,000 in 2004. Fixed asset disposals primarily relate to the write-off of manufacturing equipment and computer equipment that is no longer in use, offset from the sale of related equipment.

      In October 2003, the Company received $500,000 from Bain & Company in connection with a legal settlement. TKT recorded the $500,000 settlement as other income during the fourth quarter of 2003.

      The Company had a net loss of $65,874,000 in 2004 as compared to $75,234,000 in 2003 and $129,762,000 in 2002. Basic and diluted net loss per share was $1.89 for 2004, as compared to a basic and diluted net loss per share of $2.18 for 2003 and $3.75 for 2002. Included in the loss for 2004 are restructuring charges of $3,970,000 which contributed $0.11, to basic and diluted net loss per share. Included in the net loss for 2003 are restructuring charges of $12,461,000 and an intellectual property license fee expense of $1,350,000, which contributed $0.36 and $0.04, respectively, to basic and diluted net loss per share. Included in the net loss for 2002 is an intellectual property license fee expense of $34,660,000 and an asset impairment charge of $16,069,000, which contributed $1.00 and $0.46, respectively, to basic and diluted net loss per share.

      For the years ended December 31, 2004, 2003 and 2002, weighted average shares outstanding were 34,797,000 34,559,000 and 34,616,000, respectively.

Liquidity And Sources Of Capital

      Since its inception, TKT has financed its operations through:

      In the near term, TKT expects to finance its operations principally from existing cash and cash equivalents and from collections of accounts receivable related to sales of Replagal. The Company expects, based on its current operating plan, that its existing capital resources, together with anticipated collections on accounts receivable and on future accounts receivable from future product sales, anticipated cash payments under collaborative agreements, and interest income, will be sufficient to fund its operations into 2006.

      The Company had cash, cash equivalents and marketable securities totaling $155,214,000 at December 31, 2004, including restricted marketable securities collateralizing letters of credit totaling $7,839,000. At December 31, 2004, the Company’s wholly-owned subsidiary, TKT Europe, held $38,013,000 of the $155,214,000, primarily denominated in Swedish Kronor, British Pounds, and Euros. Cash equivalents and marketable securities are invested in United States government and agency obligations and money market funds.

      The Company used net cash of $41,688,000 for operating activities for the year ended December 31, 2004. In addition to a net loss of $65,874,000, factors affecting the Company’s cash balances included an increase in accounts receivable of $3,847,000 reflecting increased sales offset by increases in cash collections, a decrease in accrued restructuring of $351,000, an increase in deferred revenue of $4,484,000, an increase in accounts payable of $982,000, an increase in prepaid expenses and other current assets of $4,649,000, an increase in accrued expenses of $8,051,000 due to increased contract manufacturing accruals, and a decrease of inventory of $4,721,000 due to the recommencement of Replagal production in 2004. Net cash usage decreased in 2004 from 2003, primarily due to cost savings associated with the Company’s restructuring efforts, growth in Replagal sales, increased accounts receivable collections, a decrease in inventories and an increase in accrued expenses.

      Working capital at December 31, 2004, was $169,754,000 compared to $204,190,000 at December 31, 2003. The decrease in working capital during 2004 was primarily attributed to the purchase of the minority interest in TKT Europe.

      In certain European countries, such as Italy, Spain and Belgium, customary payment terms on accounts receivable are significantly longer than in the United States, particularly for products treating orphan drug indications. In these countries, the Company historically has received, and expects to continue to receive, payments approximately one year from the invoice date. Accounts receivable balances for Italy, Spain and Belgium were 71% and 66% of total accounts receivable at December 31, 2004 and 2003, respectively. The Company monitors its days’ sales outstanding and collections in these countries. To date, these customers have been paying within the customary payment terms. If collections and days’ sales outstanding in these countries deteriorate in the future, the Company’s liquidity will be adversely affected.

      Net cash used for investing activities was $120,195,000 for the year ended December 31, 2004. The Company used net cash of $61,242,000 for the purchase of TKT Europe. Net maturities and sales and purchases of marketable securities contributed $45,691,000 to cash used for investing activities. The Company used net cash of $13,226,000 during 2004 for property and equipment purchases related to leasehold improvements and equipment for the Company’s manufacturing facility. The Company expects to spend a total of approximately $9,000,000 for purchases of property and equipment in 2005, principally for expanding its internal manufacturing capabilities.

      Fluctuations in exchange rates decreased cash and cash equivalents reported in United States dollars by approximately $2,494,000, primarily due to the weakening United States dollar relative to the Swedish Krona,

British Pound, and Euro, and the translation of our foreign subsidiaries’ cash and accounts receivable balances, which are primarily denominated in Euros.

      The Company’s cash requirements for operating activities and investment activities have significantly exceeded its internally generated funds. The Company expects that its cash requirements for such activities will continue to exceed its internally generated funds until it is able to generate substantially greater product sales.

      The Company expects that it will require substantial additional funds to support its research and development programs, obligations under license agreements, acquisition of technologies, preclinical and clinical testing of its products, pursuit of regulatory approvals, acquisition of capital equipment, expansion of internal manufacturing capabilities, selling, general and administrative expenses.

      During the second quarter of 2004, the Company sold $94,000,000 of Notes for net proceeds of $90,859,000, which is being used to fund its operations. Interest on the Notes is payable at a rate of 1.25% per annum and is payable semi-annually on May 15 and November 15 of each year commencing November 15, 2004.

      The Company plans to meet its long-term cash requirements through proceeds from product sales and revenues from collaborative agreements. In December 2000, the Company filed a shelf registration statement on Form S-3 with the SEC, which became effective in December 2000. This shelf registration statement permits the Company to offer, from time to time, any combination of common stock, preferred stock, debt securities and warrants of up to an aggregate of $500,000,000. The Company currently has approximately $138,000,000 available under this shelf registration statement. The Company may also pursue opportunities to obtain additional external financing in the future through debt financing, lease arrangements related to facilities and capital equipment, collaborative research and development agreements, and license agreements.

      If the Company is unable to obtain additional financing, the Company may be required to reduce the scope of its planned research, development, sales and marketing efforts, which could harm the Company’s business, financial condition and operating results. The source, timing and availability of any future financing will depend principally upon equity and debt market conditions, interest rates and, more specifically, on the Company’s continued progress in its preclinical and clinical development programs, and the extent of its commercial success. There can be no assurance that external funds will be available on favorable terms, if at all.

      The following table summarizes the Company’s estimated significant contractual obligations at December 31, 2004:

      As of December 31, 2004, the Company had committed to pay approximately $9,311,000 to contract vendors for administering and executing clinical trials as referenced in the table above. The timing of

payments is not reasonably certain as payments are dependent upon actual services performed by the organizations as determined by patient enrollment levels and related activities. However, the Company expects to pay for these commitments throughout 2005 and into 2006 as ongoing trials are completed.

      In August 2004, the Company entered into a manufacturing agreement under which Lonza agreed to manufacture Dynepo bulk drug substance at Lonza’s production facility in Slough, United Kingdom. To date, the Company has incurred expenses of approximately $4,948,000. At December 31, 2004, the Company had committed to pay Lonza an additional approximately $13,595,000 related to additional start-up and manufacturing costs of Dynepo bulk drug substance over the next 12 months. The Company may terminate the agreement upon at least 30 days’ notice to Lonza. However, even if the Agreement is terminated, the Company will be responsible for the amounts due Lonza for work to be performed through 2006. Furthermore, in the event that the Company terminates the agreement upon notice to Lonza that is less than 12 months prior to Lonza’s estimated start date for any services related to a binding order for the manufacture of Dynepo bulk drug substance, the Company will be required to pay Lonza for that binding order.

