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

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FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

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Commission
For the fiscal year ended June 30, 2002 File Number 0-12957

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

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

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

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

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

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

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

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

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

The aggregate market value of the Common Stock, par value $.01 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on September 18, 2002 was approximately $876,693,848. There is no market
for the Series A Cumulative Convertible preferred stock, the only other class of
stock outstanding.

As of September 18, 2002, there were 42,999,823 shares of Common Stock,
par value $.01 per share, outstanding.

The Index to Exhibits appears on page 47.

Documents Incorporated by Reference

The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on December 3, 2002, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year, has been incorporated by reference, in whole or in part, into Part III
Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.



ENZON, INC.

2002 Form 10-K Annual Report

TABLE OF CONTENTS

Page

PART I

Item 1. Business 3
Item 2. Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 44
Item 8. Financial Statements and Supplementary Data 45
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 45

PART III

Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners and Management 46
Item 13. Certain Relationships and Related Transactions 46
Item 14. Controls and Procedures 46

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 47

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

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


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PART I

Item 1. BUSINESS

Overview

We are a biopharmaceutical company that develops and commercializes
products for life-threatening diseases on our own and through strategic
partnerships. We are currently executing a dual-prong strategy designed to
broaden our revenue stream, expand our product pipeline, and enhance our
organizational capabilities through both internal efforts and the execution of
strategic transactions. First, internally we are focused on the advancement of
our product pipeline through our continued investment in research and
development and the application of our proprietary PEG and SCA technologies. Our
PEG, or polyethylene glycol, technology is used to improve the delivery, safety,
and efficacy of proteins and small molecules with known therapeutic efficacy.
Our single-chain antibody, or SCA, technology is used to discover and produce
antibody-like molecules that can offer many of the therapeutic benefits of
monoclonal antibodies while addressing some of their limitations. Second,
through strategic transactions we plan to broaden our revenue stream and further
expand our product pipeline by accessing already marketed products and products
in development. Our strategic initiatives will also seek using alliances to
enhance our organization by accessing additional technologies and extending our
product development and commercialization capabilities.

To date we have developed three products that utilize our proprietary PEG
technologies and have several under development.

PEG-INTRON(R) is a PEG-enhanced version of Schering-Plough's
alpha-interferon product, INTRON(R) A. We have designed PEG-INTRON to allow for
less frequent dosing and to yield greater efficacy as compared to INTRON A. Our
worldwide partner for PEG-INTRON, Schering-Plough, has received approval of
PEG-INTRON as a monotherapy and for use in combination with REBETOL(R)
(ribavirin, USP) Capsules for the treatment of chronic hepatitis C in adult
patients not previously treated with alpha-interferon in the United States and
the European Union. The product is currently in Phase III clinical trials for
hepatitis C in Japan and is also being evaluated for use as long term
maintenance therapy in cirrhotic patients that have failed previous treatment
(COPILOT study). A Phase III clinical trial is also being conducted for
PEG-INTRON for the treatment of high risk malignant melanoma, and earlier stage
clinical trials of PEG-INTRON are being conducted for other indications,
including HIV. Schering-Plough has reported that its worldwide sales of INTRON
A, REBETOL and PEG-INTRON for all indications in 2001 totaled $1.4 billion.

PROTHECAN(R) is a PEG-enhanced version of camptothecin, a compound in the
class of molecules called topoisomerase I inhibitors. Camptothecin has been
shown in clinical testing to be potent against certain tumor types, but its
clinical development has been discontinued due to significant side effects and
poor solubility. We have shown in preclinical studies that PROTHECAN
preferentially accumulates in tumors and has comparable or better efficacy
compared to camptothecin as well as marketed topoisomerase I inhibitors. We are
currently conducting Phase II clinical trials for PROTHECAN in small cell lung,
non-small cell lung and pancreatic cancers as a monotherapy. We plan to initiate
additional clinical trails for PROTHECAN in other cancer indications in order to
fully explore PROTHECAN'S clinical potential.

We have initiated a phase I program for PEG-paclitaxel, a PEG-modified
version of paclitaxel.

We commercialize two additional products based on our PEG technology:
ADAGEN(R) for the treatment of a congenital enzyme deficiency disease called
Severe Combined Immunodeficiency Disease, or SCID, and ONCASPAR(R) for the
treatment of acute lymphoblastic leukemia. Each of these products is a
PEG-enhanced version of a naturally occurring enzyme. Both products have been
marketed for several years and have demonstrated the safe and effective
application of our PEG technology.


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Our second proprietary technology, SCAs, are genetically engineered
proteins which possess the antigen binding domains of a monoclonal antibody and
as a result its binding specificity and affinity. SCAs are designed to expand on
the therapeutic and diagnostic applications possible with monoclonal antibodies.
Preclinical studies have shown that SCAs allow for greater tissue penetration
and faster clearance from the body. During fiscal 2002 we entered into a broad
product development agreement with Micromet AG, a private German company focused
on the development of antibody products with complementary intellectual property
and development expertise in the area of SCAs. We believe that we possess strong
intellectual property in the area of SCAs. The most clinically advanced SCA
based on our technology is being developed by one of our licensees, Alexion
Pharmaceuticals. Alexion has commenced enrollment in a Phase III clinical trial
for this SCA in patients undergoing cardiopulmonary bypass surgery. Alexion is
also evaluating this SCA for myocardial infarction, for which two Phase II
clinical trials are ongoing.

Our Strategy

To build a fully integrated biopharmaceutical company and to further
realize the potential value of our PEG and SCA technologies, we intend to pursue
the following strategic initiatives:

o Continue to identify macro and small molecules of known therapeutic
value that we believe can be improved by our PEG technology and
develop PEG-enhanced versions of such compounds;

o Acquire already marketed products and build a marketing and sales
infrastructure to enhance our profitability;

o Acquire products under development and technologies which are
complementary to our technologies and clinical focus;

o Enter into development agreements with third parties to apply our
PEG technology to their existing compounds; and

o Advance our SCA technology through our Micromet collaboration.

PEG Technology

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

These advantages include:

o extended circulating life,

o lower toxicity,

o increased drug stability, and

o enhanced drug solubility.


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[GRAPHIC OMITTED]

A depiction of a PEG-enhanced molecule.

For years, we have applied and continually improved our PEG technology to
modify the pharmacologic characteristics of potential or existing protein
therapeutics. We modify proteins with PEG for the purpose of prolonging life and
reducing toxicities. In some cases, PEG can render a protein therapeutically
effective, where the unmodified form had only limited clinical utility. For
example, proteins frequently induce an immunologic response. When PEG is
attached, it disguises the compound and reduces recognition by the patient's
immune system. In addition, frequency of dosing can be reduced and the delay in
clearance can achieve an improved therapeutic effect due to the prolonged
exposure to the protein therapeutic.

We have also developed a PEG technology that allows us to apply PEG to
small molecules. We are currently applying this technology to develop
PEG-enhanced versions of anti-cancer compounds. Like proteins, many anti-cancer
compounds of potentially significant therapeutic value possess undesired
pharmacologic characteristics such as toxicity, poor solubility, and limited
half-life. The attachment of PEG to anti-cancer compounds extends their
circulatory life and, at the same time, greatly increases the solubility of
these compounds. We attach PEG to anti-cancer compounds by means of chemistries
that are designed to temporarily inactivate the compound, and then release it
over time, releasing the compound in the proximity of the targeted tissue. By
inactivating and then reactivating the compound in the body we create a prodrug
version of such compounds. These attributes may significantly enhance the
therapeutic value of new chemicals, drugs already marketed by others and
off-patent drugs with otherwise limited utility. We believe that this technology
has broad usefulness and that it can be applied to a wide range of small
molecules, such as:

o cancer chemotherapy agents,

o antibiotics,

o anti-fungals, and

o immunosuppressants.

We have significant expertise and intellectual property in the methods by
which PEG can be attached to a compound, the selection of appropriate sites on
the compound to which PEG is attached, and the amount and type of PEG used. If
PEG is attached to the wrong site on the protein, it can result in a loss of the
protein's activity or therapeutic effect. Similarly, inappropriate linkers or
the incorrect type or amount of PEG applied to a compound will typically fail to
produce the desired outcome. Given our expertise, we are able to tailor the PEG
technology to produce the desired results for the particular substance being
modified.


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PEG Products

PEG-INTRON

PEG-INTRON is a PEG-enhanced version of Schering-Plough's recombinant
alpha-interferon product called INTRON A. We have modified the INTRON A compound
by attaching PEG to it. The effect was not only a prolonged half life allowing
for once weekly dosing, but also greater efficacy as compared to unmodified
INTRON-A. Schering-Plough currently markets INTRON A for 16 major antiviral and
oncology indications worldwide. Historically the largest indication for INTRON A
is hepatitis C. INTRON A is also used to treat certain types of cancer. Our
worldwide partner for PEG-INTRON, Schering-Plough has received approval for the
treatment of adult patients with chronic hepatitis C as a monotherapy and in
combination with REBETOL (ribavirin, USP) capsules in the United States and
European Union. Schering-Plough is currently conducting late-stage clinical
trials for the treatment of hepatitis C in Japan. Schering-Plough is also
evaluating PEG-INTRON as a long term maintenance therapy (COPILOT study) and in
combination with REBETOL in hepatitis C patients who did not respond to or had
relapsed following previous interferon-based therapy. A Phase III clinical trial
is also being conducted for PEG-INTRON for the treatment of malignant melanoma
and earlier stage clinical trials of PEG-INTRON are being conducted for other
indications, including HIV.

The COPILOT (Colchicine versus PEG-INTRON Long-Term) study, is evaluating
maintenance therapy with PEG-INTRON in hepatitis C patients with advanced
cirrhosis. In this study, 250 patients with advanced cirrhosis who had
previously failed interferon-based therapy were randomized to two groups: 130
patients received once-weekly PEG-INTRON (0.5 mcg/kg) and 120 patients received
twice-daily colchicine (0.6 mg). At the end of one year of treatment, the
PEG-INTRON group had a reduction in detectable virus (HCV RNA), while the virus
levels in the colchicine group remained the same. These findings may be
important for hepatitis C patients who have not responded to previous therapy.

Schering-Plough has reported that its worldwide sales of INTRON A, REBETOL
and PEG-INTRON for all indications in 2001 totaled $1.4 billion, with the
majority of sales coming from hepatitis C.

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

Hepatitis C

According to an article published in the New England Journal of Medicine,
approximately 3.9 million people in the United States are infected with the
hepatitis C virus. Approximately 2.7 million of these people are characterized
as having chronic hepatitis C infection. We believe that the number of people
infected with the hepatitis C virus in Europe is comparable to that in the
United States. It is also estimated that approximately 2.0 million people in
Japan are infected with hepatitis C. According to the World Health Organization,
there were approximately 170 million chronic cases of hepatitis C worldwide. A
substantial number of people in the United States who were infected with
hepatitis C more than 10 years ago are thought to have contracted the virus
through blood transfusions. Prior to 1992, the blood supply was not screened for
the hepatitis C virus. In addition, the majority of people infected with the
virus are thought to be unaware of the infection because the hepatitis C virus
can incubate for 10 or more years before patients become symptomatic.
Schering-Plough estimates that only 10 to 15 percent of patients with hepatitis
C have been treated.

Prior to the introduction of PEG-INTRON, the standard of care for
hepatitis C infection was alpha-interferon administered three times per week for
one year in combination with ribavirin, another antiviral drug. The
alpha-interferon plus ribavirin therapy was approved in the United States for
the treatment of hepatitis C in December 1998. Prior to such approval, hepatitis
C infection was typically treated with alpha-interferon alone. In clinical
studies, alpha-interferon stand-alone therapy for 48 weeks has reduced viral
loads below the detectable levels in 10% to 15% of patients treated. In clinical
studies, alpha-interferon


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plus ribavirin in combination therapy has reduced viral loads below detectable
levels in 31% to 38% of patients treated. The clinical efficacy of
alpha-interferon, both as a stand-alone or combination therapy, has been limited
by serious side effects, which include flu-like symptoms, gastro-intestinal
disorders and depression, in addition to undesirable dosing requirements. The
requirement of three times per week dosing for the treatment of hepatitis C has
also limited patient compliance.

Schering-Plough reported the following results of clinical trials
conducted with PEG-INTRON for the treatment of hepatitis C. In a clinical study
comparing PEG-INTRON to INTRON A as stand-alone therapy, 24% of patients treated
with PEG-INTRON had sustained virologic response at the end of the 24 week
follow-up period following completion of 48 weeks of therapy, compared to 12% of
patients treated with INTRON A who had sustained virologic response. Sustained
virologic response is the reduction of viral loads below detectable levels. In a
clinical study comparing PEG-INTRON plus REBETOL to REBETRON Combination Therapy
containing REBETOL Capsules and INTRON A, when analyzed based upon optimal body
weight dosing, 61% of patients treated with PEG-INTRON plus REBETOL had
sustained virologic response compared to 47% of patients treated with REBETRON
combination therapy who had sustained virologic response. When the results of
this clinical trial were analyzed without using optimal body weight dosing, 54%
of the patients treated with PEG-INTRON plus REBETOL had sustained virologic
response compared to 47% of patients treated with REBETRON who had sustained
virologic response. Of the patients in this study who received at least 80% of
their treatment of PEG-INTRON plus REBETOL, 72% had sustained virologic response
compared to sustained virologic response in 46% of patients who received less
than 80% of their treatment.

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

Hoffmann-LaRoche is developing a PEGylated version of its
alpha-interferon, product ROFERON(R)-A, called PEGASYS(R). Schering-Plough and
Hoffmann-LaRoche have been the major competitors in the global alpha-interferon
hepatitis C market since the approval of INTRON A and ROFERON-A. PEGASYS is
being developed by Hoffmann-LaRoche as a monotherapy as well as in combination
with ribavirin for the treatment of hepatitis C. PEGASYS is expected to compete
with PEG-INTRON on a global basis. PEGASYS was approved in the European Union in
June 2002 and is currently under review by the FDA for its use as a monotherapy
and in combination with ribavirin in the United States. Both products have
similar characteristics and efficacy. Hoffmann-La Roche has reported that its
Phase III study, which evaluated the combination of PEGASYS in combination with
one of two doses of ribavirin (depending on body weight) for the treatment of
hepatitis C achieved an overall sustained response of 56%.

Cancer

INTRON A is also used in the treatment of cancer. Of the 16 indications
for which INTRON A is approved throughout the world, 12 are cancer indications.
Currently, INTRON A is approved in the U.S. for three cancer indications and
used in some cases for other indications on an off-label basis.

INTRON A may be prescribed in the U.S. for the treatment of late stage
malignant melanoma, follicular NHL (low grade), chronic myelogenous leukemia and
AIDS-related Kaposi's sarcoma.

In June 2001, we reported that Schering-Plough completed its Phase III
study comparing PEG-INTRON to INTRON A in patients with newly diagnosed chronic
myelogenous leukemia, or CML. In this study, PEG-INTRON administered once weekly
demonstrated clinical comparability to INTRON A administered daily, with a
comparable safety profile. Despite demonstrating clinical comparability, the
efficacy results for PEG-INTRON did not meet the protocol-specified statistical
criteria for non-inferiority, the primary endpoint of the study. The major
cytogenic response rates at month 12 for both PEG-INTRON


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and INTRON A were similar to those previously reported in the literature for
alpha-interferon.

In addition to conducting this Phase III study of PEG-INTRON in CML,
Schering-Plough has advised us that it is working with independent investigators
to research initiatives with PEG-INTRON in oncology indications through a
comprehensive medical affairs program. This program includes ongoing studies
with PEG-INTRON in high-risk melanoma, myeloma and non-Hodgkin's lymphoma, both
as and in combination with other agents. A Phase III clinical trial of
PEG-INTRON for high-risk malignant melanoma is ongoing.

Published data from a Phase I clinical trial of PEG-INTRON in various
cancer types showed that some patients who previously did not respond to
unmodified INTRON A treatment did respond to PEG-INTRON. In that trial,
PEG-INTRON was administered once per week as opposed to up to five times per
week, which is a typical therapy regimen using unmodified INTRON A, and we
expect that the once per week dosing regimen may be used in treating various
cancer types.

Potential Other Indications

We believe that PEG-INTRON may have potential in treating other diseases,
including HIV, hepatitis B and multiple sclerosis. A Phase I clinical trial of
PEG-INTRON has been conducted for HIV. In this study, 58% of the 30 patients had
substantial reductions in their levels of HIV after adding a weekly injection of
PEG-INTRON to their combination treatments.

PROTHECAN

PROTHECAN is a PEG-enhanced version of a small molecule called
camptothecin, which is an anticancer compound in the class of topoisomerase I
inhibitors. Camptothecin was originally developed at the National Institutes of
Health and is now off patent; it is a potent topoisomerase I inhibitor.