      The Company also is subject to the potential commitments discussed in the following paragraphs which are not included in the table above:

      At December 31, 2004, the Company had net operating loss carryforwards of approximately $340,720,000, which expire at various times through 2024. Due to the degree of uncertainty related to the ultimate use of loss carryforwards and tax credits, the Company has fully reserved against any potential tax benefit. The future utilization of net operating loss carryforwards and tax credits may be subject to limitation under the changes in stock ownership rules of the Internal Revenue Code. Because of this limitation, it is possible that taxable income in future years, which would otherwise be offset by net operating losses, will not be offset and, therefore, will be subject to tax.

      The Company is a party to the legal proceedings listed below which are described in greater detail under Item 3. Legal Proceedings. The costs related to these proceedings have been significant and the Company expects that these costs will continue to be significant. The Company can provide no assurance as to the outcome of any of these proceedings. A decision by a court in the United States or in any other jurisdiction in a manner adverse to the Company could have a material adverse effect on the Company’s business, financial condition and results of operations.

Recent Accounting Pronouncements

      In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation. SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share based payments transactions or employee stock options. Specifically, SFAS No. 123(R) requires that the fair value of such equity instruments or employee stock options be recognized as an expense in the financial statements as services are performed. Prior to SFAS No. 123(R), certain pro forma disclosures of fair value were required. The provisions of SFAS No. 123(R) are effective for the first interim reporting period that begins after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123(R) commencing with the quarter ending September 30, 2005. The adoption of SFAS No. 123(R) is expected to have a material effect on the Company’s consolidated financial position and results of operations.

      In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe adoption of SFAS No. 151 will have a material effect on its consolidated financial position, results of operations or cash flows.

Forward-Looking Statements

      This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, that involve risks and uncertainties. The Company may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those set forth below under “Certain Factors That May Affect Future Results.” These factors and the other cautionary statements made in this annual report should be read as being applicable to all related forward-looking statements wherever they appear in this annual report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, the Company’s actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. In addition, any forward-looking statements represent the Company’s estimates only as of the date this annual report was filed with the Securities and Exchange Commission and should not be relied upon as representing the Company’s estimates as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so, even if its estimates change.

Certain Factors That May Affect Future Results

      The following important factors could cause actual results to differ from those indicated by forward-looking statements made by the Company in this annual report and elsewhere from time to time.

Development, Clinical and Regulatory Risks

      In order to obtain regulatory approvals for the commercial sale of our potential products, we and our collaborators will be required to complete extensive clinical trials in humans to demonstrate the safety and efficacy of our products. However, we may not be able to commence or complete these clinical trials in any specified time period, or at all, either because the FDA or other regulatory agencies object, because we are unable to attract or retain clinical trial participants, or for other reasons. We currently are conducting a pivotal Phase III clinical trial of I2S, a phase I/ II clinical trial of GA-GCB, and several clinical trials involving Replagal.

      Even if we complete a clinical trial of one of our potential products, the data collected from the clinical trial may not indicate that our product is safe or effective to the extent required by the FDA, the European Commission, or other regulatory agencies to approve the potential product, or at all. For example, in November 2002, the FDA indicated to us that the data for Replagal that we submitted in connection with our BLA was not adequate for approval, and in January 2003, the FDA’s Endocrinologic & Metabolic Drugs Advisory Committee concluded that our clinical data did not provide substantial evidence of efficacy. In January 2004, we withdrew our BLA for Replagal.

      The results from preclinical testing of a product that is under development may not be predictive of results that will be obtained in human clinical trials. In addition, the results of early human clinical trials may not be predictive of results that will be obtained in larger scale, advanced-stage clinical trials. Furthermore, we, one of our collaborators, or a regulatory agency with jurisdiction over the trials may suspend clinical trials at any time if the patients participating in such trials are being exposed to unacceptable health risks, or for other reasons.

      The timing of completion of clinical trials is dependent in part upon the rate of enrollment of patients. Patient accrual is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study, the existence of competitive clinical trials, and the availability of alternative treatments. Delays in planned patient enrollment may result in increased costs and prolonged clinical development. In addition, patients may withdraw from a clinical trial for a variety of reasons. If we fail to accrue and maintain the number of patients into one of our clinical trials for which the clinical trial was designed, the statistical power of that clinical trial may be reduced which would make it harder to demonstrate that the products being tested in such clinical trial are safe and effective.

      Regulatory authorities, clinical investigators, institutional review boards, data safety monitoring boards and the hospitals at which our clinical trials are conducted all have the power to stop our clinical trials prior to completion. If our studies are not completed, we would be unable to show the safety and efficacy required to obtain marketing authorization for our products.

      We are not able to market any of our products in the United States, Europe or in any other jurisdiction without marketing approval from the FDA, the European Commission, or any equivalent foreign regulatory agency. The regulatory process to obtain marketing approval for a new drug or biologic takes many years and requires the expenditure of substantial resources. This process can vary substantially based on the type, complexity, novelty and indication of the product candidate involved.

      In August 2001, the European Commission granted marketing authorization of Replagal in the European Union, approximately one year after we submitted our MAA to the European Agency for the Evaluation of Medicinal Products, or EMEA, and approximately five years after we filed our investigational new drug application, or IND, with the FDA. The FDA never approved Replagal in the United States and, in January 2004, we withdrew our BLA for Replagal. We are continuing to seek marketing approval for Replagal in a number of other countries in the world. We may not obtain approvals in one or more of these countries when

we anticipate receiving such approval, if at all. Approval of Replagal in Japan has been delayed and we do not know when or if we will receive such approval.

      We are currently conducting a pivotal clinical trial of I2S in 96 patients with Hunter syndrome at nine sites around the world. If the results are positive, we expect to submit applications for marketing approval in the United States and in the European Union in the second half of 2005. However, even if we submit such applications, the FDA, the European Commission and other regulatory agencies to which we submit applications may not agree that our product is safe and effective and may not approve our product.

      Although the European Commission has granted marketing approval of Dynepo in the European Union, Dynepo has not been approved in the United States. In 2000, Aventis submitted a BLA to the FDA seeking marketing authorization for Dynepo in the United States. The FDA did not accept the BLA for filing, and requested that Aventis provide additional manufacturing data. Aventis has not yet submitted the requested additional data to the FDA, and we cannot predict whether or when Aventis will do so.

      The relevant regulatory authorities may not approve any of our applications for marketing authorization relating to any of our products, including Replagal, I2S, GA-GCB and Dynepo, or additional applications for or variations to marketing authorizations that we may make in the future as to these or other products. Among other things, we have had only limited experience in preparing applications and obtaining regulatory approvals. If approval is granted, it may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor safety or efficacy of the product. For example, there are conditions associated with our European Union approval of Replagal, including an obligation to conduct additional clinical trials and an obligation to submit an annual reassessment of Replagal for review by the Committee for Medicinal Products for Human Use, or CHMP. If we do not complete these clinical trials on a timely basis or the results of these trials are not satisfactory to the CHMP, the European Commission may withdraw or suspend our Replagal approval. If approval of an application to market a product is not granted on a timely basis or at all, or we are unable to maintain our approval, our business may be materially harmed.

      Some jurisdictions, including the European Union and the United States, may designate drugs for relatively small patient populations as “orphan drugs.” Orphan drug designation must be requested before submitting an application for marketing authorization. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process, but does make the product eligible for orphan drug exclusivity and, in the United States, certain tax credits. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity means that another application to market the same drug for the same indication may not be approved for a period of up to 10 years in the European Union, and for a period of seven years in the United States, except in limited circumstances set forth in the FDA Statute. Obtaining orphan drug designations and orphan drug exclusivity for our products for the treatment of rare genetic diseases may be critical to the success of these products. Our competitors may obtain orphan drug exclusivity for products competitive with our products before we do as Genzyme did with its Fabrazyme product in the United States, as discussed below.

      Even if we obtain orphan drug exclusivity for any of our potential products, we may not be able to maintain it. For example, if a competitive product is shown to be clinically superior to our product, any orphan drug exclusivity we have obtained will not block the approval of such competitive product.

      In August 2001, the European Commission granted marketing authorization of Replagal in the European Union. The European Commission also granted marketing authorization of Genzyme Corporation’s Fabrazyme product in the European Union in August 2001. In connection with these approvals, the European

Commission granted Replagal and Fabrazyme co-exclusive orphan drug status in the European Union for up to 10 years.

      In April 2003, Genzyme received marketing authorization in the United States for Fabrazyme. Because Fabrazyme had received orphan drug designation in the United States, upon its marketing approval, Fabrazyme received orphan drug exclusivity. Because Fabrazyme received marketing approval in the United States before Replagal and received orphan drug exclusivity, the FDA may not approve Replagal and Replagal will be excluded from the United States market for seven years, until April 2010, unless we receive approval to market and sell Replagal in the United States and we can demonstrate that Replagal satisfies the limited criteria for exceptions set forth in the FDA law. In January 2004, we withdrew our BLA for Replagal. We will not be able to market Replagal in the United States unless we resubmit, and obtain the FDA’s approval of, our BLA for Replagal.

      In November 2001, our I2S product for the treatment of Hunter syndrome was designated an orphan drug in the European Union and in the United States. If our I2S product is the first such product to receive marketing approval for Hunter syndrome, then our I2S product will be entitled to orphan drug exclusivity and no other application to market the same drug for the same indication may be approved, except in limited circumstances, for a period of up to 10 years in the European Union and for a period of seven years in the United States. If we are not able to maintain this orphan drug exclusivity, our business may be adversely affected.

      The testing, manufacturing, labeling, advertising, promotion, export, and marketing, among other things, of our products, both before and after approval, are subject to extensive regulation by governmental authorities in the United States, Europe and elsewhere throughout the world. Failure to comply with the law administered by the FDA, the EMEA, or other governmental authorities could result in any of the following:

      For example, the European Commission approved Replagal under “exceptional circumstances.” Approval under exceptional circumstances means that the European Commission accepted less-than-complete clinical data because it determined that it would be impractical or unethical for the drug sponsor to carry out full-scale pivotal clinical trials. The European Commission imposes specific obligations on the drug sponsor when granting such approvals. These obligations form part of the formal marketing authorization issued by the European Commission and are reviewed by the CHMP at the intervals specified, minimally on an annual basis. The annual review includes a reassessment of the overall benefit/risk ratio of the product. If the drug sponsor does not fulfill the specific obligations imposed in connection with approval, the European Commission may vary, suspend or withdraw the marketing authorization for the product. The European Commission required us as part of its post-approval requirements for Replagal to conduct additional clinical trials of Replagal. If we do not complete these clinical trials on a timely basis, the results of these studies are not satisfactory to the CHMP or we otherwise fail to comply with the conditions imposed on us pursuant to the approval under exceptional circumstances, the European Commission could withdraw or suspend its approval

of Replagal. Because Replagal is currently our only commercial product, the withdrawal or suspension of the European Commission’s approval of Replagal could materially adversely affect our business, results of operations and financial condition.

      We are required to maintain pharmacovigilance systems for collecting and reporting information concerning suspected adverse reactions to our products. In response to pharmacovigilance reports, regulatory authorities may initiate proceedings to revise the prescribing information for our products or to suspend or revoke our marketing authorizations. Procedural safeguards are often limited, and marketing authorizations can be suspended with little or no advance notice.

      Both before and after approval of a product, quality control and manufacturing procedures must conform to current good manufacturing practice regulations, or cGMP. Regulatory authorities, including the EMEA and the FDA, periodically inspect manufacturing facilities to assess compliance with cGMP. Accordingly, we and our contract manufacturers will need to continue to expend time, monies, and effort in the area of production and quality control to maintain cGMP compliance.

      In addition to regulations adopted by the EMEA, the FDA, and other foreign regulatory authorities, we are also subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other federal, state, and local regulations.

      After completion of a clinical trial designed to show safety or effectiveness, we often enroll patients taking our products in maintenance clinical trials in which these patients continue to receive treatment with our products pending approval for marketing authorization in the relevant jurisdiction. We receive no payments for such treatment. The costs associated with maintaining open-ended maintenance clinical trials can be significant. If we fail to obtain marketing authorizations in a timely manner for the product being tested in such trials, our costs associated with these maintenance clinical trials will increase and we may continue to supply the product for use in clinical trials without remuneration to us.

      We expend significant resources on research and development and preclinical studies of product candidates. However, these efforts may not result in the development of products appropriate for testing in human clinical trials. For example, our research may result in product candidates that are not expected to be effective in treating diseases or may reveal safety concerns with respect to product candidates. We may postpone or terminate research and development of a product candidate or a program at any time for any reason such as the safety or effectiveness of the potential product, allocation of resources or unavailability of qualified research and development personnel.

Litigation and Intellectual Property Risks

      In January 2005, Genzyme filed suit against us in the District Court of Tel-Aviv-Jaffa, Israel, claiming that our Phase I/ II clinical trial in Israel evaluating GA-GCB for the treatment of Gaucher disease infringes one or more claims of Israeli Patent No. 100,715. In addition, Genzyme filed a motion for preliminary injunction, including a request for an ex parte hearing and relief on the merits, to immediately seize and destroy all GA-GCB being used to treat patients in our ongoing clinical trial in Israel and to prevent us from submitting data generated from the clinical trial to regulatory agencies. In January 2005, the District Court

rejected Genzyme’s request for ex parte relief. We filed reply briefs with the District Court in February of 2005, and in March 2005, the court refused to grant Genzyme’s motion for a preliminary injunction.

      We can provide no assurance as to the outcome of the Genzyme litigation. We expect that the costs related to this suit will be significant. If we are not successful in the GA-GCB litigation, we could be prevented from conducting our clinical trial and commercializing our product in Israel, which would adversely affect the clinical development of GA-GCB. In addition, Genzyme has corresponding patents to the Israeli patent in Europe and in Canada, which Genzyme could assert against us and prevent us from making, using or selling GA-GCB in those jurisdictions.

      In April 1997, Amgen commenced a patent infringement action against us and Aventis in the United States District Court of Massachusetts. In January 2001, the United States District Court of Massachusetts concluded that Dynepo infringed eight of the 18 claims of five patents that Amgen had asserted. Amgen did not seek and was not awarded monetary damages. This decision was subsequently appealed to the United States Court of Appeals for the Federal Circuit.