For many years camptothecin has been known to be a very effective
cytotoxic agent but its low solubility has limited its use. Two camptothecin
derivatives, topotecan and irinotecan, have been approved by the FDA for the
treatment of small-cell lung, ovarian and colorectal cancers. These two products
together achieved 2001 worldwide sales of approximately $881 million.

We have linked PEG and camptothecin so that it forms a prodrug. The PEG
component confers a long circulating half life and allows the compound to
accumulate in tumor sites. Animal tests have shown that PEG-camptothecin has
better efficacy compared to camptothecin, as well as other topoisomerase I
inhibitors. We are currently conducting a Phase II clinical trial of PROTHECAN
in small cell lung, non-small cell lung and pancreatic cancers as a monotherapy.
We also expect to initiate additional Phase II clinical trials for PROTHECAN in
gastric and other cancer indications.

PEG-paclitaxel

PEG-paclitaxel is a PEG-modified version of paclitaxel formulated for ease
of administration. TAXOL (paclitaxel) is a chemotherapeutic agent used to treat
various types of cancers, including ovarian, breast, non-small cell lung, and
AIDS-related Kaposi's sarcoma. In 2001, sales of TAXOL were reported to be
approximately $1.2 billion. Using our proprietary PEG technology, our scientists
have modified paclitaxel through the chemical attachment of PEG giving
PEG-paclitaxel prodrug attributes. PEG-paclitaxel can be delivered without the
need for solubilizing agents or pre-medications. TAXOL, a commercial
formulation of paclitaxel, contains the solubilizing agent CREMOPHOR and
patients are required to take pre-medications prior to treatment to reduce the
potential for adverse reactions, which may be caused by CREMOPHOR.


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In May 2001, we initiated the patient dosing in a Phase I clinical trial
for PEG-paclitaxel. The trial is designed to determine the safety, tolerability
and pharmacology of PEG-paclitaxel in patients with advanced solid tumors and
lymphomas. Currently, we are evaluating the pharmacokinetic data from this
trial.

ADAGEN

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

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

We are marketing ADAGEN on a worldwide basis. We utilize independent
distributors in certain territories including the United States, Europe and
Australia. Currently, 76 patients in twelve countries are receiving ADAGEN
therapy. We believe many newborns with ADA-deficient SCID go undiagnosed and we
are therefore focusing our marketing efforts for ADAGEN on new patient
identification. Our sales of ADAGEN for the fiscal years ended June 30, 2002,
2001 and 2000 were $13.4 million, $13.4 million and $12.2 million respectively.

Beginning in September 2002, the United States Department of Agriculture
or USDA will require all animal sourced materials shipped to the United States
from any European country to contain a veterinary certificate that the product
is BSE free. We currently have more than a year's supply of ADA enzyme in
inventory and are investigating the ability for our supplier which processes our
ADA enzyme supply in Germany to comply with or obtain a waiver of this
requirement. We cannot guarantee that such certificate or waiver will be
available. If our supplier is unable to supply us with ADA enzyme, it is likely
that we will be unable to produce or distribute ADAGEN once we utilize our
current inventory of ADA enzyme.


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ONCASPAR

ONCASPAR, our second FDA-approved product, is a PEG-enhanced version of a
naturally occurring enzyme called L-asparaginase. It is currently approved in
the U.S., Canada, and Germany and is used in conjunction with other
chemotherapeutics to treat patients with acute lymphoblastic leukemia who are
hypersensitive, or allergic, to native, or unmodified, forms of L-asparaginase.
During June 2002 we amended our license agreement with Aventis
(formerly Rhone-Poulenc Rorer Pharmaceuticals) to acquire the rights to market
and distribute ONCASPAR in the U.S., Canada, Mexico and the Asia/Pacific region.
Under the amended agreement we acquired the rights to market and distribute
ONCASPAR in the United States and Canada in return for a payment of $15 million
and a royalty of 25% on our net sales of the product through 2014. MEDAC GmbH
has the exclusive right to market ONCASPAR in Europe.

L-asparaginase is an enzyme, which depletes the amino acid asparagine upon
which certain leukemic cells are dependent for survival. Other companies market
unmodified L-asparaginase in the U.S. for pediatric acute lymphoblastic leukemia
and in Europe to treat adult acute lymphoblastic leukemia and non-Hodgkin's
lymphoma, as well as pediatric acute lymphoblastic leukemia.

The therapeutic value of unmodified L-asparaginase is limited by its short
half-life, which requires every-other-day injections, and its propensity to
cause a high incidence of allergic reactions. We believe that ONCASPAR offers
significant therapeutic advantages over unmodified L-asparaginase. ONCASPAR has
a significantly increased half-life in blood, allowing every-other-week
administration, and it causes fewer allergic reactions. Based upon the current
use of unmodified L-asparaginase, we believe that ONCASPAR may potentially be
used in other cancer indications, including lymphoma.

Other PEG Products

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

SCA Proteins

General

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

SCAs are genetically engineered proteins designed to expand on the
therapeutic and diagnostic applications possible with monoclonal antibodies.
SCAs have the binding specificity and affinity of monoclonal antibodies and, in
their native form, are about one-fifth to one-sixth of the size of a monoclonal
antibody, typically giving them very short half-lives. We believe that human
SCAs offer the following benefits compared to most monoclonal antibodies:

o faster clearance from the body,

o greater tissue penetration for both diagnostic imaging and therapy,


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

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

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

o the potential for non-parenteral application.

[GRAPHIC OMITTED]

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

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

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

SCAs Under Development

During April 2002 we entered into a multi-year strategic collaboration
with Micromet AG a private company based in Munich, Germany. Under the terms of
the agreement Enzon and Micromet will combine their significant patent estates
and complementary expertise in single chain antibody technology. The
collaboration will focus on the development of two clinical product candidates
within the first 30 months of the collaboration. Together with Micromet, we are
in the process of establishing a new 25 person research and development unit in
Micromet's facility in Germany. Enzon and Micromet will share the costs of the
collaboration equally, as well as in any future revenues generated through the
collaboration.


11


To date, we have granted SCA product licenses to more than 15 companies,
including Bristol-Myers Squibb, Baxter Healthcare and the Gencell Division of
Aventis. These product licenses generally provide for upfront payments,
milestone payments and royalties on sales of any SCA products developed. Some of
the areas being explored with SCAs are cancer therapy, cardiovascular
indications and AIDS. As part of our collaboration with Micromet, we are
combining our core intellectual property in SCAs with Micromet's key SCA linker
and fusion protein patents. Micromet will institute a comprehensive licensing
program on behalf of the partnership and Micromet and Enzon will jointly market
their combined SCA IP to third parties and share equally in the costs and
revenues.

One of our licensees, Alexion Pharmaceuticals, Inc., is developing an SCA
directed against complement protein C5, which is a component of the body's
normal defense against foreign pathogens. Inappropriate complement activation
during cardiopulmonary bypass and myocardial infarction can lead to clinical
problems. In Phase I trials during cardiopulmonary bypass, Alexion reported that
this SCA improved cardiac and neurological function and reduced blood loss.
Alexion reported that it and its partner, Procter & Gamble, have completed a
Phase IIb study and commenced enrollment in a pivotal Phase III study, to
evaluate this SCA in patients undergoing cardiopulmonary bypass surgery and are
currently conducting two additional 1,000 patient Phase II trials to evaluate
this SCA in myocardial infarction patients. This product has been given fast
track review status by the FDA for bypass surgery.

Licenses and Strategic Partnerships

Schering-Plough Agreement

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

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

Schering-Plough's obligation to pay us royalties on sales of PEG-INTRON
terminates, on a country-by-country basis, upon the later of the date the last
patent of ours to contain a claim covering PEG-INTRON expires in the country or
15 years after the first commercial sale of PEG-INTRON in such country.

Schering-Plough has the right to terminate this agreement at any time if
we fail to maintain the requisite liability insurance of $5,000,000.

Aventis License Agreements

During June 2002 we amended our license agreement with Aventis (formerly
Rhone-Poulenc Rorer Pharmaceutical Inc.) to reacquire the rights to market and
distribute ONCASPAR in the United States, Mexico, Canada and the Asia/Pacific
region. In return for the marketing and distribution rights we


12


paid Aventis $15 million and will pay a 25% royalty on net sales of ONCASPAR
through 2014. Prior to the amendment, Aventis was responsible for marketing and
distribution of ONCASPAR. Under the previous agreement Aventis paid us a royalty
on net sales of ONCASPAR of 27.5% on annual sales up to $10 million and 25% on
annual sales exceeding $10 million. These royalty payments included Aventis'
cost of purchasing ONCASPAR from us under a supply agreement.

In connection with the reacquisition of these marketing and distribution
rights to ONCASPAR we have begun to establish a specialty sales force of 5 to 10
personnel to market ONCASPAR in the United States.

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

MEDAC License Agreement

We have granted an exclusive license to MEDAC to sell ONCASPAR and any
PEG-asparaginase product developed by us or MEDAC during the term of the
agreement in Western Europe, Turkey and Russia. Our supply agreement with MEDAC
provides for MEDAC to purchase ONCASPAR from us at certain established prices.
Under the license agreement, MEDAC is responsible for obtaining additional
approvals and indications in the licensed territories, beyond the currently
approved hypersensitive indication in Germany. Under the agreement, MEDAC is
required to meet certain minimum purchase requirements. The MEDAC license
terminated in October 2001. We are currently in negotiations with MEDAC to enter
into a new license agreement.

Micromet AG

On April 10, 2002, we announced a multi-year strategic collaboration with
Micromet AG, a private company based in Munich, Germany, to identify and develop
the next generation of antibody-based therapeutics.

Under the terms of the agreement, Enzon and Micromet will combine their
significant patent estates and complementary expertise in SCA technology to
create a leading platform of therapeutic products based on antibody fragments.
The collaboration will also benefit from a non-exclusive, royalty-bearing
license from Enzon for PEGylated SCA products. Enzon and Micromet are
establishing a new R&D Unit located at Micromet's research facility in Germany.
The R&D Unit will be staffed initially with 25 scientists and plans to be fully
operational by the end of 2002. During the first phase of the collaboration,
covering a 30-month period beginning in the third quarter of calendar 2002, the
new R&D Unit will focus on the generation of at least two clinical product
candidates in therapeutic areas of common strategic interest. Enzon and Micromet
will share equally the costs of research and development, and plan to share the
revenues generated from technology licenses and from future commercialization of
any developed products.

We hold core intellectual property in SCAs. These fundamental patents,
combined with Micromet's key patents in SCA linkers and fusion protein
technology, generate a compelling technology platform for SCA product
development. Enzon and Micromet have entered into a cross-license agreement for
their respective SCA intellectual property and have decided to jointly market
their combined SCA technology to third parties. Micromet will be the exclusive
marketing partner and will institute a comprehensive licensing program on behalf
of the partnership, for which the parties will share equally in the costs and
revenues. Current licensees to Enzon and Micromet's SCA intellectual property
include Alexion, Bristol-Myers Squibb, Cambridge Antibody Technologies, Cell
Genesys, Celltech, Crucell, Eli Lilly, Seattle Genetics and Xoma. Several SCA
molecules are in clinical trials. Alexion is currently


13


conducting a pivotal Phase III clinical study of an SCA in cardiopulmonary
bypass surgery.

In addition to our license and collaboration agreements with Micromet we
purchased an $8.3 million Micromet convertible note which bears interest of 3%
and is payable in March 2006. This note is convertible at our option into
Micromet common stock at a price of $1,015 per share.

Inhale Therapeutic Systems

In January 2002, we entered into a broad strategic alliance with Inhale
Therapeutic Systems, Inc. that includes the following components:

o The companies agreed to enter into a collaboration to jointly
develop three products to be specified over time using Inhale's
Inhance(TM) pulmonary delivery platform and SEDS(TM) supercritical
fluids platform. Inhale will be responsible for formulation
development, delivery system supply, and in some cases, early
clinical development. We will have responsibility for most clinical
development and for commercialization.

o The two companies will also explore the development of single-chain
antibody (SCA) products to be administered by the pulmonary route.

o We granted to Inhale the exclusive right to grant sub-licenses under
our PEG patents to third parties. We will receive a royalty or a
share of profits on final product sales of any products that use our
patented PEG technology. We anticipate that we will receive 0.5% or
less of Hoffmann-LaRoche's sales of PEGASYS, which represents equal
profit sharing with Inhale on this product. We retain the right to
use all of our PEG technology for our own product portfolio, as well
as those products we develop in co-commercialization collaborations
with third parties.

o We purchased $40 million of newly issued Inhale convertible
preferred stock in January 2002. The preferred stock is convertible
into Inhale common stock at a conversion price of $22.79 per share.
In the event Inhale's common stock price three years from the date
of issuance of the preferred stock or earlier in certain
circumstances is less than $22.79, the conversion price will be
adjusted down, although in no event will it be less than $18.23 per
share. Conversion of the preferred stock into common stock can occur
anywhere from 1 to 4 years following the issuance of the preferred
stock or earlier in certain circumstances. The preferred stock
investment is being accounted for under the cost method.

o The two companies also agreed in January 2002 to a settlement of the
patent infringement suit we filed in 1998 against Inhale's
subsidiary, Shearwater Polymers, Inc. Inhale will receive licensing
access to the contested patents under a cross-license agreement. We
received a one-time payment of $3 million from Inhale to cover
expenses incurred in defending our branched PEG patents which is
included in other income.

Mitsubishi Pharma

We have two license agreements with Welfide Corporation (formerly
Yoshitomi Pharmaceutical Industries, Ltd.) for the development of a recombinant
human serum albumin, or rHSA, as a blood volume expander. In 1998, Yoshitomi
Pharmaceutical Industries, Ltd. and Green Cross Corporation merged to form
Yoshitomi Pharmaceutical Industries, Ltd. and during 2000 such entity was
renamed Welfide Corporation. Yoshitomi had reported that it filed for approval
of this product in Japan in November 1997. The agreements, which were assigned
to us in connection with our acquisition of Genex Corporation in 1991, entitle
us to a royalty on sales of the rHSA product in much of Asia and North and South
America. We believe, this product is currently being developed only for the
Japanese market. A binding arbitration was concluded in February 2000 regarding
the royalty rate required under the agreements. The arbitrators awarded us a 1%
royalty on the sales of the rHSA product in Japan, South East Asia, India,
China, Australia, New Zealand and North and South America for a period of 15
years after the first commercial


14


sale of such rHSA product following market approval of that product in Japan or
the United States.

Marketing

During June 2002, we reacquired the rights to market and distribute
ONCASPAR in North America from Aventis Pharmaceuticals. In connection with the
reacquisition, we have begun to establish a 5 to 10 person specialty sales force
to commercially market ONCASPAR in the United States. We also market ADAGEN on a
worldwide basis to a small patient population.

For some of our products, we have provided exclusive marketing rights to
our corporate partners in return for royalties on sales. We have an agreement
with Nova Factor, Inc. (formerly known as Gentiva Health Services, Inc.) to
purchase and distribute ADAGEN and ONCASPAR in the United States and Canada. The
agreement provides for Nova Factor to purchase ADAGEN and ONCASPAR from us at
certain prices established in the agreement. We pay Nova Factor a service fee
for the distribution of the products.

We expect to evaluate whether to expand or acquire additional sales forces
to market additional products we may acquire or develop.

Raw Materials and Manufacturing

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

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

Manufacturing and stability problems required us to implement voluntarily
recalls for a batch of ADAGEN in March 2001 and certain batches of ONCASPAR in
June 2002.

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

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

Since January 2000, the FDA has conducted follow-up inspections as well as
routine inspections of our manufacturing facility related to ONCASPAR and
ADAGEN. Following certain of these inspections,


15


the FDA issued Form 483 reports, citing deviations from cGMP. We have or are in
the process of responding to such reports with corrective action plans and are
currently in discussion with the FDA concerning some observations set forth in
the Form 483s.

Research and Development

To date, our primary source of new products has been our internal research
and development activities. Research and development expenses for the fiscal
years ended June 30, 2002, 2001 and 2000 were approximately $18.4 million, $13.1
million, and $8.4 million, respectively.

Our research and development activities during fiscal 2002 concentrated
primarily on the Phase II clinical trials of PROTHECAN, preclinical studies, and
continued research and development of our proprietary technologies. We expect
our research and development expenses for fiscal 2003 and beyond will be at
significantly higher levels as we continue clinical trials for PROTHECAN and
PEG-paclitaxel, and additional compounds enter clinical trials.