      In January 2003, the United States Court of Appeals for the Federal Circuit issued a decision affirming in part and reversing in part the decision of the United States District Court of Massachusetts, remanded the action to the United States District Court of Massachusetts for further proceedings, and instructed the United States District Court of Massachusetts to reconsider the validity of Amgen’s patents in light of potentially invalidating prior art. In October 2004, the United States District Court of Massachusetts issued a decision on the remanded issues, finding that certain claims related to four patents held by Amgen are valid and infringed by us. In January 2005, we appealed the decision of the United States District Court of Massachusetts to the United States Court of Appeals for the Federal Circuit.

      We can provide no assurance as to the outcome of the appeal. If we and Aventis are not successful in the Dynepo litigation at the appellate level, we and Aventis would be precluded from making, using and selling Dynepo in the United States. We are required to reimburse Aventis, which controls the litigation and is paying the litigation expenses, for 50% of the expenses incurred in connection with the litigation from and after March 26, 2004. Aventis is entitled to deduct up to 50% of any royalties that Aventis may otherwise owe us with respect to the sale of Dynepo until Aventis has recouped the full amount of our share of the litigation expenses. We have the right to control any other litigation that might arise outside of the United States and are responsible for all litigation expenses incurred in connection with such litigation from and after March 26, 2004.

      In 1996, Serono and Cell Genesys became involved in a patent interference involving Serono’s “071 patent which purportedly covers certain methods of gene activation. In June 2004, the Board of Patent Appeals and Interferences of the U.S. PTO held that both Serono and Cell Genesys were entitled to certain claims in their respective patent and patent application, and Serono and Cell Genesys appealed the decision of the interference to the United States District Court of Massachusetts and the United States District Court of the District of Columbia, respectively. We were not a party to this interference.

      In August 2004, Serono served us with an amended complaint in the appeal of the PTO decision that was filed in the U.S. District Court of Massachusetts. The amended complaint alleges that we infringe Serono’s “071 patent. In October 2004, we filed a motion to dismiss the amended complaint.

      We can provide no assurance as to the outcome of the Serono litigation. We expect that if it is not dismissed, the costs associated with this litigation could be significant. If we are not successful in the gene activation litigation, we would be precluded from using certain methods of gene activation currently used in

the development of our products, including Replagal. This could have a materially adverse effect on our business.

      In January and February 2003, various parties filed purported class action lawsuits against us and Richard Selden, our former Chief Executive Officer, in the United States District Court for the District of Massachusetts. The complaints generally allege securities fraud during the period from January 2001 through January 2003. Each of the complaints asserts claims under Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, and alleges that we and our officers made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of our Replagal product to treat Fabry disease during that period.

      In April 2003, the Court consolidated the various matters under one matter: In re Transkaryotic Therapies, Inc., Securities Litigation, C.A. No. 03-10165-RWZ.

      In July 2003, the plaintiffs filed a Consolidated and Amended Class Action Complaint, which we refer to as the Amended Complaint, against us; Dr. Selden; Daniel Geffken, our former Chief Financial Officer; Walter Gilbert, Jonathan S. Leff, Rodman W. Moorhead, III, and Wayne P. Yetter, members of our board of directors; William R. Miller and James E. Thomas, former members of our board of directors; and SG Cowen Securities Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities, Inc. and Leerink Swann & Company, underwriters of our common stock in prior public offerings.

      The Amended Complaint alleges securities fraud during the period from January 4, 2001 through January 10, 2003. The Amended Complaint alleges that the defendants made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of Replagal during that period. The Amended Complaint asserts claims against Dr. Selden and us under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and against Dr. Selden under Section 20(a) of the Exchange Act. The Amended Complaint also asserts claims based on our public offerings of June 29, 2001, December 18, 2001 and December 26, 2001 against each of the defendants under Section 11 of the Securities Act of 1933 and against Dr. Selden under Section 15 of the Securities Act; against SG Cowen Securities Corporation, Deutsche Bank Securities, Pacific Growth Equities, Inc., and Leerink Swann & Company under Section 12(a)(2) of the Securities Act. The plaintiffs seek equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs.

      In September 2003, we filed a motion to dismiss the Amended Complaint. A hearing of the motion occurred in December 2003. In May 2004, the United States District Court for the District of Massachusetts issued a Memorandum of Decision and Order denying in part and granting in part our motion to dismiss the purported class action lawsuit. In the Memorandum, the Court found several allegations against us arose out of forward-looking statements protected by the “safe harbor” provisions of the PSLRA. The Court dismissed those statements as falling within the PSLRA’s safe harbor provisions. The Court also dismissed claims based on the public offerings of June 29, 2001 and December 18, 2001 because no plaintiff had standing to bring such claims. The Court allowed all other allegations to remain.

      In July 2004, the plaintiffs voluntarily dismissed all claims based on the December 26, 2001 offering because no plaintiff had standing to bring such claims.

      We filed an answer to the Amended Complaint on July 16, 2004. The plaintiffs then filed a motion for class certification in July 2004. We expect to file an opposition to this motion in March 2005. A hearing on class certification is scheduled to be held in April 2005.

      In April 2003, South Shore Gastrointerology UA 6/6/1980 FBO Harold Jacob, and Nancy R. Jacob Ttee filed a Shareholder Derivative Complaint against Dr. Selden; against the following members of our board of directors: Jonathan S. Leff, Walter Gilbert, Wayne P. Yetter, Rodman W. Moorhead III; against the

following former members of our board of directors: James E. Thomas, and William Miller; and against us as nominal defendant, in Middlesex Superior Court in the Commonwealth of Massachusetts, Civil Action No. 03-1669. On May  29, 2003, the parties moved to transfer venue to the Business Litigation Session in Suffolk Superior Court in the Commonwealth of Massachusetts. The parties’ motion was allowed, and in June 2003 the matter was accepted into the Business Litigation Session as Civil Action No. 03-02630-BLS.

      The complaint alleges that the individual defendants breached fiduciary duties owed to us and our shareholders by disseminating materially false and misleading statements to the market and causing or allowing us to conduct our business in an unsafe, imprudent and unlawful manner. The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, and to assert a claim for contribution and indemnification on behalf of us for any liability we incur as a result of the individual defendants’ alleged misconduct. The complaint seeks declaratory, equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs. In August 2003, the plaintiff filed its Verified Amended Derivative Complaint, which we refer to as the Amended Derivative Complaint. The Amended Derivative Complaint alleges that the individual defendants breached fiduciary duties owed to us and our stockholders by causing us to issue materially false and misleading statements to the public, by signing our Form 10-Ks for the years 2000 and 2001 and by signing a registration statement. The Amended Derivative Complaint also alleges that defendant Dr. Selden sold our stock while in possession of material non-public information. The plaintiffs seek declaratory, equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs.

      In September 2003, we filed a motion to dismiss the Amended Derivative Complaint. A hearing of the motion was held in January 2004. In May 2004, the Court granted our motion to dismiss. In June 2004, the plaintiff filed a Notice of Appeal appealing the dismissal of the Amended Derivative Complaint to the Massachusetts Court of Appeals.