Patents

We have licensed, and been issued, a number of patents in the United
States and other countries and have other patent applications pending to protect
our proprietary technology. Although we believe that our patents provide
adequate protection for the conduct of our business, we cannot assure you that
such patents:

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

o will afford us adequate protection from competing products, or

o will not be challenged or declared invalid.

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

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

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

During January 2002, we settled a patent infringement suit we had brought
against Shearwater Corporation Inc., a company that reportedly has developed a
Branched PEG, or U-PEG, used in Hoffmann-La Roche's product, PEGASYS, a
PEG-modified version of its alpha-interferon product ROFERON-A. The settlement
was part of a broad strategic alliance we formed with Inhale Therapeutic Systems
Inc., Shearwater Corporation's parent corporation, in which Inhale agreed to pay
us $3,000,000 to cover our expenses incurred in defending our Branched PEG
patents and pay us 0.5% of any revenues it receives from


16


Hoffmann-La Roche's manufacture and sale of PEGASYS. In addition, Enzon and
Inhale agreed to cross license their PEG intellectual property estates to each
other. Also, Inhale has the exclusive right to sublicense our PEG patent to
third parties and we will receive a royalty or a share of profit on final
product sales. We retained the rights to use our PEG patents for our own
proprietary products and products we may develop with co-commercialization
partners.

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

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

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

The degree of patent protection to be afforded to biotechnological
inventions is uncertain and our products are subject to this uncertainty. There
may be issued third party patents or patent applications containing subject
matter which we or our licensees or collaborators will require in order to
research, develop or commercialize at least some of our products. We cannot
assure you that we will be able to obtain a license to such subject matter on
acceptable terms, or at all.

In addition to the litigation described above, we expect that there may be
significant litigation in the industry regarding patents and other proprietary
rights and, to the extent we become involved in such litigation, it could
consume a substantial amount of our resources. An adverse decision in any such
litigation could subject us to significant liabilities. In addition, we rely
heavily on our proprietary technologies for which pending patent applications
have been filed and on unpatented know-how developed by us. Insofar as we rely
on trade secrets and unpatented know-how to maintain our competitive
technological position, we cannot assure you that others may not independently
develop the same or similar technologies. Although we have taken steps to
protect our trade secrets and unpatented know-how, third parties nonetheless may
gain access to such information.

Government Regulation

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


17


then developing and our ability to receive product or royalty revenues.

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

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

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

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

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

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

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

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

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

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

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

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

The approval process can take a number of years and often requires
substantial financial resources. The results of preclinical studies and initial
clinical trials are not necessarily predictive of the results from large-scale
clinical trials, and clinical trials may be subject to additional costs, delays
or modifications due to a number of factors, including the difficulty in
obtaining enough patients, clinical investigators, drug supply, or financial
support. The FDA has issued regulations intended to accelerate the approval
process for the development, evaluation and marketing of new therapeutic
products intended to treat life-threatening or severely debilitating diseases,
especially where no alternative therapies exist. If applicable, this procedure
may shorten the traditional product development process in the United States.
Similarly, products that represent a substantial improvement over existing
therapies may be eligible for priority review with a target


18


approval time of six months. Nonetheless, approval may be denied or delayed by
the FDA or additional trials may be required. The FDA also may require testing
and surveillance programs to monitor the effect of approved products that have
been commercialized, and the agency has the power to prevent or limit further
marketing of a product based on the results of these post-marketing programs.
Upon approval, a drug product or biological product may be marketed only in
those dosage forms and for those indications approved in the NDA or BLA,
although information about off-label indications may be distributed in certain
circumstances.

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

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

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

o warning letters,

o suspension of manufacturing,

o seizure of the product,

o voluntary recall of a product,

o injunctive action, or

o possible civil or criminal penalties.

To the extent we rely on third parties to manufacture our compounds and
products, those third parties will be required to comply with Current Good
Manufacturing Practices.

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

Products manufactured in the United States for distribution abroad will be
subject to FDA


19


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

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

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

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

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

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

Competition

Competition in the biopharmaceutical industry is intense and based
significantly on scientific and technological factors. These factors include the
availability of patent and other protection of technology and products, the
ability to commercialize technological developments and the ability to obtain
governmental approval for testing, manufacturing and marketing. We compete with
specialized biopharmaceutical firms in the United States, Europe and elsewhere,
as well as a growing number of large pharmaceutical companies


20


that are applying biotechnology to their operations. These companies, as well as
academic institutions, governmental agencies and private research organizations,
also compete with us in recruiting and retaining highly qualified scientific
personnel and consultants.

We are aware that other companies are conducting research on chemically
modified therapeutic proteins and that certain companies are modifying
pharmaceutical products, including proteins, by attaching PEG. In particular
Amgen has received FDA approval for Neulasta, a pegylated version of Neupogen.
Other than PEG-INTRON and our ONCASPAR and ADAGEN products, and Hoffmann-La
Roche's PEGASYS, which has been approved by the European Union and Neulasta, we
are not aware of any PEG-modified therapeutic proteins that are currently
available commercially for therapeutic use. Nevertheless, other drugs or
treatments that are currently available or that may be developed in the future,
and which treat the same diseases as those that our products are designed to
treat, may compete with our products.

Prior to the development of ADAGEN, the only treatment available to
patients afflicted with ADA-deficient SCID was a bone marrow transplant.
Completing a successful transplant depends upon finding a matched donor, the
probability of which is low. Researchers at the National Institutes of Health,
or NIH, have been treating SCID patients with gene therapy, which if
successfully developed, would compete with, and could eventually replace ADAGEN
as a treatment. The theory behind gene therapy is that cultured T-lymphocytes
that are genetically engineered and injected back into the patient will express
adenosine deaminase, the deficient enzyme in people afflicted with ADA-deficient
SCID, permanently and at normal levels. To date, patients in gene therapy
clinical trials have not been able to stop ADAGEN treatment and, therefore, the
trials have been inconclusive.

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

The current market for INTRON A, Schering-Plough's interferon alpha-2b
product, is highly competitive, with Hoffmann-La Roche, Amgen and several other
companies selling similar products. We believe that PEG-INTRON may have several
potential advantages over the other interferon products currently approved for
marketing in the United States including:

o once per week dosing versus the current three times per week dosing,
and

o increased efficacy, compared with unmodified alpha-interferon.

It has also been reported that Hoffmann-La Roche's PEGASYS product is a
pegylated longer lasting version of its interferon product, ROFERON-A.
Hoffmann-La Roche filed for United States marketing approval for PEGASYS in May
2000. During June 2002, Roche also filed for United States marketing approval in
combination with Ribavirin for treatment of hepatitis C. This product has
received priority (6 months) review status by the United States FDA. Currently
the product has not received FDA approval. During June 2002, PEGASYS received
European Union approval for treatment of hepatitis C as a monotherapy and in
combination with ribavirin. We expect PEGASYS to compete with PEG-INTRON in the
United States and the European Union.


21


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

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

o those creating smaller portions of monoclonal antibodies, which are
more specific to the target and have fewer side effects, as is the
case with Fab fragments and low molecular weight peptides.

We believe that the smaller size of our SCA proteins should permit better
penetration into the tumor, result in rapid clearance from the blood and cause a
significant decrease in the immunogenic problems associated with conventional
monoclonal antibodies. A number of organizations have active programs in SCA
proteins. We believe that our patent position on SCA proteins will likely
require companies that have not licensed our SCA protein patents to obtain
licenses under our patents in order to commercialize their products, but we
cannot assure you this will prove to be the case.

Employees

As of June 30, 2002, we employed 127 persons, including 27 persons with
Ph.D. or MD degrees. At that date, 58 employees were engaged in research and
development activities, 40 were engaged in manufacturing, and 29 were engaged in
administration and management. None of our employees are covered by a collective
bargaining agreement. All of our employees are covered by confidentiality
agreements. We consider our relations with our employees to be good.

Item 2. Properties

We own no real property. The following are all of the facilities that we
currently lease:



Approx. Approx.
Principal Square Annual Lease
Location Operations Footage Rent Expiration
-------- ---------- ------- ---- ----------

20 Kingsbridge Road Research & Development 56,000 $581,000(1) July 31, 2021
Piscataway, NJ

300 Corporate Ct. Manufacturing 24,000 183,000 March 31, 2007
S. Plainfield, NJ

685 Route 202/206 Administrative 19,000 470,000(2) June 30, 2007
Bridgewater, NJ


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

(2) Under the terms of the lease, annual rent increases over the
remaining term of the lease from $470,000 to $489,000.

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


22


Item 3. Legal Proceedings

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

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

None.


23


PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

Our common stock is traded in the over-the-counter market and is quoted on
the NASDAQ National Market under the trading symbol "ENZN".

The following table sets forth the high and low sale prices for our common
stock for the years ended June 30, 2002 and 2001, as reported by the NASDAQ
National Market. The quotations shown represent inter-dealer prices without
adjustment for retail markups, markdowns or commissions, and may not necessarily
reflect actual transactions.

Year Ended June 30, 2002 High Low
----- -----
First Quarter 67.92 42.77
Second Quarter 67.15 50.10
Third Quarter 57.86 40.75
Fourth Quarter 44.70 22.12

Year Ended June 30, 2001
First Quarter 74.13 41.38
Second Quarter 84.13 50.75
Third Quarter 67.75 33.13
Fourth Quarter 79.40 39.56

As of September 18, 2002 there were 1,670 holders of record of our common
stock.

We have never declared or paid any cash dividends on our common stock and
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth of
our business. Holders of our Series A preferred stock are entitled to an annual
dividend of $2.00 per share, payable semiannually, but only when and if declared
by our board of directors, out of funds legally available. As of June 30, 2002,
there were 7,000 shares of Series A preferred stock issued and outstanding.
Dividends on the Series A preferred stock are cumulative and accrue and
accumulate but will not be paid, except in liquidation or upon conversion, until
such time as the board of directors deems it appropriate. No dividends are to be
paid or set apart for payment on our common stock, nor are any shares of common
stock to be redeemed, retired or otherwise acquired for valuable consideration
unless we have paid in full or made appropriate provision for the payment in
full of all dividends which have then accumulated on the Series A preferred
stock.


24


The following table provides additional information on the Company's
equity-based compensation plans as of June 30, 2002:



Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column a)
- ------------- ----------------------- -------------------- -------------------------

Equity compensation
plans approved by
security holders 3,644,428 $38.07 1,549,096
Equity compensation
plans not approved
by security holders -- -- --
--------- ------ ---------
Total 3,644,428 $38.07 1,549,096
========= ====== =========


Item 6. Selected Financial Data

Set forth below is our selected financial data for the five fiscal years
ended June 30, 2002.

Consolidated Statement of Operations Data:



Years Ended June 30
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----

Revenues $75,804,746 $31,587,709 $ 17,017,797 13,158,207 $ 14,644,032
Net Income (Loss) 45,806,343 11,525,064 (6,306,464) (4,919,208) (3,617,133)
Net Income (Loss) per
Diluted Share $ 1.04 $ .26 ($0.17) ($0.14) ($0.12)
Dividends on
Common Stock None None None None None


Consolidated Balance Sheet Data:



June 30,
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----

Total Assets $610,747,883 $549,675,817 $130,252,250 $ 34,916,315 $13,741,378
Long-Term Obligations $400,000,000 $400,000,000 -- -- --


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

Results of Operations

Fiscal Years Ended June 30, 2002, 2001, and 2000

Revenues. Revenues for the year ended June 30, 2002 were $75,805,000
compared to $31,588,000 for the year ended June 30, 2001 and $17,018,000 for the
year ended June 30, 2000. The components of revenues are net sales and royalties
we earn on the sale of our products by others and contract revenues.


25


Net sales increased by 7% to $22,183,000 for the year ended June 30, 2002,
as compared to $20,769,000 for the year ended June 30, 2001. The increase was
due to increased ONCASPAR sales. The increase in ONCASPAR sales was due to the
lifting during the prior year of all of the FDA distribution and labeling
restrictions that were in place for a portion of fiscal 2001. During the year
ended June 30, 2001, the FDA gave final approval to manufacturing changes which
we made to correct certain manufacturing problems, and all previously imposed
restrictions were lifted. Net sales of ADAGEN were $13,441,000 for the year
ended June 30, 2002 and $13,369,000 for the year ended June 30, 2001.

Sales increased by 33% to 20,769,000 for the year ended June 30, 2001 from
$15,558,000 for the year ended June 30, 2000. This was due to increased ONCASPAR
and ADAGEN sales. The increase in ONCASPAR sales was due to the mid-year lifting
of FDA imposed distribution and labelling restrictions which were in place
during fiscal year ended June 30, 2000. Net sales of ADAGEN increased to
$13,369,000 for the year ended June 30, 2001 as compared to $12,159,000 in
fiscal 2000. The increase in ADAGEN sales resulted from an increase in the
number of patients receiving ADAGEN treatment.

Royalties for the year ended June 30, 2002 increased to $53,329,000
compared to $8,251,000 in the prior year. The increase was primarily due to the
commencement of sales of PEG-INTRON in combination with REBETOL in the U.S. and
increased sales of PEG-INTRON in Europe. Schering-Plough, our marketing partner
for PEG-INTRON, began selling PEG-INTRON in the European Union in June 2000 and
in the U.S. in February 2001. PEG-INTRON also received marketing approval for
use in combination with REBETOL for the treatment of chronic hepatitis C in the
European Union in March 2001 and in the U.S. in August 2001. Schering-Plough
launched PEG-INTRON as combination therapy with REBETOL in the U.S. in October
2001.

Royalties for the year ended June 30, 2001 increased to $8,251,000 as
compared to $34,000 for the year ended June 30, 2000 due to the approval of
PEG-INTRON in the European Union in late fiscal 2000 and in the United States
during fiscal 2001.

Sales of ADAGEN are expected to increase at rates comparable to those
achieved during the last two years as additional patients are treated. We
anticipate ONCASPAR revenues to increase due to increased detailing of the
product resulting from our reacquisition of marketing rights for the product
from Aventis at the end of fiscal 2002. During fiscal 2002, we distributed and
recorded the net sales of ONCASPAR, but the product was not marketed by us or
Aventis. We expect royalties on PEG-INTRON to increase in future quarters with
the continued roll out of the product in the U.S. Schering-Plough has reported
that clinical trials of PEG-INTRON for additional indications are being
conducted and will seek approval in additional countries for PEG-INTRON.
However, we cannot assure you that any particular sales levels of ADAGEN,
ONCASPAR or PEG-INTRON will be achieved or maintained.

Contract revenues for the year ended June 30, 2002 decreased by
$2,275,000, as compared to the prior year. The decrease was related primarily to
a $2,000,000 milestone payment from our development partner Schering-Plough
which was earned as a result of the FDA's approval of PEG-INTRON during the year
ended June 30, 2001.

Contract revenues for the year ended June 30, 2001 increased by
$1,141,000, as compared to the prior year as a result of a $2,000,000 milestone
payment from Schering-Plough in the fiscal year 2001 offset by a $1,000,000
milestone payment received in 2000 from Schering-Plough for the FDA's acceptance
in February 2000 of the U.S. marketing application for PEG-INTRON.

We had export sales and royalties recognized on export sales of
$26,302,000 for the year ended June 30, 2002, $11,161,000 for the year ended
June 30, 2001 and $4,137,000 for the year ended June 30, 2000. Of these amounts,
sales in Europe and royalties recognized on sales in Europe, were $22,671,000
for the year ended June 30, 2002, $10,226,000 for the year ended June 30, 2001
and $3,617,000 for the year ended June 30, 2000.


26


Cost of Sales. Cost of sales, as a percentage of net sales increased to
27% for the year ended June 30, 2002, as compared to 19% for the prior year.
This increase was due to lower cost of goods sold during the previous fiscal
year as certain finished goods, which had previously been reserved for due to
previously disclosed manufacturing problems related to ONCASPAR, were cleared
and sold in the prior year.

Cost of sales, as a percentage of sales, for the year ended June 30, 2001
was 19% as compared to 31% in 2000. This improvement was primarily due to the
prior year's write-off of ONCASPAR finished goods related to the previously
disclosed manufacturer problems.

Research and Development. Research and development expenses increased by
$5,375,000 or 41% to $18,427,000 for the year ended June 30, 2002, as compared
to $13,052,000 for the same period last year. The increase was primarily due to
the clinical advancement and related clinical trial costs for PROTHECAN
(PEG-camptothecin) and PEG-paclitaxel and increased payroll and related
expenses.

Research and development expenses for the year ended June 30, 2001
increased by 56% to $13,052,000 as compared to $8,383,000 in 2000. The increase
was due to increased payroll and related expenses due to an increase in research
personnel and increased contracted services related to clinical trials and
preclinical studies for products under development, including PROTHECAN and
PEG-paclitaxel.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 2002 increased by $4,892,000
to $16,687,000, as compared to $11,795,000 in 2001. The increase was primarily
due to increased payroll and related expenditures for additional administrative
personnel and costs related to the identification and review of potential
strategic alliances to gain access to technologies and products.

Selling, general and administrative expenses for the year ended June 30,
2001 decreased by $1,161,000 to $11,795,000, as compared to $12,956,000 in 2000.
The decrease was primarily due to a net charge of $2,600,000 recorded in the
prior year, which was the result of a binding arbitration award in a lawsuit
brought by a former financial advisor. The decrease was partially offset by
increased legal fees associated with patent filings and patent litigation costs.

Other Income/Expense. Interest income increased by $10,279,000 to
$18,681,000 for the year ended June 30, 2002, as compared to $8,402,000 for the
prior year. The increase in interest income was attributable to an increase in
interest bearing investments, primarily due to the issuance of $400,000,000 of
4.5% convertible subordinated notes during June 2001. Interest expense increased
to $19,829,000 from $275,000 for the prior year due to the issuance of the
$400,000,000 in 4.5% convertible subordinated notes in June 2001. Other income
increased to $3,218,000 for the year ended June 30, 2002 as compared to $11,000
in the prior year, primarily due to a $3,000,000 payment from Inhale in
connection with the settlement of the patent infringement suit against Inhale's
subsidiary Shearwater Corporation, Inc. This one-time payment was reimbursement
for expenses we incurred in defending our branched PEG patent.

Other income/expense increased by $5,234,000 to $8,137,000 for the year
ended June 30, 2001, as compared to $2,903,000 for the prior year. The increase
was attributable to an increase in interest income due to an increase in
interest bearing investments.

Income Taxes. For the year ended June 30, 2002, the Company recognized a
net tax benefit of approximately $9,123,000, primarily related to the reduction
in the valuation allowance based on the Company's net operating losses expected
to be utilized to offset the estimated tax liability for the year ended June 30,
2003. We also recognized a tax provision which represents our anticipated
Alternative Minimum Tax liability based on our fiscal 2002 taxable income. The
tax provision was offset by the sale of a portion of our net operating losses to
the state of New Jersey. During the year ended June 30, 2002, we sold
approximately $10,888,000 of our state net operating loss carry forwards for
proceeds of $857,000. For the year ended June 30, 2001 the Company recognized a
tax provision, which represents our anticipated Alternative Minimum Tax
liability based on our fiscal 2001 taxable income. The tax provision was offset


27


by the sale of a portion of our net operating losses to the state of New Jersey.
During the year ended June 30, 2001, we sold approximately $9,255,000 of our
state net operating loss carry forwards and recognized a tax benefit of $728,000
from this sale.

Liquidity and Capital Resources

Total cash reserves, including cash, cash equivalents and marketable
securities, as of June 30, 2002 were $485,014,000, as compared to $516,379,000
as of June 30, 2001. The decrease in total cash reserves was primarily due to
the strategic investment of approximately $48,300,000 in Inhale Therapeutics and
Micromet AG, and the payment of $15,000,000 for the reacquisition of ONCASPAR
offset in part by approximately $31,000,000 in positive cash flow from
operations. We invest our excess cash primarily in United States
government-backed securities.

As of June 30, 2002, we had $400,000,000 of 4.5% convertible subordinated
notes outstanding. The notes bear interest at an annual rate of 4.5%. Interest
is payable on January 1 and July 1 of each year beginning January 2, 2002.
Accrued interest on the notes was approximately $9,000,000 as of June 30, 2002
(which was paid on July 1, 2002). The holders may convert all or a portion of
the notes into common stock at any time on or before July 1, 2008. The notes are
convertible into our common stock at a conversion price of $70.98 per share,
subject to adjustment in certain events. The notes are subordinated to all
existing and future senior indebtedness. On or after July 7, 2004, we may redeem
any or all of the notes at specified redemption prices, plus accrued and unpaid
interest to the day preceding the redemption date. The notes will mature on July
1, 2008 unless earlier converted, redeemed at our option or redeemed at the
option of the note-holder upon a fundamental change, as described in the
indenture for the notes. Neither we nor any of our subsidiaries are subject to
any financial covenants under the indenture. In addition, neither we nor any of
our subsidiaries are restricted under the indenture from paying dividends,
incurring debt or issuing or repurchasing our securities.

To date, our sources of cash have been the proceeds from the sale of our
stock through public offerings and private placements, the issuance of the 4.5%
convertible subordinated notes, sales of and royalties on sales of ADAGEN,
ONCASPAR, and PEG-INTRON, sales of our products for research purposes, contract
research and development fees, technology transfer and license fees and royalty
advances.

The Company has a capital expenditure commitment for the year ended June
30, 2003 of approximately $3 million.

In January 2002, we purchased $40 million of newly issued Inhale
convertible preferred stock. The preferred stock is convertible into Inhale
common stock at a conversion price of $22.79 per share. In the event Inhale's
common stock price three years from the date of issuance of the preferred stock,
or earlier in certain circumstances, is less than $22.79, the conversion price
will be adjusted down, although in no event will it be less than $18.23 per
share.

In April 2002, we purchased an $8.3 million interest bearing note from
Micromet which is convertible into Micromet common stock.

In June 2002, we entered into an agreement with Aventis to reacquire our
rights to market and distribute ONCASPAR. Under this agreement we paid $15
million to Aventis.

As of June 30, 2002, 1,043,000 shares of Series A preferred stock had been
converted into 3,325,000 shares of common stock. Accrued dividends on the
converted Series A preferred stock in the aggregate of $3,770,000 were settled
by the issuance of 235,000 shares of common stock and cash payments of
$1,947,000. The preferred shares outstanding at June 30, 2002 are convertible
into approximately 32,000 shares of common stock. Dividends accrue on the
remaining outstanding shares of Series A preferred stock at a rate of $14,000
per year. As of June 30, 2002, there were accrued and unpaid dividends totaling
$172,000 on the 7,000 shares of Series A preferred stock outstanding. We have
the


28


option to pay these dividends in either cash or common stock.

Our current sources of liquidity are cash, cash equivalents and interest
earned on such cash reserves, sales of and royalties on sales of ADAGEN,
ONCASPAR, and PEG-INTRON, and sales of our products for research purposes and
license fees. Based upon our currently planned research and development
activities and related costs and our current sources of liquidity, we anticipate
our current cash reserves will be sufficient to meet our capital, debt service
and operational requirements for the foreseeable future.

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

Contractual Obligations

Our major outstanding contractual obligations relate to our operating
leases. Our facilities lease expense in future years will increase over previous
years as a result of a new lease agreement entered into in 2002.

In March 2002, we entered into a lease for a 19,000 square feet facility
located in Bridgewater, NJ that will serve as our corporate headquarters. The
lease has a term of 5 years, followed by one five year renewal option period.
The future minimum lease payments are approximately $2,350,000 throughout the
five year term of the lease. Other commitments for operating leases total
$13,679,000.

In April 2002, we entered into a multi-year strategic collaboration with
Micromet AG, a private company to combine our patent estates and complementary
expertise in single-chain antibody (SCA) technology to create a leading platform
of therapeutic products based on antibody fragments. We have an obligation to
fund 50% of research and development expenses for activities relating to SCA for
the collaboration through September 2003.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe based on our current business that there are no critical accounting
policies, except for our accounting related to Income Taxes. Under the asset and
liability method of Statement of Financial Accounting Standards No. 109 ("SFAS
109"), deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rated
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance on
net deferred tax assets is provided for when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The Company
has significant net deferred tax assets, primarily related to net operating loss
carryforward, and continues to analyze what the level of the valuation allowance
is needed (see Note 12 to the Consolidated Financial Statements). Our other
policies are described in Note 2 to the consolidated financial statements.


29


Recently Issued Accounting Standards

In July 2001, the FASB issued SFAS No. 141, Business Combination, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that all
business combinations be accounted for under a single method - the purchase
method. Use of the pooling-of-interests method no longer is permitted. SFAS 141
requires that the purchase method be used for business combinations initiated
after June 30, 2001. SFAS 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The amortization of goodwill
ceases upon adoption of the statement, which was adopted by the Company on July
1, 2001. SFAS 142 has no impact on our historical financial statements as we do
not have any goodwill or intangible assets, which resulted from business
combinations.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 requires an enterprise to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets. Since the requirement is to recognize the obligation when
incurred, approaches that have been used in the past to accrue the asset
retirement obligation over the life of the asset are no longer acceptable. SFAS
143 also requires the enterprise to record the contra to the initial obligation
as an increase to the carrying amount of the related long-lived asset (i.e., the
associated asset retirement costs) and to depreciate that cost over the life of
the asset. The liability is increased at the end of each period to reflect the
passage of time (i.e., accretion expense) and changes in the estimated future
cash flows underlying the initial fair value measurement. Enterprises are
required to adopt Statement 143 for fiscal years beginning after June 15, 2002.
We are in the process of evaluating this SFAS and the effect that it will have
on our consolidated financial statements.

In October 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS 144
supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be disposed of, it retains many of the fundamental
provisions of that statement. SFAS also supersedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. However, it retains the requirement in Opinion No. 30 to
report separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in distribution to owners) or is classified as held for sale. Enterprises are
required to adopt SFAS 144 for fiscal years beginning after December 15, 2002.
We are in the process of evaluating this SFAS and the effect that it will have
on our consolidated financial statements.

In July 2002, FASB issued FAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Standard supercedes the accounting
guidance provided by Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). FAS No. 146
requires companies to recognize costs associated with exit activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. FAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company is currently evaluating this
Standard.

Risk Factors

Our near term success is heavily dependent on Schering-Plough's effective
marketing of PEG-INTRON.

In the near term, our results of operations are heavily dependent on
Schering-Plough's sales of PEG-INTRON. Under our agreement with Schering-Plough,
pursuant to which we applied our PEG


30


technology to develop a modified form of Schering-Plough's INTRON A, we are
receiving royalties on worldwide sales of PEG-INTRON. During the fiscal year
ended June 30, 2002, royalties on sales of PEG-INTRON comprised approximately
70% of our total revenues. Schering-Plough is responsible for conducting and
funding the clinical studies, obtaining regulatory approval and marketing the
product worldwide on an exclusive basis. Schering-Plough received marketing
authorization for PEG-INTRON in the United States in January 2001 and in the
European Union in May 2000 for the treatment of hepatitis C. Schering-Plough has
also been granted marketing approval for the sale of PEG-INTRON and REBETOL
capsules as combination therapy for the treatment of hepatitis C in March 2001
in the European Union and in August 2001 in the U.S. If Schering-Plough fails to
effectively market PEG-INTRON or discontinues the marketing of PEG-INTRON for
these indications, this would have a material adverse effect on our business,
financial condition and results of operations.

Even though the use of PEG-INTRON as a stand alone therapy and as
combination therapy with REBETOL has received FDA approval, we cannot assure you
that Schering-Plough will be successful in marketing PEG-INTRON or that
Schering-Plough will not continue to market INTRON A, either as a stand-alone
product or in combination therapy with REBETOL. The amount and timing of
resources dedicated by Schering-Plough to the marketing of PEG-INTRON is not
within our control. If Schering-Plough breaches or terminates its agreement with
us, the commercialization of PEG-INTRON could be slowed or blocked completely.
Our revenues will be negatively affected if Schering-Plough continues to market
INTRON A in competition with PEG-INTRON or if it cannot meet the manufacturing
demands of the market. Schering-Plough has experienced problems manufacturing
sufficient quantities of PEG-INTRON to meet market demand. If Schering-Plough
breaches the agreement, a dispute may arise between us. A dispute would be both
expensive and time-consuming and may result in delays in the commercialization
of PEG-INTRON, which would likely have a material adverse effect on our
business, financial condition and results of operations.

We may not sustain profitability.

Prior to the fiscal year ended June 30, 2001, we had incurred substantial
losses. As of June 30, 2002, we had an accumulated deficit of approximately $73
million. Although we earned a profit for the fiscal years ended June 30, 2002
and 2001, we cannot assure you that we will be able to remain profitable. Our
ability to remain profitable will depend primarily on Schering-Plough's
effective marketing of PEG-INTRON, as well as on the rate of growth in our other
product sales or royalty revenue and on the level of our expenses. Our ability
to achieve long-term profitability will depend upon our or our licensees'
ability to obtain regulatory approvals for additional product candidates. Even
if our product candidates receive regulatory approval, we cannot assure you that
our products will achieve market acceptance or will be commercialized
successfully or that our operations will sustain profitability.

We are subject to extensive regulation. Compliance with these regulations
can be costly, time consuming and subject us to unanticipated delays in
developing our products.

The manufacturing and marketing of pharmaceutical products in the United
States and abroad are subject to stringent governmental regulation. The sale of
any of our products for use in humans in the United States will require the
prior approval of the FDA. Similar approvals by comparable agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards that apply to the clinical testing, manufacture and marketing
of pharmaceutical products. Obtaining FDA approval for a new therapeutic product
may take several years and involve substantial expenditures. ADAGEN was approved
by the FDA in 1990. ONCASPAR was approved in the United States and in Germany in
1994, and in Canada in 1997, in each case for patients with acute lymphoblastic
leukemia who are hypersensitive to native forms of L-asparaginase. ONCASPAR was
approved in Russia in April 1993 for therapeutic use in a broad range of
cancers. PEG-INTRON was approved in Europe and the United States for the
treatment of hepatitis C in May 2000 and January 2001, respectively. Except for
these


31


approvals, none of our other products has been approved for sale and use in
humans in the United States or elsewhere.

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

o criminal penalties,

o civil penalties,

o fines,

o recall or seizure,

o injunctions requiring suspension of production,

o orders requiring ongoing supervision by the FDA, or

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

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

We have experienced problems complying with the FDA's regulations for
manufacturing our products, and we may not be able to resolve these problems.

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

ADAGEN and ONCASPAR use our earlier PEG technology which tends to be less
stable then the PEG technology used in PEG-INTRON and our products under
development. Due, in part, to the draw backs in the earlier technologies we have
had and will likely continue to have these and other potential manufacturing
problems with these products.

Manufacturing and stability problems required us to implement voluntarily
recalls for one ADAGEN batch in March 2001 and certain batches of ONCASPAR in
June 2002.

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


32


and distribution restrictions for ONCASPAR and instituted additional inspection
and labeling procedures prior to distribution.

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

Since January 2000, the FDA has conducted follow-up inspections as well as
routine inspections of our manufacturing facility related to ONCASPAR and
ADAGEN. Following certain of these inspections, the FDA issued Form 483 reports,
citing deviations from cGMP. We have or are in the process of responding to such
reports with corrective action plans and are currently in discussion with the
FDA concerning some observations set forth in the Form 483s.

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

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

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

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

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

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

o the order and timing of clinical indications pursued,


33


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

o the number of patients required for enrollment,

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

o the difficulty in obtaining sufficient patient populations and
clinicians.

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

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

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

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

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

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

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

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

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

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

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

The commercial success of our products will depend upon their acceptance
by the medical community and third-party payors as clinically useful,
cost-effective and safe. Even if our products obtain


34


regulatory approval, we cannot assure you that they will achieve market
acceptance of any kind. The degree of market acceptance will depend on many
factors, including:

o the receipt, timing and scope of regulatory approvals,

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

o the availability of third-party reimbursement, and

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

If any of our products do not achieve market acceptance, we will likely
lose our entire investment in that product.

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

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

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

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

We are dependent upon a single outside supplier for each of the crucial
raw materials necessary to the manufacture of each of our products and product
candidates.

We cannot assure you that sufficient quantities of our raw material
requirements will be available to support the continued research, development or
manufacture of our products. We purchase the unmodified compounds utilized in
our approved products and products under development from outside suppliers. We
may be required to enter into supply contracts with outside suppliers for
certain unmodified compounds. We do not produce the unmodified adenosine
deaminase used in the manufacture of ADAGEN or the unmodified forms of
L-asparaginase used in the manufacture of ONCASPAR. We have a supply contract
with an outside supplier for the supply of each of these unmodified compounds.
If we experience a delay in obtaining or are unable to obtain any unmodified
compound, including unmodified adenosine deaminase or unmodified L-asparaginase,
on reasonable terms, or at all, it could have a material adverse effect on our
business, financial condition and results of operations.