      As of December 31, 2004, we had spent approximately $1.7 million related to these lawsuits. We expect that the costs related to these suits will be significant. We can provide no assurance as to the outcome of any of these suits. If we are not successful in defending these actions, we may be required to pay substantial damages to the plaintiffs and our business, results of operations and financial condition could be materially adversely affected. In addition, even if we are successful, the defense of these actions may divert the attention of our management and other resources that would otherwise be engaged in running our business.

      In May 2003, we received a copy of a formal order of investigation by the SEC. The order of investigation relates to our disclosures and public filings with regard to Replagal and the status of the FDA’s approval process for Replagal, as well as transactions in our securities.

      In July 2004, we and Dr. Richard F Selden, our former Chief Executive Officer, received “Wells” notices from the staff of the SEC, in connection with its investigation. The Wells notices state that the SEC staff has preliminarily determined to recommend that the Commission bring a civil action for possible violations of the federal securities laws in which it may seek an injunction and civil penalties against us, and an injunction, disgorgement, and an officer and director bar as to Dr. Selden. We are cooperating fully and will continue to cooperate fully with the SEC in the investigation. As of December 31, 2004, we had spent approximately $1.7 million related to this matter.

      If this investigation results in a determination that we have failed to properly disclose information relating to Replagal and the status of the FDA’s approval process for Replagal or that there were improper transactions in our securities, we could be subject to substantial fines or penalties and other sanctions. An adverse determination could have a material adverse effect on our business, results of operations and financial condition. However, at this time, we cannot accurately predict the outcome of this proceeding. In addition, even if we are successful, this investigation may divert the attention of our management and other resources that would otherwise be engaged in running our business.

      The biotechnology industry has been characterized by significant litigation, and other proceedings regarding patents, patent applications, and other intellectual property rights. We may become a party to additional patent litigation beyond the Genzyme, Amgen and Serono litigation described above and to other proceedings with respect to our products, processes and technologies.

      An adverse outcome in any patent litigation or other proceeding involving patents could subject us to significant liabilities to third parties and require us to cease using the technology or product that is at issue or to license the technology or product from third parties. We may not be able to obtain any required licenses on commercially acceptable terms, or at all.

      The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. In addition, any such litigation or proceeding will divert management’s attention and resources. Some of our competitors may be able to sustain these costs more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to develop, manufacture, and market products, form collaborations, and compete in the marketplace.

      Our success will depend in large part on our ability to obtain and maintain patent protection for our products, processes and technologies in the United States and other countries. The patent situation in the field of biotechnology generally is highly uncertain and involves complex legal, scientific and factual questions. We may not be issued patents relating to our products, processes or technologies. Even if issued, patents may be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

      Our patents also may not afford us protection against competitors with similar technology. Because some patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing or are maintained in secrecy until patents issue from those patent applications, third parties may have filed or maintained patent applications for technology used by us or covered by our pending patent applications without our being aware of these applications. For this reason, we cannot be certain that we were the first to make the inventions claimed in issued patents or pending patent applications, or that we were the first to file for protection of the inventions set forth in these patent applications. As a result, third parties could assert claims against us concerning our gene activation or other technology.

      Our overall patent strategy with respect to our gene activation technology and our protein products made using our gene activation technology is to attempt to obtain patent coverage for gene activation of the gene that encodes the product, the composition of matter of the product, the method of making the product, cells or cell lines capable of expressing the product, and the genetic constructs used to obtain the product. We have been unable to obtain patent claims in all categories with respect to all of our Gene-Activated protein products. While our patent portfolio may afford us protection against some competitors with similar technology and competitors which attempt to make products in human cell or cell lines, it may not afford us protection against all competitors, such as those who make the same products in mouse, rodent, bacterial or yeast cells.

      The expiration dates for the patents and patent applications covering our principal products are as follows:

      We may not hold proprietary rights to certain product patents, process patents, and use patents related to our products or their methods of manufacture. In some cases, these patents may be owned or controlled by third parties. Therefore, in some cases, in order to develop, manufacture, sell or import some of our existing and proposed products or processes, we may choose to seek, or be required to seek, licenses under third party patents or those patents that might issue from patent applications. In such event, we would be required to pay license fees or royalties or both to the licensor. If licenses are not available to us on acceptable terms, we or our collaborators may not be able to develop, manufacture, sell, use or import the affected products or processes.

      For example, we are aware of third party patents and patent applications that relate to gene activation. We believe that our gene activation technology does not infringe any third party patents that we believe to be valid. We are, however, involved in patent litigation in the United States, along with Aventis, with Amgen relating to Dynepo, in the United States with Serono relating to certain methods of gene activation, and in Israel with Genzyme relating to GA-GCB. We use our gene activation technology to manufacture Replagal, Dynepo, GA-GCB and other products. We do not use our gene activation technology to manufacture I2S. If the use of our gene activation technology were found to infringe a valid third party patent, we could be precluded from manufacturing and selling products manufactured using gene activation technology, and our business, results of operations and financial condition would be materially adversely affected.

      We rely upon unpatented proprietary technology, processes, and know-how. We seek to protect this information in part by confidentiality agreements with our employees, consultants, and other third party contractors. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.

      We are a party to over 20 patent licenses under which we have acquired rights to proprietary technology of third parties, including licenses to patents related to I2S and Dynepo, and expect to enter into additional patent licenses in the future. These licenses impose various commercialization, sublicensing, royalty, insurance, and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license and we could lose our license to use the acquired rights. If these rights are lost, we may not be able to market products that were covered by the license.

Business Risks

      Replagal is our only commercial product. If Replagal is not commercially successful, our business, results of operations and financial condition will be materially adversely affected.We expect that Replagal will account for all of our product sales until at least 2006. The commercial success of Replagal will depend on its acceptance by physicians, patients and other key decision-makers for the treatment of Fabry disease. The commercial success of Replagal will also depend in part upon Replagal receiving marketing approval in Japan and other countries. We have ceased our efforts to seek the approval of Replagal in the United States, but we have undertaken early-stage efforts to create an improved product that we could market worldwide. There is, however, no guarantee that we will succeed, and, even if we do, development of an improved product would take many years.

      We have exposure to currency risk for Replagal sales in Europe. Country-by-country pricing of Replagal was initially established as the local currency equivalent of between approximately $165,000 and $175,000 per patient per year for an average patient weighing 70 kilograms. The price generally remains fixed in the local currencies and varies in United States dollars with exchange rate fluctuations. Since the approval of Replagal in August 2001, the United States dollar has generally weakened versus most European currencies, including the Euro, which has resulted in increased revenues for us from sales of Replagal. If the United States dollar were to strengthen versus these currencies, this currency fluctuation would adversely impact our Replagal product sales. Foreign currency fluctuations favorably contributed $6.5 million to product sales for 2004 as compared to the same period of 2003. In addition, there are often significant delays in our customers making payments to us. If the US dollar strengthens during such periods of delay, as happened during the first two months of 2005, the amount of money that we collect in terms of US dollars would be adversely affected.

      We also have exposure to currency risk for cash and cash equivalents held by TKT Europe, which are primarily denominated in Swedish Krona, British Pound and Euro. Any change in the value of the United States dollar as compared to these foreign currencies may have an adverse effect on our liquidity. For example, a hypothetical 10 percent strengthening of the United States dollar relative to these foreign currencies would result in an approximate $3.5 million decrease in our cash and marketable securities held by TKT Europe as of December 31, 2004.