35


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

There is one FDA-approved supplier of the adenosine deaminase enzyme, or
ADA, used in ADAGEN. During 2002 we obtained FDA approval of the use of the ADA
enzyme obtained from bovine intestines from cattle of New Zealand origin. New
Zealand currently certifies that it's cattle are Bovine spongiform
encephalopathy (BSE or mad cow disease) free. Beginning in September 2002, the
United States Department of Agriculture or USDA will require all animal sourced
materials shipped to the United States from any European country to contain a
veterinary certificate that the product is BSE free. We currently have more than
a year's supply of ADA enzyme in inventory and are investigating the ability for
our supplier which processes our ADA enzyme supply in Germany to comply with or
obtain a waiver of this requirement. We cannot guarantee that such certificate
or waiver will be available. If our supplier is unable to supply us with ADA
enzyme, it is likely that we will be unable to produce or distribute ADAGEN once
we utilize our current inventory of ADA enzyme.

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

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

The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
Our success depends, in part, on our ability to develop and maintain a strong
patent position for our products and technologies both in the United States and
in other countries. We have been licensed, and been issued, a number of patents
in the United States and other countries, and we have other patent applications
pending to protect our proprietary technology. Although we believe that our
patents provide certain protection from competition, we cannot assure you that
such patents will be of substantial protection or commercial benefit to us, will
afford us adequate protection from competing products, or will not be challenged
or declared invalid. In addition we cannot assure you that additional United
States patents or foreign patent equivalents will be issued to us. The scope of
patent


36


claims for biotechnological inventions is uncertain, and our patents and patent
applications are subject to this uncertainty.

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

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

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

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

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

Prior to our reacquisition in June 2002 of marketing rights to ONCASPAR
for the United States and certain other countries, ADAGEN, which we market on a
worldwide basis to a small patient population, was the only product for which we
engaged in the direct commercial marketing and therefore we do not have
significant experience in sales, marketing or distribution. For some of our
products, we have provided exclusive marketing rights to our corporate partners
in return for milestone payments and royalties to be received on sales. To the
extent that we enter into licensing arrangements for the marketing and sale of
our future products, any revenues we receive will depend primarily on the
efforts of these third parties. We will not control the amount and timing of
marketing resources that such third parties devote to our products. In addition,
to the extent we market products directly, significant additional expenditures
and management resources would be required to increase the size of our internal
sales force. In any sales or marketing effort, we would compete with many other
companies that currently have extensive and well-funded sales operations. Our
marketing and sales efforts may be unable to compete successfully against other
such companies.

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

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

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


37


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

o coordinating our new product and process development;

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

o hiring additional management and other critical personnel; and

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

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

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

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

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

o continued progress of our research and development programs,

o our ability to establish additional collaborative arrangements,

o changes in our existing collaborative relationships,

o progress with preclinical studies and clinical trials,

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

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

o competing technological and market developments, and

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


38


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

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

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

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

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

Because of the specialized scientific nature of our business, we are
highly dependent upon qualified scientific, technical and managerial personnel.
There is intense competition for qualified personnel in the pharmaceutical
field. Therefore, we may not be able to attract and retain the qualified
personnel necessary for the development of our business. The loss of the
services of existing personnel, as well as the failure to recruit additional key
scientific, technical and managerial personnel in a timely manner, would harm
our research and development programs and our business.

Risks Related To Our Industry

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

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

We face intense competition from established biotechnology and
pharmaceutical companies, as well as academic and research institutions that are
pursuing competing technologies and products. We know that competitors are
developing or manufacturing various products that are used for the prevention,
diagnosis or treatment of diseases that we have targeted for product
development. Many of our competitors have substantially greater research and
development capabilities and experiences and greater manufacturing, marketing
and financial resources than we do. Accordingly, our competitors may develop
technologies and products that are superior to those we or our collaborators are
developing and render our technologies and products or those of our
collaborators obsolete and noncompetitive. In addition, many of our competitors
have much more experience than we do in preclinical testing and human clinical
trials of new drugs, as well as obtaining FDA and other regulatory approval. If
we cannot compete effectively, our business and financial performance would
suffer.

We may be sued for product liability.

Because our products and product candidates are new treatments with
limited, if any, past use on humans, their use during testing or after approval
could expose us to product liability claims. We maintain product liability
insurance coverage in the total amount of $40 million for claims arising from
the use of our products in clinical trials prior to FDA approval and for claims
arising from the use of our products after FDA approval. We cannot assure you
that we will be able to maintain our existing insurance coverage or obtain
coverage for the use of our other products in the future. Also, this insurance
coverage and our


39


resources may not be sufficient to satisfy any liability resulting from product
liability claims, and a product liability claim may have a material adverse
effect on our business, financial condition or results of operations.

Sales of our products could be adversely affected if the costs for these
products are not reimbursed by third-party payors.

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

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

Risks Related To Our Subordinated Notes and Common Stock

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

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

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

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

o the status of corporate collaborations and supply arrangements,

o regulatory approvals,

o government regulation,

o developments in patent or other proprietary rights,

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

o litigation,


40


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

o general market conditions in our industry.

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

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

Our notes are subordinated.

Our 4.5% convertible subordinated notes are unsecured and subordinated in
right of payment to all of our existing and future senior indebtedness. In the
event of our bankruptcy, liquidation or reorganization, or upon acceleration of
the notes due to an event of default under the indenture and in certain other
events, our assets will be available to pay obligations on the notes only after
all senior indebtedness has been paid. As a result, there may not be sufficient
assets remaining to pay amounts due on any or all of the outstanding notes. We
are not prohibited from incurring debt, including senior indebtedness, under the
indenture. If we were to incur additional debt or liabilities, our ability to
pay our obligations on the notes could be adversely affected. As of June 30,
2002, we had no senior indebtedness outstanding.

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

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

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

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

The term fundamental change is limited to certain specified transactions
and may not include other events that might adversely affect our financial
condition or the market value of the notes or our common


41


stock. Our obligation to offer to redeem the notes upon a fundamental change
would not necessarily afford holders of the notes protection in the event of a
highly leveraged transaction, reorganization, merger or similar transaction
involving us.

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

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

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

Sales of substantial amounts of our common stock in the open market, or
the availability of such shares for sale, could adversely affect the price of
our common stock. An adverse effect on the price of our common stock may
adversely affect the trading price of the notes. We had 42,999,823 shares of
common stock outstanding as of June 30, 2002. The following securities that may
be exercised for, or are convertible into, shares of our common stock were
issued and outstanding as of June 30, 2002:

o Options. Stock options to purchase 3,644,428 shares of our common
stock at a weighted average exercise price of approximately $38.07
per share; of this total, 1,410,153 were exercisable at a weighted
average exercise price of $24.84 per share as of such date.

o Series A preferred stock. 7,000 shares of our Series A preferred
stock are outstanding, which were convertible into an aggregate of
175,000 shares of our common stock as of such date.

o Convertible subordinated notes. Notes which will convert to
5,635,390 shares of our common stock at a conversion price of $70.98
as of such date.

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

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

Under our certificate of incorporation, our board of directors has the
authority to issue up to 3,000,000 shares of preferred stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or action by our stockholders. The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any shares of preferred stock that may be issued in the future.

In May, 2002, our board of directors authorized shares of Series B
Preferred Stock in connection with its adoption of a stockholder rights plan,
under which we issued rights to purchase Series B Preferred Stock to holders of
the common stock. Upon certain triggering events, such rights become exercisable
to purchase common stock (or, in the discretion of our board of directors,
Series B Preferred Stock) at a price substantially discounted from the then
current market price of the Common Stock. Our stockholder rights


42


plan could generally discourage a merger or tender offer involving our
securities that is not approved by our board of directors by increasing the cost
of effecting any such transaction and, accordingly, could have an adverse impact
on stockholders who might want to vote in favor of such merger or participate in
such tender offer.

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

We have a significant amount of indebtedness.

As a result of the initial offering of the notes, our long-term debt is
$400,000,000. This indebtedness has affected us by:

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

o making it more difficult to obtain additional financing.

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

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

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


43


RATIO OF EARNINGS TO FIXED CHARGES

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



Year Ended June 30,
------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----

Ratio of earnings to fixed charges* .... 3:1 22:1 N/A N/A N/A

Deficiency of earnings available to
cover fixed charges* ............... N/A N/A ($6,306) ($4,919) ($3,617)


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

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

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

Our holdings of financial instruments are comprised of debt securities and
time deposits. All such instruments are classified as securities
available-for-sale. We do not invest in portfolio equity securities or
commodities or use financial derivatives for trading purposes. Our debt security
portfolio represents funds held temporarily pending use in our business and
operations. We manage these funds accordingly. We seek reasonable assuredness of
the safety of principal and market liquidity by investing in rated fixed income
securities while at the same time seeking to achieve a favorable rate of return.
Our market risk exposure consists principally of exposure to changes in interest
rates. Our holdings are also exposed to the risks of changes in the credit
quality of issuers. We typically invest the majority of our investments in the
shorter-end of the maturity spectrum, and at June 30, 2002 all of our holdings
were in instruments maturing in four years or less.

The table below presents the principal amounts and related weighted
average interest rates by year of maturity for our investment portfolio as of
June 30, 2002.



2003 2004 2005 2006 Total Fair Value
-----------------------------------------------------------------------------------------------------

Fixed Rate $75,062,270 $ 79,974,578 $124,212,652 $ 90,152,455 $369,401,955 $371,155,695
Average Interest Rate 2.54% 3.45% 3.84% 4.41% 3.63% --
Variable Rate -- -- -- -- -- --
Average Interest Rate -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------
$75,062,270 $ 79,974,578 $124,212,652 $ 90,152,455 $369,401,955 $371,155,695
=====================================================================================================


Our 4.5% convertible subordinated notes in the principal amount of
$400,000,000 due July 1, 2008 have fixed interest rates. The fair value of fixed
interest rate convertible notes is affected by changes in interest rates and by
changes in the price of our common stock.


44


Item 8. Financial Statements and Supplementary Data

The response to this item is submitted as a separate section of this
report commencing on Page F-1.

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

Not applicable.


45


PART III

The information required by Item 10 - Directors and Executive Officers of
the Registrant; Item 11 - Executive Compensation; Item 12 - Security Ownership
of Certain Beneficial Owners and Management and Item 13 - Certain Relationships
and Related Transactions; is incorporated into Part III of this Annual Report on
Form 10-K by reference to the Proxy Statement for our Annual Meeting of
Stockholders scheduled to be held on December 3, 2002.

Item 14. Controls and Procedures

Based upon KPMG's management letter to our Board of Directors, dated
September 11, 2002, there were no deficiencies or weaknesses in our internal
controls and therefore, we have not made any changes to our internal controls
since KPMG's last evaluation of such controls on September 11, 2002.


46


PART IV

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

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

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

Page Number
or
Exhibit Incorporation
Number Description By Reference
- ------ ----------- ------------

3(i) Certificate of Incorporation as amended @

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

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

4.2 Registration Rights Agreement dated as of June
26, 2001, between the Company and the initial
purchasers ++++(4.2)

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

10.1 Form of Change of Control Agreements dated as
of January 20, 1995 entered into with the
Company's Executive Officers ###(10.2)

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

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

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

10.5 Form of Stock Purchase Agreement between the
Company and the purchasers of the Series A
Cumulative Convertible Preferred Stock +(10.11)

10.6 Stock Purchase Agreement between the Company
and Schering Corporation dated as of June 30,
1995 ~(10.16)

10.7 Independent Directors' Stock Plan ~~~(10.24)

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

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

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

10.11 Form of Employee Retention Agreement dated as
of August 3, 2001 between the Company and
certain key employees +++(10.13)

10.12 Lease - 685 Route 202/206, Bridgewater, New Jersey ####

10.13 Employment Agreement with Ulrich Grau dated as
of March 6, 2002 ####

10.14 2001 Incentive Stock Plan @

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

12.1 Computation of Ratio of Earnings to Fixed Charges @

21.0 Subsidiaries of Registrant @

23.0 Consent of KPMG LLP @

99.1 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 @


47


99.2 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 @

@ Filed herewith

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

+ Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-39391) filed with the Commission and incorporated
herein by reference thereto.

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

+++ Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 2001 and incorporated herein by
reference thereto.

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

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

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

~~~ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 and incorporated herein by
reference thereto.

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

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

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

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

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

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

(b) Reports on Form 8-K.

On April 11, 2002, we filed with the Commission a Current Report on Form
8-K dated April 10, 2002 reporting our multi-year strategic collaboration with
Micromet AG.

On May 9, 2002, we filed with the Commission a Current Report on Form 8-K
dated May 8, 2002


48


reporting our financial results for the third quarter in fiscal year 2002.

On May 22, 2002 we filed with the Commission a Current Report on Form 8-K
dated May 17, 2002 reporting that we declared a dividend of one preferred share
purchase right per share for each outstanding share of Common Stock, par value
$0.01 of the Company. The dividend will be payable on June 3, 2002 to holders of
the Common Shares of record on that date.

On June 12, 2002 we filed with the Commission a Current Report on Form 8-K
dated June 12, 2002 reporting a voluntary recall of the prescription medication
ONCASPAR, a product used for the treatment of acute lymphoblastic leukemia.


49


SIGNATURES

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

ENZON, INC.
(Registrant)


Dated: September 26, 2002 by: /S/ Arthur J. Higgins
--------------------------
Arthur J. Higgins
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)

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

Name Title Date
---- ----- ----

/S/ Arthur J. Higgins Chairman, President and September 26, 2002
- ---------------------------- Chief Executive Officer
Arthur J. Higgins (Principal Executive Officer)

/S/ Kenneth J. Zuerblis Vice President, Finance, September 26, 2002
- ---------------------------- Chief Financial Officer
Kenneth J. Zuerblis (Principal Financial and
Accounting Officer) and
Corporate Secretary

/S/ David S. Barlow Director September 26, 2002
- ----------------------------
David S. Barlow

/S/ Rolf A. Classon Director September 26, 2002
- ----------------------------
Rolf A. Classon

/S/ Rosina B. Dixon Director September 26, 2002
- ----------------------------
Rosina B. Dixon

/S/ David W. Golde Director September 26, 2002
- ----------------------------
David W. Golde

/S/ Robert LeBuhn Director September 26, 2002
- ----------------------------
Robert LeBuhn

/S/ Robert L. Parkinson, Jr. Director September 26, 2002
- ----------------------------
Robert L. Parkinson, Jr.


50


CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Arthur J. Higgins, certify that:

1. I have reviewed this annual report on Form 10-K of Enzon. Inc.
("Enzon");

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Enzon as of, and for, the periods presented in this
annual report.

September 26, 2002


/s/ Arthur J. Higgins
---------------------------
Arthur J. Higgins
Chief Executive Officer


51


CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kenneth J. Zuerblis, certify that:

1. I have reviewed this annual report on Form 10-K of Enzon. Inc.
("Enzon");

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Enzon as of, and for, the periods presented in this
annual report.

September 26, 2002


/s/ Kenneth J. Zuerblis
---------------------------
Kenneth J. Zuerblis
Chief Financial Officer


52


ENZON, INC. AND SUBSIDIARIES

Index

Page
----

Independent Auditors' Report F-2

Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 2002 and 2001 F-3
Consolidated Statements of Operations - Years ended
June 30, 2002, 2001 and 2000 F-4
Consolidated Statements of Stockholders' Equity -
Years ended June 30, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows - Years ended
June 30, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements - Years ended
June 30, 2002, 2001 and 2000 F-8


F-1


INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Enzon, Inc.:

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

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enzon, Inc. and
subsidiaries as of June 30, 2002 and 2001, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2002, in conformity with accounting principles generally accepted in the
United States of America.


KPMG LLP

Short Hills, New Jersey
August 8, 2002


F-2


ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and 2001



2002 2001
------------- -------------

ASSETS
Current assets:
Cash and cash equivalents $ 113,857,998 $ 310,223,837
Short-term investments 75,165,094 129,520,083
Accounts receivable 26,050,415 11,087,748
Inventories 2,213,667 1,852,144
Other current assets 4,174,652 2,837,199
------------- -------------
Total current assets 221,461,826 455,521,011
------------- -------------
Property and equipment 19,230,456 13,181,671
Less accumulated depreciation and amortization 9,128,545 9,761,999
------------- -------------
10,101,911 3,419,672
------------- -------------
Other assets:
Marketable securities 295,990,601 76,634,780
Cost method equity investments 48,381,782 40,777
Debt issue costs, net 10,946,380 12,774,951
Product acquisition costs, net 14,008,047 --
Deferred tax assets 8,342,000 --
Patents and other assets, net 1,515,336 1,284,626
------------- -------------
379,184,146 90,735,134
------------- -------------
Total assets $ 610,747,883 $ 549,675,817
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,526,180 $ 4,670,259
Accrued expenses 6,174,304 4,490,081
Accrued interest 9,000,000 250,000
------------- -------------

Total current liabilities 19,700,484 9,410,340
------------- -------------
Accrued rent 552,256 581,438
Unearned revenue -- 694,814
Notes payable 400,000,000 400,000,000
------------- -------------
400,552,256 401,276,252
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares;
issued and outstanding 7,000 shares in 2002 and 2001
(liquidation preference aggregating $347,000 in 2002 and
$333,000 in 2001) 70 70
Common stock-$.01 par value, authorized 90,000,000 shares
issued and outstanding 42,999,823 shares in 2002 and 41,990,859
shares in 2001 429,999 419,909
Additional paid-in capital 262,854,210 257,682,479
Accumulated other comprehensive income 1,095,739 884,935
Deferred compensation (1,202,221) (1,509,171)
Accumulated deficit (72,682,654) (118,488,997)
------------- -------------
Total stockholders' equity 190,495,143 138,989,225
------------- -------------
Total liabilities and stockholders' equity $ 610,747,883 $ 549,675,817
============= =============


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


F-3


ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2002, 2001 and 2000



2002 2001 2000
------------ ------------ ------------
Revenues:

Net sales $ 22,182,704 $ 20,768,767 $ 15,557,906
Royalties 53,329,494 8,251,234 33,582
Contract revenue 292,548 2,567,708 1,426,309
------------ ------------ ------------
Total revenues 75,804,746 31,587,709 17,017,797
------------ ------------ ------------

Costs and expenses:
Cost of sales 6,077,454 3,864,284 4,888,357
Research and development expenses 18,426,860 13,051,714 8,382,772
Selling, general and administrative expenses 16,687,365 11,795,398 12,956,118
------------ ------------ ------------
Total costs and expenses 41,191,679 28,711,396 26,227,247
------------ ------------ ------------

Operating income (loss) 34,613,067 2,876,313 (9,209,450)
------------ ------------ ------------

Other income (expense):
Interest and dividend income 18,680,908 8,401,526 2,943,311
Interest expense (19,828,918) (275,049) (4,051)
Other 3,217,878 10,627 (36,274)
------------ ------------ ------------

2,069,868 8,137,104 2,902,986
------------ ------------ ------------

Income (loss) before tax benefit 36,682,935 11,013,417 (6,306,464)

Tax benefit 9,123,408 511,647 --
------------ ------------ ------------

Net income (loss) $ 45,806,343 $ 11,525,064 ($6,306,464)
============ ============ ============

Basic earnings (loss) per common share $ 1.07 $ 0.28 ($0.17)
============ ============ ============
Diluted earnings (loss) per common share $ 1.04 $ 0.26 ($0.17)
============ ============ ============

Weighted average number of common
shares outstanding - basic 42,726,112 41,602,104 38,172,515
============ ============ ============

Weighted average number of common shares
and dilutive potential common shares
outstanding 44,025,783 43,606,194 38,172,515
============ ============ ============


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


F-4


ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 2002, 2001 and 2000



Preferred stock Common stock
----------------------------------- ----------------------------------
Amount Number of Par Amount Number of Par
per share Shares Value per share Shares Value
--------- ------ ----- --------- ------ -----

Balance, July 1, 1999 107,000 $ 1,070 36,488,684 $364,886
Common stock issued for exercise of
non-qualified stock options -- -- -- 4.25 807,181 8,072
Common stock issued for conversion of
Series A preferred stock 25.00 (100,000) (1,000) 11.00 227,271 2,273
Dividends issued on Series A preferred stock -- -- -- -- --
Common stock issued for exercise of
common stock warrants -- -- -- 4.57 1,012,116 10,121
Net Proceeds from common stock offering 44.50 2,300,000 23,000
Common stock issued for Independent
Directors' Stock Plan -- -- -- 30.82 2,863 29
Common stock options issued for
consulting services -- -- -- -- -- --
Net loss -- -- -- -- -- --
----- ------- ---------- --------
Balance, June 30, 2000 7,000 70 40,838,115 408,381
Common stock issued for exercise of
non-qualified stock options -- -- -- -- 1,032,468 10,325
Issuance of restricted common stock -- -- -- 61.40 25,000 250
Common stock issued on conversion
of common stock warrants -- -- -- 1.79 93,993 940
Common stock issued for Independent
Directors' Stock Plan -- -- -- 51.84 1,283 13
Amortization of deferred compensation -- -- -- -- -- --
Unrealized gain on securities -- -- -- -- -- --
Net income -- -- -- -- -- --
----- ------- ---------- --------
Balance, June 30, 2001, carried forward 7,000 $ 70 41,990,859 $419,909



Additional Other
paid-in Comprehensive Deferred Accumulated
capital Income Compensation Deficit Total
------- ------ ------------ ------- -----

Balance, July 1, 1999 $ 146,970,289 ($121,761,026) $ 25,575,219
Common stock issued for exercise of
non-qualified stock options 3,286,246 -- -- -- 3,294,318
Common stock issued for conversion of
Series A preferred stock (1,273) -- -- -- --
Dividends issued on Series A preferred stock -- -- -- (1,946,571) (1,946,571)
Common stock issued for exercise of
common stock warrants 4,395,803 -- -- -- 4,405,924
Net Proceeds from common stock offering 95,647,262 -- -- -- 95,670,262
Common stock issued for Independent
Directors' Stock Plan 88,208 -- -- -- 88,237
Common stock options issued for
consulting services 181,239 -- -- -- 181,239
Net loss -- -- -- (6,306,464) (6,306,464)
------------- -------- ----------- ------------- -------------
Balance, June 30, 2000 250,567,774 -- -- (130,014,061) 120,962,164
Common stock issued for exercise of
non-qualified stock options 5,345,647 -- -- -- 5,355,972
Issuance of restricted common stock 1,534,750 -- (1,534,750) -- 250
Common stock issued on conversion
of common stock warrants 167,810 -- -- -- 168,750
Common stock issued for Independent
Directors' Stock Plan 66,498 -- -- -- 66,511
Amortization of deferred compensation -- -- 25,579 -- 25,579
Unrealized gain on securities -- 884,935 -- -- 884,935
Net income -- -- -- 11,525,064 11,525,064
------------- -------- ----------- ------------- -------------
Balance, June 30, 2001, carried forward $ 257,682,479 $884,935 ($1,509,171) ($118,488,997) $ 138,989,225


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


F-5


ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years ended 2002, 2001 and 2000



Preferred stock Common stock
----------------------------- ----------------------------------
Amount Number of Par Amount Number of Par
per share Shares Value per share Shares Value
--------- ------ ----- --------- ------ -----

Balance, June 30, 2001, brought forward 7,000 $70 41,990,859 $419,909
Common stock issued for exercise of
non-qualified stock options -- -- -- -- 1,007,638 10,077
Common stock issued for Independent
Directors' Stock Plan -- -- -- -- 1,326 13
Amortization of deferred compensation -- -- -- -- -- --
Unrealized gain on securities, net of income
taxes of $658,000 -- -- -- -- -- --
Net income -- -- -- -- -- --
----- --- ---------- --------
Balance, June 30, 2002 7,000 $70 42,999,823 $429,999
===== === ========== ========


Additional Other
paid-in Comprehensive Deferred Accumulated
capital Income Compensation Deficit Total
------- ------ ------------ ------- -----

Balance, June 30, 2001, brought forward $257,682,479 $ 884,935 ($1,509,171) ($118,488,997) $138,989,225
Common stock issued for exercise of
non-qualified stock options 5,171,731 -- -- -- 5,181,808
Common stock issued for Independent
Directors' Stock Plan -- -- -- -- 13
Amortization of deferred compensation -- -- 306,950 306,950
Unrealized gain on securities, net of income
taxes of $658,000 -- 210,804 -- -- 210,804
Net income -- -- -- 45,806,343 45,806,343
------------ ---------- ----------- ------------- ------------
Balance, June 30, 2002 $262,854,210 $1,095,739 ($1,202,221) ($ 72,682,654) $190,495,143
============ ========== =========== ============= ============


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


F-6


ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2002, 2001 and 2000



2002 2001 2000
------------- ------------- -------------

Cash flows from operating activities:
Net income (loss) $ 45,806,343 $ 11,525,064 ($6,306,464)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 971,569 587,495 499,245

Amortization of bond premium/discount (2,680,372) (830,481) --
Amortization of debt issue costs 1,828,571 -- --
Deferred income taxes (9,000,000) -- --
Loss on retirement of assets 2,870 2,746 36,274
Non-cash expense for issuance of restricted
common stock, warrants, and options 306,950 92,090 269,476
Changes in operating assets and liabilities:
Increase in accounts receivable (14,962,667) (5,645,293) (837,608)
Increase (decrease) in inventories (361,523) (905,427) 379,884
Increase in other current assets (1,337,453) (567,315) (1,232,483)
(Increase) decrease in deposits (385,609) (101,419) 326,952
(Decrease) increase in accounts payable (144,079) 2,204,899 749,271
Increase (decrease) accrued expenses 1,981,362 (1,216,730) (473,442)
Increase in accrued interest 8,750,000 250,000 --
Decrease in accrued rent (29,182) (26,476) (26,476)
Increase (decrease) in unearned revenue -- 184,814 (300,363)
------------- ------------- -------------
Net cash provided by (used in) operating
activities 30,746,780 5,553,967 (6,915,734)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (7,502,741) (2,082,621) (768,415)
Purchase of intangible asset (15,000,000) -- --
Proceeds from sale of equipment 962 3,525 --
Purchase of cost method equity investments (48,341,005) -- --
Proceeds from sale of marketable securities 270,549,000 24,972 --
Purchase of marketable securities (512,001,000) (163,244,000) (90,478,010)
Maturities of marketable securities 80,260,000 45,303,000 4,000,000
Decrease in long-term investments (259,656) (20,437) --
------------- ------------- -------------
Net cash used in investing activities (232,294,440) (120,015,561) (87,246,425)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,181,821 5,524,972 103,370,504
Proceeds from issuance of notes -- 400,000,000 --
Preferred stock dividend paid -- -- (1,946,571)
Debt issue costs -- (12,774,951) --
------------- ------------- -------------
Net cash provided by financing activities 5,181,821 392,750,021 101,423,933
------------- ------------- -------------
Net increase (decrease) in cash and
equivalents (196,365,839) 278,288,427 7,261,774
Cash and cash equivalents at beginning of year 310,223,837 31,935,410 24,673,636
------------- ------------- -------------
Cash and cash equivalents at end of year $ 113,857,998 $ 310,223,837 $ 31,935,410
============= ============= =============


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


F-7


ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 2002, 2001 and 2000

(1) Company Overview

Enzon, Inc. ("Enzon" or "Company") is a biopharmaceutical company that
develops, manufactures and markets enhanced therapeutics for life-threatening
diseases through the application of its proprietary technologies. The Company
was originally incorporated in 1981. To date, the Company's sources of cash have
been the proceeds from the sale of its equity and debt securities through public
offerings and private placements, sales of ADAGEN(R), and ONCASPAR(R), royalties
on sales of PEG-INTRON(TM), sales of its products for research purposes,
contract research and development fees, technology transfer and license fees and
royalty advances. The manufacturing and marketing of pharmaceutical products in
the United States is subject to stringent governmental regulation, and the sale
of any of the Company's products for use in humans in the United States will
require the prior approval of the United States Food and Drug Administration
("FDA"). To date, ADAGEN, ONCASPAR and PEG-INTRON are the only products of the
Company which have been approved by the FDA, all of which utilize the Company's
PEG technology.

(2) Summary of Significant Accounting Policies

Principles of Consolidation

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

Cash Equivalents

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

Investments In Securities

The Company classifies its investments in debt and marketable equity
securities as held-to-maturity or available-for-sale. Debt and marketable equity
securities classified as available-for-sale are carried at fair market value,
with the unrealized gains and losses, net of related tax effect, included in the
determination of comprehensive income and reported in stockholders' equity. As
of June 30, 2002 and 2001, all of the Company's debt and marketable equity
securities were classified as available-for sale as the Company does not have
the intent to hold them to maturity.


F-8


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

The amortized cost, gross unrealized holding gains or losses, and fair
value for the Company's available-for-sale securities by major security type at
June 30, 2002 were as follows:



Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair Market
Cost Gains Losses Value
------------ ----------- ------------- ------------

U.S. Government
agency debt $339,638,000 $ 2,052,000 $ -- $341,690,000
U.S. corporate debt 29,764,000 -- (298,000) 29,466,000
------------ ----------- ------------- ------------
$369,402,000 $ 2,052,000 ($298,000) $371,156,000
============ =========== ============= ============


Maturities of debt securities classified as available-for-sale at June 30,
2002 were as follows:

Years ended June, 30 Amortized Cost Fair Market Value
-------------- -----------------
2003 $ 75,062,000 $ 75,165,000
2004 79,975,000 80,171,000
2005 124,213,000 124,911,000
2006 90,152,000 90,909,000
------------ ------------
$369,402,000 $371,156,000
============ ============

Gross realized gains from the sale of investment securities included in
income for the year ended June 30, 2002 were $1,185,000.

The amortized cost, gross unrealized holding gains or losses, and fair
value for securities available-for-sale by major security type at June 30, 2001
were as follows:



Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair Market
Cost Gains Losses Value
------------ ----------- ------------- ------------

U.S. Government
agency debt $ 19,921,000 $ 467,000 $ -- $ 20,388,000
U.S. corporate debt 171,807,000 520,000 (253,000) 172,074,000
Foreign corporate
debt 13,542,000 151,000 -- 13,693,000
------------ ----------- ------------- ------------
$205,270,000 $ 1,138,000 ($ 253,000) $206,155,000
============ =========== ============= ============


Gross realized gains from the sale of investment securities included in
income for the year ended June 30, 2001 were $178,000.

The fair value of substantially all securities is determined by quoted
market prices. Gains or losses on securities sold are based on the specific
identification method.

Inventory Costing and Idle Capacity


F-9


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

Costs associated with idle capacity at the Company's manufacturing
facility are charged to cost of sales as incurred.

Patents

The Company has licensed, and been issued, a number of patents in the
United States and other countries and has other patent applications pending to
protect its proprietary technology. Although the Company believes that its
patents provide adequate protection for the conduct of its business, there can