      The biotechnology industry is highly competitive and characterized by rapid and significant technological change. Our competitors include pharmaceutical companies, biotechnology firms, universities, and other research institutions. Many of these competitors have substantially greater financial and other resources than we do and are conducting extensive research and development activities on technologies and products similar to, or competitive with, ours.

      We may be unable to develop technologies and products that are more clinically efficacious or cost-effective than products developed by our competitors. Even if we obtain marketing approval for our product candidates, many of our competitors have more extensive and established sales, marketing, and distribution capabilities than we do. Litigation with third parties, such as our litigation with Amgen, could delay our time to market or preclude us from reaching the market for certain products and enable our competitors to more quickly and effectively penetrate certain markets.

      We believe that the primary competition with respect to our products for the treatment of rare genetic diseases is from biotechnology and smaller pharmaceutical companies. Competitors include Actelion Ltd.,

BioMarin Pharmaceutical Inc., and Genzyme. The markets for some of the potential therapeutics for rare genetic diseases caused by protein deficiencies are quite small. As a result, if competitive products exist, we may not be able to successfully commercialize our products.

      Our primary competition with respect to Replagal is Genzyme’s Fabrazyme. Competition with Genzyme in the market for treatment of Fabry disease is intense. Replagal and Fabrazyme were each granted marketing authorization in the European Union and were also granted co-exclusive orphan drug status in the European Union for up to 10 years. Fabrazyme has received marketing authorization and orphan drug exclusivity in the United States, which, subject to limited criteria for exceptions, excludes Replagal from the United States market until April 2010 at the earliest.

      We believe that our primary competition with respect to our GA-GCB product for the treatment of Gaucher disease will be Genzyme’s product for the treatment of Gaucher disease, Cerezyme. We expect competition with Genzyme in the market for treatment of Gaucher disease will be intense. If approved, GA-GCB also would compete with Zavesca, an approved small molecule therapy developed by Celltech for the treatment of Gaucher disease.

      We have developed several Gene-Activated protein products that would compete with proteins that are currently being marketed by third parties. For instance, in the case of Dynepo, competing products are marketed by Amgen, Johnson & Johnson, F. Hoffmann-La Roche Ltd. (Boehringer Mannheim GmbH), Sankyo Company Ltd., Chugai Pharmaceutical Co., Ltd., and the pharmaceutical division of Kirin Brewery Co., Ltd. in Japan.

      Many of the products against which our Gene-Activated protein products, such as Dynepo and GA-GCB, would compete have well-known brand names, have been promoted extensively, and have achieved market acceptance by third-party payors, hospitals, physicians, and patients. In addition, many of the companies that produce these protein products have patents covering techniques used to produce these products, which have often served as effective barriers to entry in the therapeutic proteins market. As with Amgen and its erythropoietin product, these companies may seek to block our entry into the market by asserting that our Gene-Activated protein products infringe their patents. Many of these companies are also seeking to develop and commercialize new or potentially improved versions of their proteins.

      The commercial success of any of our products for which we obtain marketing approval from the European Commission, the FDA, and other regulatory authorities will depend upon their acceptance by patients, the medical community and third-party payors as clinically effective, safe and cost-effective. It may be difficult for us to achieve market acceptance of our products.

      Other factors that we believe will materially affect market acceptance of our products include:

      If we cannot achieve market acceptance for our products, our business, results of operations and financial condition will be adversely affected.

      The manufacture of proteins is complicated and technical. We have limited manufacturing experience. In order to continue to develop products, apply for regulatory approvals, and commercialize our products, we will need to develop, contract for, or otherwise arrange for the necessary manufacturing capabilities. We have manufactured, and plan to continue in the future to manufacture, the bulk drug substance for Replagal, I2S and GA-GCB for preclinical testing, clinical trials, and commercial sale. We have engaged Lonza to manufacture Dynepo bulk drug substance and intend to engage additional third-party contract manufacturers for the formulation and packaging of Dynepo bulk drug substance into finished product for us.

      Any manufacturing of our products must comply with cGMP as required by the countries in which we intend to sell our products. Before approving an application for marketing authorization for a product, the FDA, relevant European regulatory authority, or any other equivalent foreign regulatory agency will inspect the facilities at which the product is manufactured. If we or our third-party manufacturers do not comply with applicable cGMP, such regulatory agency may refuse to approve our application for marketing authorization. Once the regulatory agency approves a product, we or our third-party manufacturers must continue to comply with cGMP. If we or our third-party manufacturers fail to maintain compliance with cGMP, adverse consequences can result, including suspension or withdrawal of an approved product from the market, operating restrictions, and the imposition of civil and criminal penalties.

      In some of our manufacturing processes, we use bovine-derived serum sourced from Canada and the United States. The discovery of additional cattle in either Canada or the United States with bovine spongiform encephalopathy, or mad cow disease, could cause the regulatory agencies in some countries to impose restrictions on our products, or prohibit us from using our products at all in such countries.

      We rely on one manufacturing facility for the production of our products, other than Dynepo, for both commercial and clinical use. If the Alewife Facility is damaged or destroyed, our ability to supply our products, including Replagal, I2S and GA-GCB for commercial sale and clinical use, could be interrupted, and our sales of Replagal and the timing of our I2S or GA-GCB clinical trials could be adversely affected.

      We are dependent upon third party manufacturers to perform their obligations in a timely manner and in accordance with applicable government regulations. For instance, other than with respect to the manufacturing of the bulk drug substance for Replagal, I2S, and GA-GCB, we rely on contract manufacturing arrangements with third parties for all aspects of the manufacture of our products, including the formulation and packaging of TKT-manufactured bulk drug substance into finished product. Each of these manufacturing arrangements relates to only some aspects of the manufacturing process. In the event that any one of these manufacturers fails to or is unable to comply with its obligations under its manufacturing agreement with us or with its regulatory obligations, and if the manufacturer’s failure materially delays the ultimate production of Replagal, I2S, or GA-GCB or adversely affects our inventory levels, our sales of Replagal or the timing of our I2S or GA-GCB clinical trials could be adversely affected.

      In August 2004, we entered into a manufacturing agreement with Lonza under which Lonza agreed to manufacture Dynepo bulk drug substance at Lonza’s production facility in Slough, United Kingdom. We plan

to enter into arrangements with contract manufacturers for the formulation and packaging of Dynepo bulk drug substance into finished product, work with our contract manufacturers to set up and validate manufacturing processes, and obtain the approval by the European Commission of variations to our existing MAA for Dynepo reflecting the new manufacturing sites. We intend to commercialize Dynepo by entering into arrangements with third parties for the distribution, marketing and sale of Dynepo. If we cannot establish contract manufacturing arrangements on favorable terms or at all, successfully set up and validate manufacturing processes or obtain the approval of the European Commission, we will not be able to sell Dynepo in the European Union when planned, which could result in Dynepo being subject to additional competition and which would adversely affect our cash resources.

      The value of the inventory under the control of our third party contract manufacturers far exceeds the amount of liability such third parties are willing to assume for their negligence. In the event that inventory in the possession of one of our third-party manufacturers is damaged, we could face significant financial losses and we could also experience an interruption in supply which could have a significant adverse affect on our sales.

      There are a limited number of third-party manufacturers capable of manufacturing our protein products with a limited amount of production capacity. As a result, we may experience difficulty in obtaining adequate manufacturing capacity for our needs. If we are unable to obtain or maintain contract manufacturing of our products, or to do so on commercially reasonable terms, we may not be able to complete development of our products or market them.