be no assurance that such patents will be of substantial protection or
commercial benefit to the Company, will afford the Company adequate protection
from competing products, or will not be challenged or declared invalid, or that
additional United States patents or foreign patent equivalents will be issued to
the Company. The degree of patent protection to be afforded to biotechnological
inventions is uncertain, and the Company's products are subject to this
uncertainty.

Patents related to the acquisition of SCA Ventures, Inc., formerly Genex
Corporation, were recorded at their fair value at the date of acquisition and
are being amortized over the estimated useful lives of the patents ranging from
8 to 17 years. Accumulated amortization as of June 30, 2002 and 2001 was
$1,490,000 and $1,372,000, respectively.

Costs related to the filing of patent applications related to the
Company's products and technology are expensed as incurred.

Property and Equipment

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

Long-Lived Assets

In accordance with statement of Financial Accounting ("SFAS") No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, the Company reviews long-lived assets for impairment whenever
events or changes in business circumstances occur that indicate the carrying
amount of the assets may not be recovered. The Company assesses the
recoverability of long-lived assets held and to be used based on undiscounted
cash flows.

Product Acquisition Cost

Cost related to acquisition of products are recorded on the balance sheet
at cost and amortized over the estimated life of the product.

Revenue Recognition

Revenues from the sale of the Company's products that are sold are
recognized at the time of shipment and provision is made for estimated returns.
Reimbursement for ADAGEN sold directly to third party payers is handled on an
individual basis due to the high cost of treatment and limited patient


F-10


population. Because of the uncertainty of reimbursement and the Company's
commitment of supply to the patient regardless of whether or not the Company
will be reimbursed, revenues for the sale of ADAGEN are recognized when
reimbursement from third party payers becomes likely.

Royalties under the Company's license agreements with third parties are
recognized when earned (See note 13).

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

Research and Development

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

Stock-Based Compensation Plans

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

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

Cash Flow Information

During the year ended June 30, 2000, 100,000 shares of Series A Preferred
Stock were converted to 227,271 shares of Common Stock. Accrued dividends of
$1,947,000 on the Series A Preferred Shares that were converted, were settled by
cash payments. Additionally, cash payments totaling $19 were made for fractional
shares related to the conversions. There were no conversions of Series A
Cumulative Convertible Preferred Stock ("Series A Preferred Stock" or "Series A
Preferred Shares") during the years ended June 30, 2002 and 2001.

Cash payments for interest were approximately $9,250,000, $25,000 and
$4,000 for the years ended June 30, 2002, 2001 and 2000, respectively. There
were no income tax payments made for the years ended June 30, 2002, 2001 and
2000.


F-11


Reclassifications

The Company made certain reclassifications to the 2001 and 2000 financial
statements to conform to the 2002 presentation.

(3) Comprehensive Income

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

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



Years ended June 30,
2002 2001 2000
----------- ----------- -----------

Net income (loss) $45,806,000 $11,525,000 ($6,306,000)
Unrealized gain on securities net of
tax of $658,000 for 2002 and $0
for 2001 and 2000 211,000 885,000 --
----------- ----------- -----------

Total comprehensive income (loss) $46,017,000 $12,410,000 ($6,306,000)
=========== =========== ===========


(4) Earnings (loss) Per Common Share

Basic earnings (loss) per share is computed by dividing the net income
(loss) available to common shareholders adjusted for cumulative undeclared
preferred stock dividends for the relevant period, by the weighted average
number of shares of Common Stock issued and outstanding during the periods. For
purposes of calculating diluted earnings per share for the years ended June 30,
2002 and 2001, the denominator includes both the weighted average number of
shares of Common Stock outstanding and the number of dilutive Common Stock
equivalents. The number of dilutive Common Stock equivalents includes the effect
of non-qualified stock options calculated using the treasury stock method and
the number of shares issuable upon conversion of the outstanding Series A
Preferred Stock. The number of shares issuable upon conversion of the Company's
4.5% Convertible Subordinated Notes due 2008 (the "Notes") have not been
included as the effect of their inclusion would be antidilutive. For the year
ended June 30, 2000, the exercise or conversion of all dilutive potential common
shares is not included for purposes of the diluted loss per share calculation as
the effect of their inclusion would be antidilutive due to the net loss recorded
for that period. As of June 30, 2002, the Company had 6,955,000 dilutive
potential common shares outstanding that could potentially dilute future
earnings per share calculations.


F-12


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

The following table reconciles the basic and diluted earnings (loss) per
share calculation:



Years ended June 30,
----------------------------------------------
2002 2001 2000
----------- ----------- -----------

Net income (loss) $45,806,000 $11,525,000 ($6,306,000)
Less: preferred stock dividends 14,000 14,000 14,000
----------- ----------- -----------
Net income (loss) available to
common stockholders $45,792,000 $11,511,000 ($6,320,000)
=========== =========== ===========
Weighted average number of
common shares issued and
outstanding - basic 42,726,112 41,602,104 38,172,515
Effect of dilutive common stock
equivalents:
Conversion of preferred stock 16,000 16,000 --
Exercise of non-qualified
stock options and restricted stock 1,283,671 1,988,090 --
----------- ----------- -----------
44,025,783 43,606,194 38,172,515
=========== =========== ===========


(5) Inventories

Inventories consist of the following:

June 30,
--------------------------
2002 2001
---------- ----------
Raw materials $ 827,000 $ 421,000
Work in process 1,043,000 737,000
Finished goods 344,000 694,000
---------- ----------
$2,214,000 $1,852,000
========== ==========

(6) Property and Equipment

Property and equipment consist of the following:

June 30,
---------------------------- Estimated
2002 2001 useful lives
---- ---- ------------
Equipment $ 9,123,000 $ 8,692,000 3-7 years
Furniture and fixtures 1,362,000 1,446,000 7 years
Vehicles 55,000 24,000 3 years
Leasehold improvements 8,690,000 3,020,000 3-15 years
----------- -----------
$19,230,000 $13,182,000
=========== ===========

During the years ended June 30, 2002 and 2001, the Company's fixed asset
disposals were approximately $1,454,000 and $991,000, respectively. The Company
disposed of $1,450,000 in fully depreciated assets during the year ended June
30, 2002.


F-13


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

Depreciation and amortization charged to operations relating to property
and equipment totaled $817,000, $442,000 and $348,000 for the years ended June
30, 2002, 2001 and 2000, respectively.

(7) Accrued Expenses

Accrued expenses consist of:

June 30,
---------------------------
2002 2001
---- ----
Accrued wages and vacation $3,685,000 $1,596,000
Accrued Medicaid rebates 1,418,000 943,000
Unearned revenue 183,000 630,000
Accrued costs associated with
subordinated notes offering -- 371,000
Other 888,000 950,000
---------- ----------
$6,174,000 $4,490,000
========== ==========

(8) Long-term debt

In June 2001, the Company completed a private placement of $400,000,000 in
4.5% Convertible Subordinated Notes due July 1, 2008 (the "Notes"). The Company
received net proceeds from this offering of $387,200,000, after deducting costs
associated with the offering. The Notes bear interest at an annual rate of 4.5%.
Accrued interest on the Notes was approximately $9,000,000 as of June 30, 2002.
The holders may convert all or a portion of the Notes into Common Stock at any
time on or before July 1, 2008. The Notes are convertible into Common Stock at a
conversion price of $70.98 per share, subject to adjustment in certain events.
The Notes are subordinated to all existing and future senior indebtedness. On or
after July 7, 2004, the Company may redeem any or all of the Notes at specified
redemption prices, plus accrued and unpaid interest to the day preceding the
redemption date. Upon the occurrence of a "fundamental change", as defined in
the indenture governing the Notes, holders of the Notes may require the Company
to redeem the Notes at a price equal to 100 percent of the principal amount. In
August 2001, the Company filed a registration statement with the U.S. Securities
and Exchange Commission covering the resale of the Notes and the Common Stock
issuable upon conversion of the Notes. The fair value of the 4.5% Convertible
Subordinated Notes was approximately $286,520,000 at June 30, 2002.

(9) Stockholders' Equity

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


F-14


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

acquiring person or group for one share of Enzon or in certain circumstances,
shares of the third party acquirer, each having a value of twice the Right's
then-current exercise price. The Rights will expire on May 16, 2012.

Series A Preferred Stock

The Company's Series A Preferred Shares are convertible into Common Stock
at a conversion rate of $11 per share. The value of the Series A Preferred
Shares for conversion purposes is $25 per share. Holders of the Series A
Preferred Shares are entitled to an annual dividend of $2 per share, payable
semiannually, but only when and if declared by the Board of Directors, out of
funds legally available. Dividends on the Series A Preferred Shares are
cumulative and accrue and accumulate but will not be paid, except in liquidation
or upon conversion, until such time as the Board of Directors deems it
appropriate in light of the Company's then current financial condition. No
dividends are to be paid or set apart for payment on the Company's Common Stock,
nor are any shares of Common Stock to be redeemed, retired or otherwise acquired
for valuable consideration unless the Company has paid in full or made
appropriate provision for the payment in full of all dividends which have then
accumulated on the Series A Preferred Shares. Holders of the Series A Preferred
Shares are entitled to one vote per share on matters to be voted upon by the
stockholders of the Company. As of June 30, 2002 and 2001, undeclared accrued
dividends in arrears were $172,000 or $24.54 per share and $158,000 or $22.54
per share, respectively. All Common Shares are junior in rank to the Series A
Preferred Shares, with respect to the preferences as to dividends, distributions
and payments upon the liquidation, dissolution or winding up of the Company.

Common Stock

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

In December 2001, the stockholders approved the amendment of the Company's
certificate of incorporation to increase the total number of shares of common
stock the Company is authorized to issue from 60,000,000 shares to 90,000,000
shares.

During the year ended June 30, 2000, the Company sold 2,300,000 shares of
Common Stock in a public offering at a gross offering price of $44.50 per share.
The offering resulted in gross proceeds of approximately $102,350,000 and net
proceeds of approximately $95,670,000.

The board of directors has the authority to issue up to 3,000,000 shares
of preferred stock, par value $0.01 per share, and to determine the price and
terms, including preferences and voting rights, of those shares without
stockholder approval.

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


F-15


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

As of June 30, 2002, the Company has reserved its common shares for
special purposes as detailed below:

Shares issuable upon conversion of
Series A Preferred Shares 16,000
Non-Qualified Stock Option Plan 5,194,000
Shares issuable upon conversion of Notes 5,635,000
----------
10,845,000
==========

Common Stock Warrants

As of June 30, 2002 and 2001, there were no warrants outstanding.

During the year ended June 30, 2001, warrants were exercised to purchase
94,000 shares of the Company's Common Stock. Of this amount, 34,000 warrants
were issued in connection with the Company's January and March 1996 private
placements of Common Stock and 60,000 were issued during the year ended June 30,
1999 as compensation for consulting services.

During the year ended June 30, 2000, warrants were exercised to purchase
1,012,000 shares of the Company's Common Stock. Of this amount, 702,000 warrants
were issued in connection with the Company's January 1996 private placement and
134,000 were issued during the year ended June 30, 1999 as compensation for
consulting services. The exercise price of and the number of shares issuable
under these warrants were adjusted under standard anti-dilution provisions, as
defined in the warrants.

(10) Independent Directors' Stock Plan

On December 3, 1996, the stockholders voted to approve the Company's
Independent Directors' Stock Plan, which provides for compensation in the form
of quarterly grants of Common Stock to non-executive, independent directors
serving on the Company's Board of Directors. Each independent director is
granted shares of Common Stock equivalent to $2,500 per quarter plus $500 per
Board of Director's meeting attended. The number of shares issued is based on
the fair market value of Common Stock on the last trading day of the applicable
quarter. In October 2000, the Compensation Committee of the Board of Directors
amended the Plan to provide that the Independent Directors will be entitled to
elect to receive up to 50% of the fees payable in cash with the remainder of the
fee to be paid in Common Stock. During the years ended June 30, 2002, 2001 and
2000, the Company issued 1,000, 1,000 and 3,000 shares of Common Stock,
respectively, to independent directors, pursuant to the Independent Directors'
Stock Plan. Commencing with the stock issuable for the quarter ended March 31,
2002, the Compensation Committee has determined to issue the common stock
previously issuable to the independent directors under the Independent Plan
under the Company's 2001 Incentive Stock Plan which was approved by the
Company's stockholders in December 2001.


F-16


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

(11) Stock Option Plans

In November 1987, the Company's Board of Directors adopted a Non-Qualified
Stock Option Plan (the "Stock Option Plan"). As of June 30, 2002, 5,194,000
shares of Common Stock were reserved for issuance pursuant to options, which may
be granted to employees, non-employee directors or consultants to the Company.
The exercise price of the options granted must be at least 100% of the fair
market value of the stock at the time the option is granted. Options may be
exercised for a period of up to ten years from the date they are granted. Some
of the options granted contain accelerated vesting provision, under which the
vesting and exercisability of such shares will accelerate if the closing price
of the Company's Common Stock extends $100 per share for at least twenty
consecutive days as reported by the NASDAQ national market. The other terms and
conditions of the options generally are to be determined by the Board of
Directors, or an option committee appointed by the Board, at their discretion.

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

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation". The Company continues to use APB No. 25, "Accounting for Stock
Issued to Employees," to account for the Stock Option Plan. All options granted
under the Stock Option Plan are granted with exercise prices which equal or
exceed the fair market value of the stock at the date of grant. Accordingly,
there is no compensation expense recognized for options granted to employees.

The following pro forma financial information shows the effect and the
Company's net income (loss) and net income (loss) per share, had compensation
expense been recognized consistent with the fair value method of SFAS 123.



2002 2001 2000
---- ---- ----

Net income (loss) - as reported $45,806,000 $11,525,000 ($6,306,000)
Net income (loss) - pro forma 23,055,117 1,609,000 ($10,008,000)
Net income (loss) per diluted share - as reported $ 1.04 $ 0.26 ($0.17)
Net income (loss) per diluted share - pro forma $ 0.52 $ 0.04 ($0.26)



F-17


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

The fair value of each option granted during the three years ended June
30, 2002 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (i) dividend yield of 0%,
(ii) expected term of five years, (iii) volatility of 78%, 83% and 84% and (iv)
a risk-free interest rate of 4.00%, 5.72% and 6.19% for the years ended June 30,
2002, 2001 and 2000, respectively. The weighted average fair value at the date
of grant for options granted during the years ended June 30, 2002, 2001 and 2000
was $44.39, $56.79 and $33.78 per share, respectively.

The following is a summary of the activity in the Company's Stock Option
Plans:



Weighted
Average
Exercise Range of
Shares Price Prices
------ ----- ------

Outstanding at July 1, 1999 3,724,000 4.51 $ 1.88 to $15.75

Granted at exercise prices which equaled
the fair market value on the date of grant 302,000 33.78 $21.50 to $69.50
Exercised (809,000) 4.25 $ 2.06 to $32.00
Canceled (11,000) 20.53 $ 6.00 to $37.38
----------
Outstanding at June 30, 2000 3,206,000 7.35 $ 1.88 to $69.50

Granted at exercise prices which equaled
the fair market value on the date of grant 1,150,000 56.79 $44.75 to $73.22
Exercised (1,033,000) 5.25 $ 2.06 to $39.94
Canceled (39,000) 36.31 $14.13 to $58.63
----------
Outstanding at June 30, 2001 3,284,000 24.98 $ 1.88 to $73.22

Granted at exercise prices which equaled
the fair market value on the date of grant 1,399,000 44.39 $25.10 to $65.86
Exercised (1,008,000) 4.13 $ 2.00 to $37.38
Canceled (31,000) 41.56 $22.31 to $70.69
----------
Outstanding at June 30, 2002 3,644,000 38.07 $ 2.47 to $73.22
==========


Of the options the Company granted for the fiscal year ended June 30,
2002, some contain accelerated vesting provisions based on the achievement of
certain milestones.


F-18


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

As of June 30, 2002, the Stock Option Plans had options outstanding and
exercisable by price range as follows:



Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----

$1.87 - $ 4.50 541,000 2.74 $ 3.54 541,000 $ 3.54
$4.62 - $15.75 370,000 6.02 $ 8.78 350,000 $ 8.47
$22.31 - $28.17 463,000 9.54 $27.41 20,000 $22.60
$29.75 - $43.75 389,000 8.88 $39.78 108,000 $41.67
$43.85 - $44.75 424,000 8.16 $44.71 41,000 $44.75
$45.98 - $55.99 498,000 9.12 $51.13 20,000 $51.53
$57.12 - $58.63 494,000 9.28 $57.82 64,000 $58.62
$60.35 - $69.50 26,000 8.44 $63.82 7,000 $63.22
$70.00 - $73.21 439,000 8.86 $70.11 259,000 $70.04
--------- ---------
3,644,000 7.76 $38.08 1,410,000 $24.84
========= =========


(12) Income Taxes

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

The components of the income tax benefit are summarized as follows:

June 30,
---------------------------
2002 2001
----------- ---------
Current:
Federal $ -- $ 217,000
State (857,067) (728,647)
----------- ---------
Total current (857,067) (511,647)
----------- ---------

Deferred:
Federal (6,132,696) --
State (2,133,645) --
----------- ---------

Total deferred (8,266,341) --
----------- ---------
Income tax benefit ($9,123,408) ($511,647)
=========== =========


F-19


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

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

June 30,
2002 2001
------------ -----------
Income tax expense (benefit)
computed at federal
statutory rate $ 12,839,027 $ 3,854,696

Add (deduct) effect of:
State income taxes (including sale
of state net operating loss
carryforwards), net of federal tax (1,930,962) (473,620)

Federal tax benefit through
utilization of net operating loss
carryforwards against current
period income (13,116,686) (3,892,723)

Reduction in beginning of year
valuation allowance (6,914,787) --
------------ -----------

($9,123,408) ($511,647)
============ ===========


F-20


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

At June 30, 2002 and 2001, the tax effects of temporary differences that
give rise to the deferred tax assets and deferred tax liabilities are as
follows:



2002 2001
Deferred tax assets:

Inventories $ 49,000 $ 116,000
Investment valuation reserve 78,000 78,000
Contribution carryover 63,000 36,000
Compensated absences 271,000 190,000
Excess of financial statement over tax depreciation 719,000 862,000
Royalty advance - Aventis 396,000 396,000
Accrued expenses 356,000 315,000
Federal and state net operating loss carryforwards 74,574,000 63,662,000
Research and development and investment tax
credit carryforwards 12,009,000 9,851,000
------------ ------------
Total gross deferred tax assets 88,515,000 75,506,000

Less valuation allowance (78,809,000) (74,800,000)
------------ ------------

9,706,000 706,000
------------ ------------

Deferred tax liabilities:

Unrealized gain on securities (658,000) --
Book basis in excess of tax basis of acquired assets (706,000) (706,000)
------------ ------------
(1,364,000) (706,000)
------------ ------------

Net deferred tax assets $ 8,342,000 $ --
============ ============


During 2002 and 2001, the Company recognized a tax benefit of $857,000 and
$728,000 respectively, from the sale of certain state net operating loss
carryforwards.

A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. At June 30,
2002, the Company had Federal net operating loss carryforwards of approximately
$202,000,000 and combined state net operating loss carryforwards of
approximately $120,000,000 that will expire in the years 2003 through 2021. The
Company also has federal research and development tax credit carryforwards of
approximately $9,042,000 for tax reporting purposes, which expire in the years
2003 to 2021. In addition, the Company has $2,967,000 state research and
development tax credit carryforwards, which expire in the years 2003 to 2008.
The Company's ability to use the net operation loss and research and development
tax credits carryforwards are subject to certain limitations due to ownership
changes, as defined by rules pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended. Of the deferred tax asset related to the federal and
state net operating loss carryforwards, approximately $54,260,000 relates to a
tax deduction for non-qualified stock options. The Company will increase paid in
capital when these benefits are realized for tax purposes. Management believes
that it is more likely than not that a portion of the deferred tax asset will be
realized associated with the net operating losses from operating activities,
based on future operations, and has recognized approximately $9 million as a
deferred tax asset at June 30, 2002 related to the expected future profits. The
Company has provided a


F-21


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

valuation allowance of $78,809,000 against the remaining deferred tax asset and
will continue to reassess the need for such in accordance with SFAS 109 and
based on the future operating performance of the Company.

In addition to the net operating loss carryforward stated above, the
Company has additional net operating loss of $39,945,000 from the acquisition of
Enzon Labs, Inc. which is limited to a maximum of $4,921,000 per year. The
$39,945,000 is not included in the determination of the deferred tax asset
figure in the table above.

(13) Significant Agreements

Schering Agreement

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

PEG-INTRON received marketing authorization in the European Union as a
stand-alone therapy for hepatitis C in May 2000 and as a combination therapy
with REBETOL in March 2001. Schering-Plough received FDA approval for PEG-INTRON
as a stand-alone therapy for the treatment of hepatitis C in January 2001 and as
a combination therapy with REBETOL for the treatment of hepatitis C in August
2001.

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

In January 2001, the Company earned a final $2,000,000 million milestone
payment upon the FDA's approval of PEG-INTRON and in February 2000 the Company
earned a $1,000,000 million milestone payment when the FDA accepted the
Biologics License Application, or BLA, for PEG-INTRON filed by Schering-Plough.
These milestone payments were recognized when received, as the earnings process
was complete. Schering-Plough's obligation to pay the Company royalties on sales
of PEG-INTRON terminates, on a country-by-country basis, upon the later of the
date the last patent of the Company to contain a claim covering PEG-INTRON
expires in the country or 15 years after the first commercial sale of PEG-INTRON
in such country.

Schering-Plough has the right to terminate this agreement at any time if
the Company fails to maintain the requisite liability insurance of $5,000,000.


F-22


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

Aventis Agreement

During June 2002, the Company amended its license agreement with Aventis
to reacquire rights to market and distribute ONCASPAR in the United States,
Mexico, Canada and the Asia/Pacific region. In return for the marketing and
distribution rights the Company paid Aventis $15 million and will pay a 25%
royalty on net sales of ONCASPAR through 2014. Prior to the amendment Aventis
was responsible for the marketing and distribution of ONCASPAR. Under the
previous agreement Aventis paid the Company a royalty on net sales of ONCASPAR
of 27.5% on annual sales up to $10 million and 25% on annual sales exceeding $10
million.

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

Under the Company's license agreement with Aventis in effect prior to the
June 2002 amendment discussed above (the "Prior License Agreement"), Enzon
granted an exclusive license to Aventis to sell ONCASPAR in the U.S. Enzon has
received licensing payments totaling $6,000,000 and was entitled to royalties on
net sales of ONCASPAR. During July 2000, the Company further amended the license
agreement with Aventis to increase the base royalty payable to the Company on
net sales of ONCASPAR from 23.5% to 27.5% on annual sales up to $10,000,000 and
25% on annual sales exceeding $10,000,000. These royalty payments included
Aventis' cost of purchasing ONCASPAR under a separate supply agreement. The
agreement was also extended until 2016. Additionally, the Prior License
Agreement eliminated the super royalty of 43.5% on net sales of ONCASPAR which
exceed certain agreed-upon amounts. The Prior License Agreement also provided
for a payment of $3,500,000 in advance royalties, which was received in January
1995.

As part of the June 2002 amendment, the remaining unpaid royalty advance
on the balance sheet of $1 million was eliminated. This will be offset against
the $15 million payment to Aventis and the net $14 million is included in
product acquisition cost, net and will be amortized over 14 years, the estimated
remaining life of ONCASPAR.

During August 2000, the Company made a $1,500,000 million payment to
Aventis which was accrued at June 30, 2000 to settle a disagreement over the
purchase price of ONCASPAR under the supply agreement and to settle Aventis'
claim that Enzon should be responsible for Aventis' lost profits while ONCASPAR
was under temporary labeling and distribution modifications. In November 1998,
the Company and the FDA agreed to temporary labeling and distribution
modifications for ONCASPAR, as a result of certain previously disclosed
manufacturing problems. These temporary modifications resulted in Enzon, rather
than Aventis, distributing ONCASPAR directly to patients on an as needed basis.

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


F-23


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

MEDAC Agreement

The Company also granted an exclusive license to MEDAC to sell ONCASPAR
and any PEG-asparaginase product, developed by the Company or MEDAC, during the
term of the agreement in Western Europe, Turkey and Russia. The Company's supply
agreement with MEDAC provides for MEDAC to purchase ONCASPAR from the Company at
certain established prices, which increase over the initial five-year term of
the agreement. Under the license agreement, MEDAC is responsible for obtaining
additional approvals and indications in the licensed territories, beyond the
currently approved hypersensitive indication in Germany. Under the agreement,
MEDAC is required to meet certain minimum purchase requirements. The MEDAC
license terminates in October 2001. The Company is currently in negotiations
with MEDAC to enter into a new license agreement.

Nova Factor Agreement

The Company has an agreement with Nova Factor, Inc. ("Nova Factor"),
formerly Gentiva Health Services to purchase and distribute ADAGEN and ONCASPAR
in the United States and Canada. The agreement provides for Nova Factor to
purchase the products from the Company at prices established in the agreement.
Nova Factor also receives a service fee for the distribution of the products.

Inhale Agreement

In January 2002, the Company entered into a broad strategic alliance with
Inhale Therapeutic Systems, Inc. that includes the following components:

o The companies agreed to enter into a collaboration to jointly
develop three products to be specified over time using Inhale's
Inhance(TM) pulmonary delivery platform and SEDS(TM) supercritical
fluids platform. Inhale will be responsible for formulation
development, delivery system supply, and in some cases, early
clinical development. Enzon will have responsibility for most
clinical development and for commercialization.

o The two companies also agreed to collaborate on the development of
single-chain antibody (SCA(R)) products to be administered by the
pulmonary route.

o Enzon granted to Inhale the exclusive right to grant sub-licenses
under Enzon's PEG patents to third parties. Enzon will receive a
share of profits for certain products that currently incorporate
Enzon's branched PEG technology and royalties on sales of products
that are subject to new sub-licenses that Inhale grants to its
partners under Enzon's PEG patents. Enzon retains the right to use
all of its PEG technology for its own product portfolio, as well as
those products it develops in co-commercialization collaborations
with third parties. Enzon purchased $40 million of newly issued
Inhale convertible preferred stock in January 2002. The preferred
stock is convertible into Inhale common stock at a conversion price
of $22.79 per share. In the event Inhale's common stock price three
years from the date of issuance of the preferred stock or earlier in
certain circumstances is less than $22.79, the conversion price will
be adjusted down, although in no event will it be less than $18.23
per share. Conversion of the preferred stock into common stock can
occur anywhere from 1 to 4 years following the issuance of the
preferred stock or earlier in certain circumstances. The preferred
stock investment will be accounted for under the cost method.


F-24


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

o The two companies also agreed in January 2002 to a settlement of the
patent infringement suit filed in 1998 by Enzon against Inhale's
subsidiary, Shearwater Polymers, Inc. Inhale will receive licensing
access to the contested patents under a cross-license agreement.
Enzon received a one-time payment of $3 million from Inhale to cover
expenses incurred in defending Enzon's branched PEG patents which is
included in other income.

Micromet Agreement

On April 10, 2002, the Company announced a multi-year strategic
collaboration with Micromet AG ("Micromet"), a private company based in Munich,
Germany, to identify and develop the next generation of antibody-based
therapeutics.

Under the terms of the agreement, Enzon and Micromet (collectively, the
Partners) will combine their significant patent estates and complementary
expertise in single-chain antibody ("SCA") technology to create a leading
platform of therapeutic products based on antibody fragments. The collaboration
will also benefit from a non-exclusive, royalty-bearing license from Enzon for
PEGylated SCA products. The companies will establish a new R&D Unit located at
Micromet's research facility in Germany. The R&D Unit will be staffed initially
with 25 scientists and plans to be fully operational by the end of 2002. During
the first phase of the collaboration, covering a 30-month period beginning in
the third quarter of calendar 2002, the new R&D Unit will focus on the
generation of at least two clinical product candidates in therapeutic areas of
common strategic interest. The Partners will share equally the costs of research
and development, and plan to share the revenues generated from technology
licenses and from future commercialization of any developed products.

In addition to the R&D collaboration, Enzon made an $8.3 million
investment into Micromet in the form of a note convertible into common stock of
Micromet. This note is convertible into Micromet Common Stock at a price of
$1,015 per share.

We hold core intellectual property in SCAs. These fundamental patents,
combined with Micromet's key patents in SCA linkers and fusion protein
technology, generate a compelling technology platform for SCA product
development. The Partners have entered into a cross-license agreement for there
respective SCA intellectual property and have decided to jointly market their
combined SCA to third parties. Micromet will be the exclusive marketing partner
and will institute a comprehensive licensing program on behalf of the
partnership, for which the parties will share equally in the costs and revenues.
Current licensees to Enzon and Micromet SCA intellectual property include
Alexion, Bristol-Myers Squibb, Cambridge Antibody Technologies, Cell Genesys,
Celltech, Crucell, Eli Lilly, Seattle Genetics and Xoma. Several SCA molecules
are in clinical trials. Alexion Pharmaceuticals, Inc. is currently in Phase III
clinical studies in cardiopulmonary bypass surgery.

(14) Commitments and Contingencies

In the course of normal operations, the Company is subject to the
marketing and manufacturing regulations as established by the FDA. During fiscal
1999, the Company agreed with the FDA to temporary labeling and distribution
modifications for ONCASPAR due to increased levels of particulates in certain
batches of ONCASPAR, which the Company manufactured. The Company, rather than
its marketing partner, Aventis, took over distribution of ONCASPAR directly to
patients, on an as needed basis.


F-25


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

During fiscal 2001, the FDA gave final approval to manufacturing changes,
which the Company made to correct these manufacturing problems, and all previous
imposed restrictions were lifted.

During April 2000, the Company agreed to binding arbitration to settle a
lawsuit, filed by LBC Capital Resources, Inc. ("LBC") a former financial
advisor, in the United States District Court for the District of New Jersey. The
arbitrator awarded LBC a $6,000,000 judgment. In its suit LBC claimed that under
a May 2, 1995 letter agreement between LBC and the Company, LBC was entitled to
a commission in connection with the Company's January and March 1996 private
placements, comprised of $675,000 and warrants to purchase 1,250,000 shares of
the Company's Common Stock at an exercise price of $2.50 per share. As a result
of the arbitration award, the Company recognized a net charge to selling,
general and administrative expenses of approximately $2,600,000 during the third
quarter of the year ended June 30, 2000. The charge represents the net profit
and loss effect of the incremental reserves provided specifically for this
litigation, offset by the reduction during the quarter of $2,900,000 of other
contingency accruals that were deemed to not be required for certain other
contingencies.

The Company has agreements with certain members of its upper management,
which provide for payments following a termination of employment occurring after
a change in control of the Company. The Company also has an employment
agreement, dated May 9, 2001 with its Chief Executive Officer and certain
members of upper management which provides for severance payments in addition to
the change in control provisions discussed above.

(15) Leases

The Company has several leases for office, warehouse, production and
research facilities and equipment. The non-cancelable lease-terms for the
operating leases expire at various dates between 2003 and 2021 and each
agreement includes renewal options.

Future minimum lease payments, for non-cancelable operating (leases with
initial or remaining lease terms in excess of one year) as of June 30, 2002 are:

Year ending Operating
June 30, leases
-------- ------
2003 $ 1,274,000
2004 1,261,000
2005 1,250,000
2006 1,264,000
2007 1,174,000
Thereafter 9,806,000
-----------
Total minimum lease payments $16,029,000
===========

Rent expense amounted to $847,000, $856,000 and $1,055,000 for the years
ended June 30, 2002, 2001 and 2000, respectively.


F-26


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

(16) Retirement Plans

The Company maintains a defined contribution, 401(k) pension plan for
substantially all its employees. The Company currently matches 50% of the
employee's contribution of up to 6% of compensation, as defined. The Company's
match is invested solely in a fund which purchases the Company's Common Stock in
the open market. Total Company contributions for the years ended June 30, 2002,
2001, and 2000 were $196,000, $156,000 and $128,000, respectively.

(17) Business and Geographical Segments

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

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

During the years ended June 30, 2002, 2001 and 2000, the Company had
export sales and royalties recognized on export sales of $26,302,000,
$11,161,000 and $4,137,000, respectively. Of these amounts, sales and royalties
in Europe and royalties recognized on sales in Europe represented $22,671,000,
$10,226,000 and $3,617,000 during the years ended June 30, 2002, 2001 and 2000,
respectively.

ADAGEN sales represent approximately 61%, 64% and 78% of the Company's
total net sales for the year ended June 30, 2002, 2001 and 2000, respectively. A
portion of the Company's ADAGEN sales for the years ended June 30, 2002, 2001
and 2000, were made to Medicaid patients.


F-27


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

(18) Quarterly Results of Operations (Unaudited)

The following table presents summarized unaudited quarterly financial
data.



Three Months Ended
-------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, Fiscal Year
2001 2001 2002 2002 2002
------------- ----------- ----------- -------------- -----------

Revenues $12,143,702 $18,601,788 $19,844,153 $ 25,215,103 $75,804,746
Gross Profit (1) 3,715,629 4,416,756 4,352,880 3,619,985 16,105,250
Tax (Provision) Benefit (86,331) 183,002 267,174 8,759,563 9,123,408
Net income $ 4,230,220 $ 8,645,525 $12,167,075 $ 20,763,523 $45,806,343
=========== =========== =========== ============== ===========
Net income per
common share:
Basic $ 0.10 $ 0.20 $ 0.28 $ 0.48 $ 1.07
Diluted $ 0.10 $ 0.20 $ 0.28 $ 0.47 $ 1.04

Weighted
average number
of shares of
common stock
outstanding-basic 42,122,284 42,766,699 42,969,222 42,982,052 42,726,112

Weighted
average number
of shares of
common stock
outstanding-diluted 43,922,829 43,959,216 43,933,865 43,839,982 44,025,783


Three Months Ended
-------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, Fiscal Year
2000 2000 2001 2001 2001
------------- ----------- ----------- -------------- -----------

Revenues $ 5,173,614 $ 6,019,145 $9,931,754 $ 10,463,196 $31,587,709
Gross profit (1) 3,613,914 4,134,146 4,393,680 4,762,744 16,904,484
Tax (Provision) Benefit (11,654) (43,622) 632,879 (65,956) 511,647
Net income $ 571,052 $ 2,137,483 $5,508,221 $ 3,308,308 $11,525,064
=========== =========== ========== ============== ===========

Net income per
common share:
Basic $ 0.01 $ 0.05 $ 0.13 $ 0.09 $ 0.28
Diluted $ 0.01 $ 0.05 $ 0.13 $ 0.07 $ 0.26



F-28


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



Three Months Ended
---------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, Fiscal Year
2000 2000 2001 2001 2001
------------- ------------ ---------- ---------- ------------

Weighted
average number
of shares of
common stock
outstanding-basic 41,101,289 41,568,723 41,802,586 41,935,820 41,602,104

Weighted
average number
of shares of
common stock
outstanding-diluted 43,658,659 43,850,319 43,718,044 43,956,840 43,606,194


(1) Gross Profit is calculated as Product Sales less Cost of Goods sold.


F-29


EXHIBIT INDEX


Exhibit Page
Numbers Description Number
- ------- ----------- ------

3(i) Certificate of Incorporation as amended E-1

10.14 2001 Incentive Stock Plan E-36

10.15 Development, License and Supply Agreement between the Company and E-46
Schering Corporation, dated November 14, 1990, as amended

12.1 Computation of Ratio of Earnings to Fixed Charges E-155

21.0 Subsidiaries of Registrant E-156

23.0 Consent of KPMG LLP E-157

99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to E-158
Section 906 of the Sarbanes - Oxley Act of 2002

99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to E-159
Section 906 of the Sarbanes - Oxley Act of 2002



E