      Manufacture of proteins, including our products and potential products, is expensive and requires lengthy production cycle times. We build inventory of both bulk drug substance and of finished product in order to ensure the adequate supply to patients of our products and potential products, including Replagal and I2S. Accordingly, we have significant capital invested in inventory. In the event that any of our facilities containing inventory are damaged, the inventory at the facility could be destroyed or damaged. We may not be able to produce or have produced replacement inventory on a timely basis or at all.

      We also have limited experience in managing our supply for Replagal and our other potential products. If we fail to keep an adequate inventory of our products, it is possible that patients could miss treatments, which could have an adverse effect on our ability to sell our products and on our clinical trials. Conversely, if we are unable to sell our high-cost inventory in a timely manner, or if our high-cost inventory were to be destroyed or expire, we could experience cash flow difficulties and financial losses.

      Some of the raw materials used to manufacture our products are expensive and are available from a small number of suppliers. If we fail to keep an adequate inventory of our raw materials, it is possible that we would be unable to manufacture our products in a timely manner. Conversely, if we are unable to use our high-cost raw materials, or if our high-cost raw materials were to be destroyed or expire, we could experience cash flow difficulties and financial losses.

      In certain countries, including the countries of the European Union, Australia, and Canada, the pricing of prescription pharmaceuticals and the level of reimbursement are subject to governmental control. In some countries, it can take an extended period of time to establish and obtain reimbursement, and reimbursement approval may be required at the individual patient level, which can lead to further delays. In addition, in some

countries such as Italy, Spain and Belgium, it normally takes an extended period of time to collect payment even after reimbursement has been established.

      In the United States and elsewhere, the availability of reimbursement by governmental and other third-party payors affects the market for any pharmaceutical product. These third-party payors continually attempt to contain or reduce the costs of health care by challenging the prices charged for medical products and services. For example, in Germany, the reimbursement authority unilaterally reduced the price that it would reimburse for all pharmaceutical products, including Replagal, by six percent in 2003 and an additional 10 percent in 2004. In addition, in Australia, the reimbursement authorities have limited their overall budget for purchase of enzyme replacement therapy for Fabry disease, including both Replagal and Fabrazyme, to $10 million Australian dollars. In Canada, the Company is seeking reimbursement from provincial authorities. The federal reimbursement authority in Canada, which is only authorized to make recommendations regarding reimbursement to provincial authorities, issued a non-binding recommendation that the provincial governments not provide reimbursement for Replagal in Canada. Governmental and reimbursement authorities or third-party payors in other countries may attempt to control costs by limiting access to pharmaceutical products such as Replagal and the other products we are developing or by narrowing the class of patients for which a pharmaceutical product such as Replagal or the other products we are developing may be prescribed. If we are not able to obtain pricing and reimbursement at satisfactory levels for our products that receive marketing approval, our revenues and results of operations will be adversely affected. Once we obtain reimbursement, there is no assurance that the reimbursement rates for a particular country will be maintained. If rates are lowered, our revenues and results of operations could be adversely affected.

      We expect that the prices for many of our products, when commercialized, including in particular our products for the treatment of rare genetic diseases, may be high compared to other pharmaceutical products. For example, we have established pricing and reimbursement for substantially all patients receiving Replagal in the European Union. Country-by-country pricing was initially established as the local currency equivalent of between approximately $165,000 and $175,000 per patient per year for an average patient weighing 70 kilograms. The price generally remains fixed in the local currencies and varies in United States dollars with exchange rate fluctuations. We may encounter particular difficulty in obtaining satisfactory pricing and reimbursement for products for which we seek a high price.

      We also may experience pricing pressure with respect to Replagal and other products for which we may obtain marketing approval in the United States due to the trend toward managed health care, the increasing influence of health maintenance organizations and legislative proposals. We may not be able to sell our products profitably if reimbursement is unavailable or is limited in scope or amount.

      We have limited sales and marketing experience and capabilities, and limited resources to devote to sales and marketing activities. We currently have no sales force in the United States. In order to market our products, we will need to develop this experience and these capabilities or rely upon third parties to perform these functions. We are seeking a collaborator to distribute, market and sell Dynepo in Europe. If we are unable to enter into a collaboration on satisfactory terms or on a timely basis, sales of Dynepo will be delayed and our business will be adversely affected. If we rely on third parties to distribute, market or sell our products, our success will be dependent upon the efforts of these third parties in performing these functions. In many instances, we may have little or no control over the activities of these third parties in distributing, marketing and selling our products. If we conduct these activities directly, as we do with Replagal and as we plan to do with respect to some of our potential products, including I2S, we may not be able to recruit and maintain sales and marketing personnel, which would adversely affect our sales efforts.

      While we do not feel that any single individual is indispensable, our success is highly dependent on the retention of principal members of our technical, commercial, and administrative staff.

      Our future growth will require hiring a significant number of qualified technical, commercial and administrative personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we are not able to continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow.

      We are parties to collaborative agreements with third parties relating to certain of our principal products. We are relying on Genzyme to develop and commercialize I2S in Japan and certain other countries in Asia; on Aventis to develop, obtain regulatory approvals for, and manufacture, market, and sell Dynepo in the United States; and Sumitomo to develop and commercialize Replagal in Japan, Korea, China and Taiwan. We also use third party distributors to distribute Replagal in many areas of the world including Australia, Canada, Europe, and Israel. Our collaborators may not devote the resources necessary or may otherwise be unable or unwilling to complete development and commercialization of these potential products. Our existing collaborations are subject to termination without cause on short notice under specified circumstances. In some cases, we may not receive payments contemplated in the agreements with our collaborators if our collaborators fail to achieve certain regulatory and commercial milestones.

      Our existing collaborations and any future collaborative arrangements with third parties may not be scientifically or commercially successful. Factors that may affect the success of our collaborations include the following:

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

      We have three significant customers, Healthcare at Home Limited, the University of Mainz, and Globopharm AG, who accounted for 16%, 13% and 8% of our product sales respectively in 2004. The same customers accounted for 18%, 12% and 12% of our product sales in 2003 and 8%, 22%, and 6% of the Company’s product sales in 2002.

      The loss of any significant customer may significantly lower our revenues and adversely affect our business, results of operations and financial conditions.

      Our business exposes us to the risk of product liability claims that is inherent in the manufacturing, testing, and marketing of human therapeutic products. We maintain clinical trial liability insurance and product liability insurance in amounts that we believe to be reasonable. This insurance is subject to deductibles and coverage limitations. We may not be able to obtain additional insurance or maintain insurance on acceptable terms or at all. Moreover, any insurance that we do obtain may not provide adequate protection against potential liabilities. If we are unable to obtain insurance at acceptable cost or otherwise protect against potential product liability claims, we may be exposed to significant liabilities, which may materially adversely affect our business and financial position. These liabilities could prevent or interfere with our product commercialization efforts.

      In connection with our review of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we have identified material weaknesses in our internal control over financial reporting relating to the information technology environment, foreign currency fluctuation and tax issues at our European sales and marketing subsidiary, TKT Europe. Because we began most of our Section 404 compliance work for TKT Europe after we completed the purchase of the minority interest in TKT Europe in October 2004, we have not completed our evaluation of our internal control over financial reporting and are continuing to evaluate and test our internal control over financial reporting. As a result, we may identify additional material weaknesses.

      We are required to file an amendment to this annual report on Form 10-K by May 2, 2005. Such amendment would include management’s report on our internal control over financial reporting and a report from Ernst & Young LLP, our independent registered public accounting firm, reporting on our internal control over financial reporting and attesting to management’s report. If we fail to file such an amendment by May 2, 2005, we will be in violation of our reporting requirements under the U.S. securities laws and our ability to conduct financings and take other actions will be limited.

      Material weaknesses in our internal control over financial reporting could result in material misstatements in our financial statements not being prevented or detected. We may experience difficulties or delays in completing remediation or may not be able to successfully remediate the material weaknesses at all.

      Any material weakness or unsuccessful remediation could affect investor confidence in the accuracy and completeness of our financial statements, which in turn could harm our business and have an adverse effect on our stock price and our ability to raise additional funds.

      As part of our compliance obligations under Section 404 of Sarbanes-Oxley with respect to internal control over financial reporting, as well as an effort to increase operational efficiencies, we are working to implement an enterprise resource planning, or ERP, system. If we are not able to validate the new ERP system in time for us to meet our Section 404 compliance requirements for 2005 under Sarbanes-Oxley, potential investors could lose confidence in our financial reports, which could harm our business and have an adverse effect on our stock price. In addition, we have invested substantial financial and human resources in the ERP implementation project. If we cannot successfully integrate and test the system, and train personnel, we could incur financial losses as well as operational inefficiencies that could adversely affect our business.

Financing Risks

      We have experienced significant operating losses since our inception in 1988. As of December 31, 2004, our accumulated deficit was $506.5 million. We had net losses of $65.9 million, $75.2 million and $129.8 million in 2004, 2003 and 2002, respectively.

      We expect that we will continue to incur substantial losses and that, until we have substantial product sales, our cumulative losses will continue to increase. We recorded $77.4 million, $57.2 million and $34.7 million in product sales for the years ended December 31, 2004, 2003 and 2002, respectively. We expect that the losses that we incur will fluctuate from quarter to quarter and that these fluctuations may be substantial.

      Our cash requirements for operating activities, financing activities and investment activities have historically exceeded our internally generated funds. We expect that our cash requirements for such activities will continue to exceed our internally generated funds until we are able to generate substantially greater product sales.

      We expect, based on our current operating plan, that our existing capital resources and anticipated proceeds from collections on existing accounts receivable and on future accounts receivable from product sales, anticipated cash payments under collaborative agreements, and interest income, will be sufficient to fund our operations into 2006. However, our existing capital resources and our other anticipated sources of capital

may not provide adequate funds to satisfy our capital requirements. Our future capital requirements will depend on many factors, including the following:

      Because we expect to incur substantial operating losses in the future, we may need to seek additional funding for our operations. We may do so through collaborative arrangements and public or private debt or equity financings or lease arrangements related to facilities and capital equipment. Additional financing may not be available to us on acceptable terms, if at all. If we do not obtain additional financing, our financial condition may be adversely affected.

      If we raise additional funds by issuing equity securities, further dilution to our then existing stockholders will result. If we raise additional funds by issuing debt securities, our total indebtedness will increase and we may subject ourselves to covenants that limit or restrict our ability to take specified actions, such as incurring additional debt or making capital expenditures. In addition, the terms of the financing may adversely affect the holdings or the rights of our stockholders. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs or some of our commercialization activities. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to certain of our technologies, product candidates, or products which we would otherwise pursue on our own.

      We incurred $94 million of indebtedness when we sold the Notes. We may also incur additional long-term indebtedness or obtain working capital lines of credit to meet future financing needs. This indebtedness could have significant negative consequences for our business, operating results and financial condition, including:

      If we experience a decline in revenues, we could have difficulty making required payments on the Notes and any indebtedness which we may incur in the future. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of the Notes or any indebtedness which we may incur in the future, we would be in default, which would permit the holders of the Notes and any such indebtedness to accelerate the maturity of the Notes and any such indebtedness and could cause defaults under the Notes or any such indebtedness we may incur in the future. Any default under the Notes or any indebtedness which we may incur in the future could have a material adverse effect on our business, operating results and financial condition.

      Our common stock has been and in the future may be subject to substantial price volatility. The value of your investment could decline due to the effect of many factors upon the market price of our common stock, including but not limited to:

      In addition, the stock market has experienced significant price and volume fluctuations, and the market prices of biotechnology companies have been highly volatile. Moreover, broad market and industry fluctuations that are not within our control may adversely affect the trading price of our common stock. During the period from January 1, 2003 to December 31, 2004, the closing sale price of our common stock on the Nasdaq National Market ranged from a low of $3.80 per share to a high of $26.08 per share. You must be willing to bear the risk of significant fluctuations in the price of our common stock and the risk that the value of your investment in our securities could decline.

      Section 203 of the Delaware General Corporation Law and our certificate of incorporation, by-laws and stockholder rights plan contain provisions that might enable our management to resist a takeover of our company or discourage a third party from attempting to take over our company. These provisions include the inability of stockholders to act by written consent or to call special meetings, and the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval. In addition, our employee stock option plans contain provisions which accelerate the vesting of employee stock options under specified circumstances following a change in control.

      These provisions could have the effect of delaying, deferring, or preventing a change in control of us or a change in our management that securityholders may consider favorable or beneficial. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock or our other securities.

      The Company maintains its investment portfolio consistent with its investment policy, which has been approved by the Board of Directors. The Company’s investment portfolio principally consists of investments in United States government and agency obligations. The Company’s investments also are subject to interest rate risk and will decrease in value if market interest rates increase. However, due to the relatively short duration of the Company’s investments, interest rate risk is mitigated. The Company does not own derivative financial instruments in its investment portfolio. Accordingly, the Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments which would require disclosure under this item.

      As of December 31, 2004, the Company did not have any off-balance sheet arrangements.

      The Company has exposure to currency risk for Replagal sales in Europe. Country by country pricing was initially established as the local currency equivalent of between approximately $165,000 and $175,000 per patient per year for an average patient weighing 70 kilograms. The price generally remains fixed in the local currencies and varies in United States dollars with exchange rate fluctuations. Foreign currency fluctuations increased sales and gross margins by $6.5 million in 2004 as compared to 2003.

      The Company also has exposure to currency risk for cash and cash equivalent balances in Europe. As of December 31, 2004, the Company had approximately $38,117,000 denominated principally in Euros, British Pounds and Swedish Kronor. A hypothetical 10 percent increase in currency rates relative to the United States dollar would result in an approximate $3.5 million decrease in the fair value of the Company’s cash and cash equivalents balances denominated in Swedish Kronor, British Pounds and Euros as of December 31, 2004. The Company currently does not hedge its cash currency exposure.

      The following financial statements and supplementary data are included as part of this Annual Report on Form 10-K:

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Transkaryotic Therapies, Inc.

We have audited the accompanying consolidated balance sheets of Transkaryotic Therapies, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transkaryotic Therapies, Inc. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

Boston, Massachusetts

March 15, 2005

TRANSKARYOTIC THERAPIES, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Consolidated Financial Statements.

TRANSKARYOTIC THERAPIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying Notes to Consolidated Financial Statements.

TRANSKARYOTIC THERAPIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY