<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d26964_10k.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  -------------
                                    FORM 10-K
                Annual Report Pursuant to Section 13 or 15(d) of
                       The Securities Exchange Act of 1934
                                  -------------


                                                             Commission
For the fiscal year ended June 30, 2001                      File Number 0-12957


                               [LOGO] 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.)


20 Kingsbridge Road, Piscataway, New Jersey                         08854
(Address of principal executive offices)                          (Zip Code)

Registrant's telephone number, including area code: (732) 980-4500


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)


     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 20, 2001 was approximately $1,933,080,976. There is no market
for the Series A Cumulative Convertible preferred stock, the only other class of
stock outstanding.

     As of September 20, 2001, there were 42,202,109 shares of Common Stock, par
value $.01 per share, outstanding.

     The Index to Exhibits appears on page 45.

                       Documents Incorporated by Reference

     The  registrant's  definitive  Proxy  Statement  for the Annual  Meeting of
Stockholders  scheduled  to be held on  December  4, 2001,  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.
<PAGE>

                                   ENZON, INC.

                          2001 Form 10-K Annual Report

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

                                     PART I

Item 1.  Business                                                              3
Item 2.  Properties                                                           22
Item 3.  Legal Proceedings                                                    22
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                                              26
Item 7.  Management's Discussion and Analysis of Financial
               Condition and Results of Operations                            26
Item 7a. Quantitative and Qualitative Disclosures About
               Market Risk                                                    43
Item 8.  Financial Statements and Supplementary Data                          43
Item 9.  Changes in and Disagreements With Accountants on
               Accounting and Financial Disclosure                            43

                                    PART III

Item 10. Directors and Executive Officers of the Registrant                   44
Item 11. Executive Compensation                                               44
Item 12. Security Ownership of Certain Beneficial Owners
               and Management                                                 44
Item 13. Certain Relationships and Related Transactions                       44

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports
               on Form 8-K                                                    45

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.


                                       2
<PAGE>

                                     PART I

Item 1. BUSINESS

Overview

     We  are  a  biopharmaceutical  company  that  develops  and  commercializes
enhanced  therapeutics for life-threatening  diseases through the application of
our two proprietary platform technologies:  PEG and single-chain antibodies.  We
apply our PEG, or  polyethylene  glycol,  technology  to improve  the  delivery,
safety and  efficacy  of proteins  and small  molecules  with known  therapeutic
efficacy. We apply our single-chain antibody, or SCA, technology to discover and
produce  antibody-like  molecules that offer many of the therapeutic benefits of
monoclonal antibodies while addressing some of their limitations.

PEG Products

     PEG-INTRON(TM)   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,  received  approval for the
treatment of adult patients with chronic hepatitis C in May 2000 in the European
Union and in January 2001 in the United  States.  PEG-INTRON  was also  recently
approved in the European Union and the United States 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.  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.  Schering-Plough's  worldwide
sales of INTRON A,  REBETRON(TM)  Combination  Therapy  and  PEG-INTRON  for all
indications in 2000 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 it
possesses  limited  clinical  utility due to  significant  side effects and poor
solubility.  We have shown in pre-clinical studies that PROTHECAN preferentially
accumulates in tumors and has better  efficacy  compared to camptothecin as well
as other  topoisomerase  I  inhibitors.  In July 2001,  we  initiated a Phase II
clinical trial of PROTHECAN in patients with small-cell lung cancer.

     PEG-paclitaxel  is a PEG-modified  version of paclitaxel.  We have designed
PEG-paclitaxel  to be  delivered  without  the need for  solubilizing  agents or
premedications and to be more efficacious than TAXOL(R)  (paclitaxel).  We filed
an Investigational New Drug, or IND, application with the FDA for PEG-paclitaxel
in December  2000.  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.

     We have commercialized 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 on
the  market  for  several  years and have  demonstrated  the safe and  effective
application of our PEG technology.

Single-Chain Antibodies

     SCAs  are  genetically   engineered  proteins  which  possess  the  binding
specificity and affinity of monoclonal  antibodies and 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.  We  believe  that  we  possess  strong
intellectual  property in the area of


                                       3
<PAGE>

SCAs.  The  most  clinically  advanced  SCA  based  on our  technology  is being
developed by one of our licensees,  Alexion  Pharmaceuticals,  for complications
arising during  cardiopulmonary  bypass surgery,  for which a Phase IIb clinical
trial has been completed, and myocardial infarction, for which Phase II clinical
trials are ongoing.

Strategy

     To further realize the potential value of our PEG and SCA technologies,  we
intend to pursue the following strategic initiatives:

     o    continue to identify proteins 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  technologies  and companies  which are  complementary  to our
          technologies and clinical focus;

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

     o    advance our SCA technology  through  in-licensing,  collaborations and
          entering into license agreements with third parties.

PEG Technology

     Our  proprietary  PEG  technology  involves  chemically  attaching  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.

                               [GRAPHIC OMITTED]

                     A depiction of a PEG-enhanced molecule.


                                       4
<PAGE>

     For  many  years,  we  have  applied  our PEG  technology  to  enhance  the
pharmacologic  characteristics  of potential or existing  protein  therapeutics.
When we modify proteins with our PEG technology,  it often causes these proteins
to have properties,  such as improved  circulating  life and reduced  toxicities
that significantly improve their therapeutic performance. In some cases, PEG can
render a protein therapeutically  effective,  where the unmodified form had been
ineffective.   For  example,   proteins  are  often  limited  in  their  use  as
therapeutics because they frequently induce an immunologic response. When PEG is
attached,  it disguises  the compound and reduces  recognition  by the patient's
immune system. As a result, many of the favorable  characteristics  listed above
are achieved. Given such improvement, frequency of dosing can be reduced without
diminishing  potency  and  the  delay  in  clearance  can  achieve  an  improved
therapeutic effect due to the prolonged exposure to the protein.

     We have developed a next  generation 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 not only disguises the
molecule,   thereby  lowering   potential   immunogenicity   and  extending  its
circulatory  life, but also greatly increases the solubility of these compounds.
We attach  PEG to  anti-cancer  compounds  by means of a  covalent  bond that is
designed to temporarily inactivate the compound, and then deteriorate over time,
releasing the compound in the proximity of targeted tissue.  By inactivating and
then  reactivating the compound in the body we create a Pro Drug 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 also believe that we will be able to use this PEG  technology  to impart
Pro Drug  attributes  to proteins  and  peptides,  including  enzymes and growth
factors.

     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.

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, to allow for less  frequent  dosing and to yield greater
efficacy as compared to unmodified  INTRON-A.  We have  developed  PEG-INTRON in
conjunction with Schering-Plough. Schering-Plough currently markets


                                       5
<PAGE>

INTRON A for 16 major antiviral and oncology indications worldwide.  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, received
approval for the  treatment of adult  patients  with chronic  hepatitis C in May
2000 in the European Union and in January 2001 in the United States.  PEG-INTRON
was also recently  approved in the United States and the European  Union for use
in  combination  with REBETOL  (ribavirin,  USP)  Capsules for the  treatment of
chronic   hepatitis  C  in  adult   patients   not   previously   treated   with
alpha-interferon.  A  clinical  trial  is  being  conducted  for  PEG-INTRON  as
combination  therapy with REBETOL in patients  with chronic  hepatitis C 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.  Schering-Plough's
worldwide sales of INTRON A, REBETRON Combination Therapy and PEG-INTRON for all
indications in 2000 totaled $1.4 billion.

     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.   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 up
to 10 years before patients become  symptomatic.  We estimate that only 10 to 15
percent of patients with hepatitis C have been treated.

     The current standard of care for hepatitis C infection is  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  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


                                       6
<PAGE>

patients who received less than 80% of their treatment.

     Under our licensing  agreement with  Schering-Plough,  we earned  milestone
payments and will earn royalties on worldwide sales of PEG-INTRON. We received a
$1.0 million milestone payment based on the FDA's acceptance in February 2000 of
Schering-Plough's  U.S.  marketing  application for the use of PEG-INTRON in the
treatment of hepatitis  C. We received a final $2.0  million  milestone  payment
based on the FDA's  approval of PEG-INTRON in January 2001.  Schering-Plough  is
responsible for all marketing and development activities for PEG-INTRON.

     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  and  INTRON A were
similar to those previously reported in the literature for alpha interferon. The
results of this Phase III study have not yet been  presented or  published,  and
are not publicly available at this time.

     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 monotherapy 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 be applied 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 drugs  called
topoisomerase I inhibitors.  Camptothecin, which was originally developed at the
National  Institutes of Health and is now off patent, is believed to be a potent
topoisomerase I inhibitor.

                                       7
<PAGE>

     For many years camptothecin has been known to be a very effective oncolytic
agent but its drug  delivery  problems  have 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.  While these two
new  products  are  more  soluble  than  camptothecin,  their  efficacy  rate is
relatively low. Despite their limitations,  these two products together achieved
2000 worldwide sales of approximately $700 million.

     We  believe  that  by  adjusting  the  way PEG is  covalently  attached  to
camptothecin,  the PEG attachment can be used to inactivate the compound's toxic
mechanism, which allows it to circulate in the bloodstream for longer periods of
time.  This allows the compound to  accumulate  in the proximity of tumor sites.
Preliminary  animal  tests have shown that  camptothecin  modified  with our PEG
technology preferentially accumulates in tumors and has better efficacy compared
to camptothecin, as well as other topoisomerase I inhibitions. The covalent bond
used in PROTHECAN to attach PEG to the  camptothecin  is designed to deteriorate
over time, resulting in the PEG falling off and allowing the compound once again
to become active.

     We are currently conducting a Phase II clinical trial of PROTHECAN in small
cell lung cancer and expect to inititate  additional Phase II clinical trials in
non-small cell lung, pancreatic and gastric cancers.

  PEG-paclitaxel

     PEG-paclitaxel is a PEG-modified version of paclitaxel  formulated for ease
of administration.  TAXOL (paclitaxel) is a powerful chemotherapeutic agent with
delivery  limitations.  It is used to treat various types of cancers,  including
ovarian,  breast,  non-small cell lung, and AIDS-related  Kaposi's  sarcoma.  In
2000, sales of TAXOL were reported to be approximately  $1.6 billion.  Using our
proprietary PEG technology,  our scientists have modified paclitaxel through the
chemical  attachment of PEG using a linker  designed to  deteriorate  over time,
giving  PEG-paclitaxel  prodrug  attributes.  We designed  PEG-paclitaxel  to be
delivered without the need for solubilizing  agents or premedications  and to be
more  efficacious  than TAXOL.  TAXOL,  a commercial  formulation of paclitaxel,
contains  the  solubilizing  agent  CREMOPHOR  and patients are required to take
premedications prior to treatment to reduce the potential for adverse reactions,
which may be caused by CREMOPHOR.

     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.

  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  recently,  has obtained it from cattle of German  origin.  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.  In
November 2000, BSE was identified for the first time in cattle in Germany. There
is  evidence  of a link


                                       8
<PAGE>

between  the  agent  that  causes  BSE  in  cattle  and a new  variant  form  of
Creutzfeld-Jakob  disease  or nvCJD  in  humans.  The ADA that has been  used in
ADAGEN and will be used through  early 2002,  is derived from bovine  intestines
harvested  prior to  November  2000,  when herds were  identified  in Germany as
BSE-free.  The BSE agent has not been  detected  in the herds from which ADA was
derived  for  ADAGEN  and we have no reason to  believe  that  these  herds were
infected  with  that  agent.  Based  upon  the  timing  of  the  harvest  of the
intestines,  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 makes 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  have  been  in  discussions  with  the  FDA  concerning  our  continued
distribution of ADAGEN.  Given the significant  benefit to the patients who take
this product and the likely significant  adverse  consequences to these patients
if this product were not  available,  we have agreed with the FDA to continue to
distribute the product.  In order to avoid any potential  BSE-related  risk from
ADAGEN and to be consistent with  recommendations from the FDA, our supplier has
secured  a new  source  of  bovine  intestines  from New  Zealand,  which has no
confirmed cases of BSE. We are working closely with our supplier to expedite the
delivery  of ADA from New Zealand  herds,  but do not  anticipate  being able to
supply ADAGEN  derived from this source until early in 2002. In the longer term,
we are pursuing  development  of a recombinant  form of human ADA, but a product
based on this technology will not be available for several years, if ever.

     We  are  marketing   ADAGEN  on  a  worldwide  basis.  We  utilize  outside
distributors  in certain  territories  including the United  States,  Europe and
Japan.  Currently, 69 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,  2001,
2000 and 1999 were $13.4 million, $12.2 million and $11.2 million respectively.

  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 United States,  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.
Aventis  Pharmaceuticals  (formerly Rhone-Poulenc Rorer Pharmaceuticals) has the
exclusive license to market ONCASPAR in the U.S. and Canada,  and 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 United States 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


                                       9
<PAGE>

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 pre-clinical studies for additional PEG-enhanced compounds.
We will continue to seek opportunities to develop other PEG-enhanced products.

SCA Proteins

  General

     Antibodies  are proteins  produced by the immune  system in response to the
presence  in the body of  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. 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,

     o    a  significant  decrease in  immunogenic  problems  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    a better opportunity to be used orally, intranasally, transdermally or
          by inhalation.


                                       10
<PAGE>

                               [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  costly  and time  consuming
humanization  procedures.  SCAs are also readily produced through  intracellular
expression  (inside cells)  allowing for their use in gene therapy  applications
where SCA molecules act as specific inhibitors of cell function.

     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

     We believe that we have a strong  patent  position in the area of SCAs.  We
also believe that all products made by or  incorporating  SCA-based  proteins or
genes will require a license  under our patents.  However,  we cannot assure you
that this will prove to be the case.  We have  granted  licenses  to a number of
corporations and intend to issue additional  licenses.  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.

     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,  this SCA improved
cardiac and neurological  function and reduced blood loss. Alexion reported that
it and its  partner,  Procter & Gamble,  completed a Phase IIb 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
heart


                                       11
<PAGE>

attack patients. This product has been given fast track review status by the FDA
for bypass surgery.

  Internal Development

     Internally,  our  research  staff is  currently  working  on a SCA  protein
candidate,  as well as  evaluating  the  feasibility  of  partnering  with other
companies  that are  currently  developing  SCA  proteins  that are  already  in
clinical  development.  We are also developing new technology which combines our
proprietary  SCA and PEG  technologies.  We have  shown that it is  possible  to
increase  the  half  life of an  SCA,  by a  factor  of two to  twenty-fold,  by
attaching PEG to it.

Strategic Alliances and Licenses

     In addition to internal  product  development,  we seek to enter into joint
development   and  licensing   arrangements   with  other   pharmaceutical   and
biopharmaceutical  companies  to expand the pipeline of products  utilizing  our
proprietary PEG and SCA protein  technologies.  We believe that our technologies
can be used to improve products that are already on the market or that are under
development to produce therapeutic products that provide a safer, more effective
and more convenient therapy.

  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
will 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 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  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.

     In February 2000, we earned a $1.0 million  milestone  payment when the FDA
accepted the marketing  application for PEG-INTRON filed by Schering-Plough  and
in January 2001 we earned a final $2.0 million  milestone payment upon the FDA's
approval of  PEG-INTRON.  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

     We have  entered  into a license  agreement  with  Aventis  Pharmaceuticals
(formerly Rhone-Poulenc


                                       12
<PAGE>

Rorer  Pharmaceutical,  Inc.),  as amended,  under  which we granted  Aventis an
exclusive  license  to  sell  in  the  United  States  ONCASPAR  and  any  other
asparaginase or  PEG-asparaginase  product developed by us or Aventis during the
term of the amended license agreement.  During July 2000, we further amended our
license agreement with Aventis to increase the base royalty payable to us on net
sales of ONCASPAR  from 23.5% to 27.5% on annual sales up to $10 million and 25%
on annual sales  exceeding  $10 million.  These  royalty  payments  will include
Aventis' cost of purchasing  ONCASPAR  from us under our supply  agreement.  The
term of the agreement was also extended  until 2016.  Additionally,  the amended
license agreement eliminated the super royalty of 43.5% on net sales of ONCASPAR
which exceed certain  agreed-upon  amounts.  The Aventis U.S. License  Agreement
also  provided  for a payment of $3.5  million in advance  royalties,  which was
received in January 1995.

     The payment of royalties to us under the amended license  agreement will be
offset by an original credit of $5.9 million, which represents a royalty advance
plus  reimbursement of certain amounts due to Aventis under the original license
agreement  and  interest  expense.  The royalty  advance is shown as a long term
liability,  with the corresponding  current portion included in accrued expenses
on our  consolidated  balance  sheets as of June 30, 2001 and 2000.  The royalty
advance will be reduced as royalties are recognized under the agreement.

     The amended  license  agreement  prohibits  Aventis from  making,  using or
selling an  asparaginase  product in the U.S.  or a  competing  PEG-asparaginase
product anywhere in the world until the later of the expiration of the agreement
or, if the agreement is terminated  earlier,  five years after termination.  The
agreement  terminates in December 2016 but  automatically  renews for additional
one-year  periods  unless  either  party  notifies  the other in writing that it
intends not to renew the agreement at least three months prior to the end of the
current term.  It can be terminated  earlier by either party due to a default by
the other. In addition, Aventis may terminate the agreement at any time upon one
year's prior notice to us or if we are unable to supply product for more than 60
days under our separate supply agreement with Aventis.  When the amended license
agreement terminates,  all rights we granted to Aventis under the agreement will
revert to us.  Under its  supply  agreement  with us,  Aventis  is  required  to
purchase from us all of its product  requirements for sales of ONCASPAR in North
America.  If we are  unable to  supply  product  to  Aventis  under  the  supply
agreement for more than 60 days for any reason other than a force majeure event,
Aventis  may  terminate  the  supply  agreement  and  we  will  be  required  to
exclusively  license Aventis the know-how  required to manufacture  ONCASPAR for
the period of time  during  which the  agreement  would have  continued  had the
license agreement not been terminated.

     During  August 2000 we made a $1.5  million  payment to Aventis,  which was
accrued for at June 30, 2000, to settle a  disagreement  over the purchase price
of ONCASPAR  under the supply  agreement  and to settle  Aventis'  claim that we
should  be  responsible  for its lost  profits  while  ONCASPAR  was  under  the
temporary labeling and distribution restrictions described in "Raw Materials and
Manufacturing." The settlement also calls for a payment of $100,000 beginning in
May 2000 and for each month  thereafter  that expires 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 our  manufacturing
changes,  which were made to correct these problems,  and all previously imposed
restrictions  on ONCASPAR were lifted.  This will allow for resumption of normal
distribution  and labeling of this  production by Aventis,  which is expected to
occur during the first quarter of calendar year 2002.

     Under separate  license  agreements,  Aventis has exclusive  rights to sell
ONCASPAR in Canada and Mexico.  These agreements  provide for Aventis to seek to
obtain marketing approval of ONCASPAR in Canada and Mexico and for us to receive
royalties on net sales of ONCASPAR in these countries,  if any. These agreements
expire 10 years after the first commercial sale of ONCASPAR in each country, but
automatically renew for consecutive five-year periods unless either party elects
to terminate at least three


                                       13
<PAGE>

months  prior  to the end of the  current  term.  Aventis  may  terminate  these
agreements on one year's prior notice to us.

     We also have a license  agreement  with Aventis for the Pacific Rim region,
specifically,  Australia,  New Zealand,  Japan, Hong Kong, Korea, China, Taiwan,
the Philippines,  Indonesia,  Malaysia, Singapore,  Thailand, Laos, Cambodia and
Vietnam.  Under the license  agreement,  Aventis is  responsible  for  obtaining
approvals for indications in the licensed territories.  Our supply agreement for
the Pacific Rim region provides for Aventis to purchase  ONCASPAR for the region
from us at  established  prices,  which increase over the term of the agreement.
The license  agreement also provides for minimum  purchase  requirements for the
first   four   years  of  the   agreement.   These   agreements   expire   on  a
country-by-country basis 10 years after the first commercial sale of ONCASPAR in
each country,  but automatically renew for consecutive  five-year periods unless
either  party  elects to terminate at least three months prior to the end of the
current term.  Aventis may terminate these agreements on one year's prior notice
to us.

  MEDAC License Agreement

     We have also 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,
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. We are  currently in  negotiations  with MEDAC to enter into a new
license agreement.

Welfide Agreements

     We have two  license  agreements  with the  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 a rHSA  product  sold by Welfide 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  Welfide  sales of rHSA 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 sale of Yoshitomi's  rHSA following  market
approval of that product in Japan or the United States.

Marketing

     Other than ADAGEN,  which we market on a worldwide basis to a small patient
population,  we do not engage in the direct  commercial  marketing of any of our
products and therefore do not have an established  sales force.  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  Gentiva  Health
Services to purchase and distribute ADAGEN and ONCASPAR in the United States and
Canada.  The agreement provides for Gentiva to purchase ADAGEN and ONCASPAR from
us at certain prices established in the agreement.  We pay Gentiva a service fee
for the distribution of the products.  The agreement with Gentiva will terminate
as to ONCASPAR when Aventis resumes distribution of that product.


                                       14
<PAGE>

     We expect to evaluate  whether to create or acquire a sales force to market
certain products in the United States or to continue to enter into licensing and
marketing  agreements with others for United States and foreign  markets.  These
agreements  generally  provide that our  licensees or  marketing  partners  will
conduct all or a significant portion of the marketing of these products.

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 to  manufacture  the PEG we require.
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.

     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, 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.

     In March 2001, we voluntarily  replaced a batch of ADAGEN that was found to
have an impurity which we believe was introduced in the filling process.

Research and Development

     Our primary source of new products is our internal research and development
activities.  Research and  development  expenses for the fiscal years ended June
30, 2001, 2000 and 1999 were approximately $13.0 million, $8.4 million, and $6.8
million, respectively.

     Our research and  development  activities  during fiscal 2001  concentrated
primarily on the Phase I clinical trials of PROTHECAN, pre-clinical studies, and
continued  research and development of our proprietary  technologies.  We expect
our  research  and  development  expenses  for  fiscal  2002 and beyond to be at
significantly  higher  levels as we continue  clinical  trials for PROTHECAN and
PEG-paclitaxel, and additional compounds enter clinical trials.


                                       15
<PAGE>

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 selling our products.

     We also believe that there are  PEG-modified  products  being  developed by
third  parties  that  infringe  on one or more  of our  current  PEG  technology
patents.  On  December  7, 1998,  we filed a patent  infringement  suit  against
Shearwater  Polymers  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.  Shearwater  has  filed a
counterclaim in this litigation alleging that our Branched PEG patent is invalid
and unenforceable.

     During August 2001,  Schering-Plough  granted a sub-license  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.  We plan to continue to
prosecute  our suit against  Shearwater  for  Shearwater's  infringement  of our
branched PEG patents based upon Shearwater's  making, using and selling branched
PEG  reagents  to parties  other than  Hoffmann-La  Roche  solely with regard to
PEGASYS.  During August 2001, we dismissed a similar  infringement  suit against
Hoffmann-La  Roche 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.  Curis Inc.  (formerly
known as Creative  BioMolecules  Inc.) or Curis,  provoked an interference  with
this patent and on June 28, 1991, the United States Patent and Trademark  Office
entered summary judgment  terminating the interference  proceeding and upholding
our patent.  Curis  subsequently  lost its


                                       16
<PAGE>

appeal of this decision in the United States Court of Appeals and did not file a
petition for review of this decision by the United  States  Supreme Court within
the required time period.

     In November  1993,  Curis signed cross  license  agreements  with us in the
field of our SCA protein  technology and Curis'  Biosynthetic  Antibody  Binding
Site protein  technology.  Under the agreements,  each company is free,  under a
non-exclusive,  worldwide license,  to make, use and sell products utilizing the
technology  claimed by both companies' SCA patents,  without paying royalties to
the other. Each company may grant sublicenses under the other company's antibody
engineering  patents to third  parties  to use and sell  products  developed  or
conceived and reduced to practice by the company  granting such  sublicense.  If
such a  sublicense  is granted,  the company  granting  the  sublicense  will be
required to pay to the other  company a portion of any license fees or royalties
received  by such  company  under the  sublicense.  Our  limited  right to grant
sublicenses  under  Curis'  patents  may  require a licensee of ours to obtain a
license  from  Curis if the  product  being  developed  by such  licensee  would
infringe  Curis'  patents.  We cannot  assure you that any such license could be
obtained on terms that are  favorable to our  licensee,  if at all. In addition,
the  agreements  provide for the release and  discharge  by each  company of the
other  from any and all claims  based on past  infringement  of the  technology,
which is the subject of the  agreements.  The  agreements  also  provide for any
future  disputes  between  the  companies  regarding  new patents in the area of
engineered   monoclonal  antibodies  to  be  resolved  pursuant  to  agreed-upon
procedures. 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.  We have been
advised that Curis  assigned its cross license  agreement with us to Micromet as
part of its sale of its single chain polypeptide assets.

     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  pre-clinical  and clinical  testing and other  requirements  of the
Federal  Food,  Drug,  and  Cosmetic  Act and the  Public  Health  Service  Act,
implemented by the FDA, as well as similar statutory and regulatory requirements
of foreign  countries.  Obtaining  these  marketing  approvals and  subsequently
complying with ongoing statutory and regulatory  requirements is costly and time
consuming.  Any failure by us or our  collaborators,  licensors  or licensees to
obtain,  or any delay in  obtaining,  regulatory  approval or in complying  with
other  requirements,  could adversely affect the  commercialization  of products
that we are then  developing  and our  ability  to  receive  product  or royalty
revenues.


                                       17
<PAGE>

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

     o    conducting  appropriate  pre-clinical  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,  pre-clinical 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,  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 pre-clinical 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


                                       18
<PAGE>

priority review with a target approval time of six months. Nonetheless, approval
may be denied or delayed by the FDA or  additional  trials may be required.  The
FDA also may require testing and surveillance  programs to monitor the effect of
approved products that have been commercialized, and the agency has the power to
prevent or limit  further  marketing of a product  based on the results of these
post-marketing  programs.  Upon approval, a drug product or a 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.


                                       19
<PAGE>

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

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

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

     Moreover,  we anticipate that Congress,  state legislatures and the private
sector will continue to review and assess controls on health care spending.  Any
such proposed or actual changes could cause us or our  collaborators to limit or
eliminate  spending on  development  projects  and may  otherwise  impact us. We
cannot  predict  the  likelihood,  nature  or  extent  of  adverse  governmental
regulation that might result from future  legislative or administrative  action,
either in the  United  States or  abroad.  Additionally,  in both  domestic  and
foreign markets,  sales of our proposed  products will depend, in part, upon the
availability of reimbursement from third-party payors, such as government health
administration authorities,  managed care providers, private health insurers and
other   organizations.   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


                                       20
<PAGE>

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 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.  Other than
PEG-INTRON  and our  ONCASPAR  and  ADAGEN  products,  and  Hoffmann-La  Roche's
PEGASYS,  which  has  been  approved  in  Switzerland,  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.  More  recently,  researchers  at the  National
Institutes of Health,  or NIH, have been  attempting to treat SCID patients with
gene therapy,  which if  successfully  developed,  would compete with, and could
eventually replace ADAGEN as a treatment.  The patients in these trials are also
receiving  ADAGEN  treatment in addition to the gene therapy.  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, Inc. and several
other companies  selling similar  products.  We believe that PEG-INTRON may have
several potential advantages over the interferon products currently approved for
marketing in the United States and the European Union, including:

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

     o    increased efficacy.

     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.  Currently the product has not received FDA or European  Union approval or
approval in any other  countries,  with the  exception of  Switzerland  where it
received marketing clearance in August 2001.

     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:


                                       21
<PAGE>

     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 from us in order to commercialize their products,  but we cannot assure
you this will prove to be the case.

Employees

     As of June 30, 2001,  we employed  106  persons,  including 21 persons with
Ph.D.  degrees.  At that  date,  52  employees  were  engaged  in  research  and
development activities, 31 were engaged in manufacturing, and 23 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:

<TABLE>
<CAPTION>
                                                Approx.      Approx.
                              Principal         Square       Annual           Lease
       Location              Operations         Footage       Rent         Expiration
       --------              ----------         -------       ----         ----------
<S>                    <C>                      <C>        <C>           <C>
20 Kingsbridge Road    Research & Development   56,000     $496,000(1)   June 15, 2007
Piscataway, NJ         and Administrative

300 Corporate Ct.      Manufacturing            24,000      183,000      March 31, 2007
S. Plainfield, NJ
</TABLE>

(1)  Under the terms of the lease, annual rent increases over the remaining term
     of the lease from $496,000 to $581,000.

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

Item 3. Legal Proceedings

     In December 1998, we filed a patent  infringement  suit against  Shearwater
Polymers Inc., a company that has manufactured, used and sold a Branched PEG, or
U-PEG,  reagent to Hoffmann-La Roche for its use to make its PEGASYS product,  a
pegylated version of its alpha-interferon product called ROFERON-A. This case is
being heard in the U.S.  District  Court for the  Northern  District of Alabama.
During September 2000, we filed a similar  infringement suit in Federal Court in
New Jersey against Hoffmann-La Roche.

     In January 2000,  Hoffmann-LaRoche filed lawsuits in both the United States
and France against  Schering-Plough  alleging that PEG-INTRON  infringes certain
patents held by Hoffmann-La Roche. Hoffmann-La


                                       22
<PAGE>

Roche  filed a similar  suit in Germany.  During  August  2001,  Schering-Plough
entered  into a licensing  agreement  with  Hoffmann-La  Roche that  settled all
patent  disputes  relative  to  the  two  companies'  respective   peginterferon
products. The settlement agreement included a Schering-Plough  sublicense of our
branched PEG patents (among others) to Hoffmann-La  Roche. The sublicense of our
patents pertains only to pegylated  versions of alpha interferon.  Consequently,
we  agreed  to  dismiss  the  patent  infringement   lawsuit  we  filed  against
Hoffmann-La Roche asserting that PEGASYS infringes our branched PEG patents.  We
plan to continue to prosecute the patent infringement lawsuit against Shearwater
for  infringement  of our branched PEG patents based upon  Shearwater's  making,
using, and selling branched PEG reagents to parties other than Hoffmann-La Roche
solely  with regard to  Hoffmann-La  Roche's PEG  interferon  product,  PEGASYS.
Shearwater  has  filed a  counter-claim  in this  litigation  alleging  that our
Branched PEG patent is invalid and unenforceable.

     The licensing  agreement  between  Schering-Plough  and  Hoffmann-La  Roche
provides for each company to manufacture and market worldwide its  peginterferon
products free from liability for infringement  under the other's existing patent
rights. Additionally, Schering-Plough and Hoffmann-La Roche dismissed all patent
litigation  in the  United  States  and  Europe  involving  the  two  companies'
respective  peginterferon products.  Schering-Plough and Hoffmann-La Roche cross
licensed  to  each  other  all  patents  applicable  to  their  pegylated  alpha
interferon   products,    PEG-INTRON   (peginterferon   alfa-2b)   and   PEGASYS
(peginterferon alfa-2a),  respectively.  In addition, each party will license to
the other its patents  applicable to peginterferon  as combination  therapy with
ribavirin.

     There is no other 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
<PAGE>

                                     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,  2001 and 2000,  as  reported  by the NASDAQ
National  Market.  The quotations  shown represent  inter-dealer  prices without
adjustment for retail markups, markdowns or commissions, and may not necessarily
reflect actual transactions.

                                                  High           Low
                                                  ----           ---
           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

           Year Ended June 30, 2000
                First Quarter                     34.63         20.08
                Second Quarter                    46.25         26.63
                Third Quarter                     70.50         37.69
                Fourth Quarter                    47.63         25.69

     As of September  20, 2001 there were 1,743  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, 2001
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.

     On June 21, 2001 we completed a private placement of $400 million principal
amount of 4.5%  convertible  subordinated  notes due 2008. The sale of the notes
was made in reliance on the  exemption  from  registration  contained in Section
4(2) of the  Securities Act of 1933, as amended.  Following  this sale,  resales
were permitted by the initial purchasers to qualified institutional buyers under
Rule 144A of the Securities  Act. The initial  purchasers  were Morgan Stanley &
Co. Inc.,  CIBC World Markets Corp.,  SG Cowen  Securities  Corp. and Legg Mason
Wood  Walker  Inc.  The  aggregate   discount  to  the  initial  purchasers  was
$12,000,000.  We received net proceeds of  approximately  $387,200,000  from the
sale of


                                       24
<PAGE>

the notes. The notes are convertible,  subject to prior redemption,  in whole or
in part,  into shares of common stock at any time on or before July 1, 2008 at a
conversion price of $70.98 per share, subject to adjustment upon certain events.
We will not issue  fractional  shares of common  stock  upon  conversion  of the
notes.  Instead,  we will pay cash equal to the market price of the common stock
on the business day prior to the  conversion  date. We may redeem all or some of
the notes at any time on or after July 7, 2004 at  redemption  prices  declining
from 102.57% of their principal  amount in 2004 to 100% of the principal  amount
in 2008, plus accrued and unpaid interest.


                                       25
<PAGE>

Item 6. Selected Financial Data

     Set forth below is our selected financial data for the five fiscal years
ended June 30, 2001.

Consolidated Statement of Operations Data:

<TABLE>
<CAPTION>
                                                      Year Ended June 30
                        --------------------------------------------------------------------------------
                             2001            2000             1999             1998             1997
                             ----            ----             ----             ----             ----
<S>                     <C>             <C>              <C>              <C>              <C>
Revenues                $  31,587,709   $  17,017,797    $  13,158,207    $  14,644,032    $  12,727,052
Net Income (Loss)          11,525,064      (6,306,464)      (4,919,208)      (3,617,133)      (4,557,025)
Net Income (Loss) per
  Diluted Share         $         .26   $       (0.17)   $       (0.14)   $       (0.12)   $       (0.16)
Dividends on
Common Stock                     None            None             None             None             None
</TABLE>

Consolidated Balance Sheet Data:

<TABLE>
<CAPTION>
                                                            June 30,
                        --------------------------------------------------------------------------------
                             2001            2000             1999             1998             1997
                             ----            ----             ----             ----             ----
<S>                     <C>             <C>              <C>              <C>              <C>
Total Assets            $ 549,675,817   $ 130,252,250    $  34,916,315    $  13,741,378    $  16,005,278
Long-Term Obligations   $ 400,000,000              --               --               --               --
</TABLE>

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

Results of Operations

Fiscal Years Ended June 30, 2001, 2000, and 1999

     Revenues.  Revenues  for the year  ended  June 30,  2001  were  $31,588,000
compared to $17,018,000 for the year ended June 30, 2000 and $13,158,000 for the
year ended June 30, 1999.  The components of revenues are sales of our products,
royalties we earn on the sale of our products by others, and contract revenues.

     Sales  increased by 35% to $20,941,000 for the year ended June 30, 2001, as
compared  to  $15,558,000  for the year ended  June 30,  2000  primarily  due to
increased  ONCASPAR sales. The increase in ONCASPAR sales was due to the lifting
of all of the FDA  distribution and labeling  restrictions,  which were in place
during the prior year. These  restrictions were put in place in fiscal 1999 as a
result of  manufacturing  problems  that  caused an  increase  in the  levels of
particulates  in batches of  ONCASPAR,  which in turn  resulted in an  increased
rejection rate for this product. Our marketing partner,  Aventis Pharmaceuticals
(formerly  Phone-Poulenc  Rorer  Pharmaceuticals,   Inc.)  stopped  distributing
ONCASPAR in fiscal 1999 and we took over  distribution  of ONCASPAR  directly to
patients on an as-needed  basis.  During the year ended June 30,  2001,  the FDA
gave final  approval to  manufacturing  changes  which we made to correct  these
manufacturing  problems,  and all  previously  imposed  restrictions  have  been
lifted.  This will allow for the resumption of normal  distribution and labeling
of this  product by Aventis,  which is  expected to take place  during the first
quarter of calendar year 2002. Net sales of ADAGEN were $13,369,000 for the year
ended  June 30,  2001 and  $12,159,000  for the year ended  June 30,  2000.  The
increase  in ADAGEN  sales  resulted  from an increase in the number of patients
receiving ADAGEN treatment.

     Sales  increased by 21% to $15,558,000  for the year ended June 30, 2000 as
compared to


                                       26
<PAGE>

$12,856,000  for the prior year due to  increased  ONCASPAR  and  ADAGEN  sales.
ONCASPAR  sales for the year ended June 30, 2000 increased due to the lifting in
November 1999 of some of the temporary  labeling and  distribution  restrictions
which were  placed on  ONCASPAR  by the FDA as a result of certain  difficulties
encountered in our manufacturing  process discussed above. The increase was also
due to an  increase  in ADAGEN  sales of  approximately  8%,  resulting  from an
increase in the number of patients receiving ADAGEN treatment.

     Royalties  for the  year  ended  June 30,  2001,  increased  to  $8,254,000
compared to $34,000 in the prior year.  The increase in royalties was due to the
commencement of sales of PEG-INTRON in the U.S. and 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  received  marketing
approval as once-weekly  monotherapy for the treatment of chronic hepatitis C in
the European Union in May 2000 and in the U.S. in January 2001.  PEG-INTRON also
received  marketing  approval  for  use in  combination  with  REBETOL  for  the
treatment of hepatitis C in the European  Union in March 2001 and in the U.S. in
August 2001. We did not  recognize  any  royalties  related to PEG-INTRON in the
year ended June 30, 1999.

     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 will decline  significantly  when Aventis resumes
distribution of the product and our revenues  related to the product will revert
back to a 27.5%  royalty on net sales.  We expect  royalties  on  PEG-INTRON  to
increase in future quarters with the U.S.  approval of PEG-INTRON as combination
therapy with REBETOL for  hepatitis C in August  2001.  Schering-Plough  is also
conducting clinical trials for additional indications for PEG-INTRON.  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, 2001  increased by $966,000,
as compared to the prior year.  The  increase in contract  revenues was due to a
$2,000,000 milestone payment from Schering-Plough,  which was earned as a result
of the FDA's  approval of PEG-INTRON  in January  2001.  During the prior year a
$1,000,000  milestone payment was recognized as a result of the FDA's acceptance
in February 2000 of Schering-Plough's  U.S. marketing application for the use of
PEG-INTRON  in the treatment of chronic  hepatitis C. Contract  revenues for the
year ended June 30, 2000 increased by $1,124,000,  as compared to the prior year
as a result of this $1,000,000 milestone payment from Schering-Plough.

     We had export sales and royalties recognized on export sales of $11,115,000
for the year ended June 30,  2001,  $4,137,000  for the year ended June 30, 2000
and  $3,075,000  for the year ended June 30, 1999.  Of these  amounts,  sales in
Europe and royalties  recognized on sales in Europe,  were  $10,418,000  for the
year  ended June 30,  2001,  $3,617,000  for the year  ended  June 30,  2000 and
$2,559,000 for the year ended June 30, 1999.

     Cost of Sales.  Cost of sales, as a percentage of net sales improved to 18%
for the year ended June 30,  2001,  as compared  to 31% for the prior year.  The
improvement was primarily due to the prior year's write-off of ONCASPAR finished
goods related to the previously discussed manufacturing problems.

     Cost of sales,  as a percentage of sales,  for the year ended June 30, 2000
was 31% as compared to 34% in 1999. During each of the years ended June 30, 2000
and 1999, we recorded a charge related to a write-off of ONCASPAR finished goods
on hand.

     Research and Development.  Research and development  expenses  increased by
$4,669,000 or 56% to  $13,052,000  for the year ended June 30, 2001, as compared
to $8,383,000  for the same period last year.  The increase was due to increased
payroll  and  related  expenses  due to  increases  in  research  personnel  and
increased  contracted  services  related to  clinical  trials  and  pre-clinical
studies for products under


                                       27
<PAGE>

development, including PROTHECAN (PEG-camptothecin) and PEG-paclitaxel. Research
and development activities are expected to continue to increase significantly as
we continue  the  advancement  of the current and  additional  Phase II clinical
trials  for   PROTHECAN,   we   continue   our  Phase  I  clinical   trials  for
PEG-paclitaxel, and as we conduct clinical trials for additional compounds.

     Research  and  development  expenses  for the  year  ended  June  30,  2000
increased by 23% to $8,383,000  as compared to $6,836,000 in 1999.  The increase
in  research  and  development  expenses  resulted  from an increase in expenses
related to the  clinical  development  of  PROTHECAN  and other PEG  products in
pre-clinical development.

     Selling,  General  and  Administrative   Expenses.   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,  as discussed  below.  The decrease was  partially  offset by increased
legal fees associated with patent filings and patent litigation costs.

     Selling,  general and  administrative  expenses for the year ended June 30,
2000  increased by 59% to  $12,956,000,  as compared to $8,133,000 in 1999.  The
increase in selling,  general and administrative expenses was principally due to
a net charge to earnings of $2,600,000  recorded in the third quarter.  This net
charge was the result of a  $6,000,000  payment we made,  pursuant  to a binding
arbitration  in a  lawsuit  brought  by LBC  Capital  Resources  Inc.,  a former
financial  advisor,  for fees related to our 1996 private  placement,  partially
offset by the reversal of certain other  contingency  reserves.  The increase in
selling,  general  and  administrative  expenses  was also due to an increase in
legal fees associated with patent filing and litigation costs.

     Other  Income/Expense.  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 in other  income/expense is attributable to an increase
in interest income as a result of an increase in interest bearing investments.

     Other  income/expense  increased by $1,702,000  to $2,903,000  for the year
ended June 30, 2000, as compared to $1,201,000  for the prior year. The increase
was  attributable  to an  increase  in  interest  income due to an  increase  in
interest bearing investments.

     Provision for taxes.  We were  profitable for the year ended June 30, 2001,
and  accordingly we have  recognized a tax provision for the year ended June 30,
2001.  The tax provision  represents  our  anticipated  Alternative  Minimum Tax
liability based on the fiscal 2001 taxable income.  The tax provision was offset
by the  sale of a  portion  of our net  operating  losses  for the  state of New
Jersey.  During March 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, 2001 were $516,379,000,  as compared to $118,413,000
as of June 30,  2000.  We invest  our excess  cash  primarily  in United  States
government-backed  securities. The increase in total cash reserves was primarily
the result of our sale of $400,000,000 of 4.5%  convertible  subordinated  notes
during June 2001.  We received net proceeds of  $387,200,000  from this offering
after  deducting  costs.  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 1,
2002.  Accrued interest on the notes was  approximately  $250,000 as of June 30,
2001. 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


                                       28
<PAGE>

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
noteholder  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
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.

     Under our amended license agreement with Aventis,  we received a payment of
$3,500,000 in advance royalties in January 1995. Royalties due under the amended
license agreement will be offset against an original credit of $5,970,000, which
represents the royalty advance plus reimbursement of certain amounts due Aventis
under the original agreement and interest expense,  before cash payments will be
made under the agreement. The royalty advance is shown as a long-term liability.
The corresponding  current portion of the advance is included in accrued expense
on the consolidated  balance sheets. We will reduce the advance as royalties are
recognized  under  the  agreement.  Through  June  30,  2001,  an  aggregate  of
$4,307,000 in royalties  payable by Aventis has been offset against the original
credit.

     As of June 30, 2001,  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 shares of Series A preferred stock outstanding at June 30, 2001
are  convertible  into  approximately  16,000 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,  2001,  there  were  accrued  and  unpaid
dividends  totaling  $158,000 on the 7,000  shares of Series A  preferred  stock
outstanding.  We have the 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  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.

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.  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.


                                       29
<PAGE>

     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.  Enterpreises  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 and current impairment policy.

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  technology  to develop a modified  form of
Schering-Plough's  INTRON A, we will receive  royalties  on  worldwide  sales of
PEG-INTRON.  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  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. 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 have a history of losses and we may not sustain profitability.

     We have incurred  substantial  losses since our  inception.  As of June 30,
2001, we had an accumulated  deficit of approximately $118 million.  Although we
earned a profit for the year ended June


                                       30
<PAGE>

30, 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 approvals,  none of our other products have 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


                                       31
<PAGE>

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.

     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. In November 1999, as a
result  of   manufacturing   changes  we  implemented   the  FDA  withdrew  this
distribution restriction.

     In July 1999, the FDA conducted an inspection of our manufacturing facility
in connection  with our product license for ADAGEN.  Following that  inspection,
the FDA documented several deviations from 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.

     In March 2001, we voluntarily  replaced a batch of ADAGEN that was found to
have an impurity, which we believe was introduced in the filling process.

     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.


                                       32
<PAGE>

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.  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,

     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  pre-clinical  and clinical  trials do not yield positive  results,  our
product candidates will fail.

     If  pre-clinical  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 pre-clinical  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


                                       33
<PAGE>

     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.  The  results of this Phase III study have not yet been
presented or published,  and are not publicly  available at this time. We cannot
assure you that those results will support any marketing  approval of PEG-INTRON
for the treatment of CML.

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

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

     o    the receipt, timing and scope of regulatory approvals,

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

     o    the availability of third-party reimbursement, and

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

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

     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


                                       34
<PAGE>

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.

     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 pre-clinical 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, in ADAGEN.  The ADA enzyme,  until  recently,  was obtained by our supplier
from  bovine   intestines  in  cattle  of  German  origin.   Bovine   spongiform
encephalopathy  (BSE or mad cow  disease)  has been  detected in cattle herds in
Germany  after we  acquired  the ADA  enzyme  and at a time when the herds  were
identified  by the  supplier  as  BSE-free.  The FDA has  advised us that we may
continue to distribute  our current  inventory of ADAGEN which  contains the ADA
enzyme  obtained  from cattle of German origin until such time as we are able to
obtain FDA  approval  of the use of the ADA enzyme  obtained  from cattle of New
Zealand  origin.  We cannot  assure you that the FDA will approve the use of the
ADA  obtained in New Zealand  prior to the time that our  current  inventory  of
ADAGEN is  exhausted.  If we do not  receive  such timely  approval,  we will be
unable to distribute ADAGEN.

     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.


                                       35
<PAGE>

     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 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 are involved in one pending litigation matter in which
we are seeking to enforce certain of our patents.

     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.


                                       36
<PAGE>

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

     Other than ADAGEN,  which we market on a worldwide basis to a small patient
population, we have not engaged in the direct commercial marketing of any of our
products 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 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, if 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 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;

     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,
pre-clinical  studies,  clinical  trials and other  activities  relating  to the
successful  commercialization of potential products. In addition, we may seek to
acquire additional  technologies and companies,  which could require substantial
capital.  We do not expect to achieve  significant sales or royalty revenue from
our current FDA-approved  products,  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


                                       37
<PAGE>

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 pre-clinical studies and clinical trials,

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

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

     o    competing technological and market developments, and

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

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

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

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

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

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

     Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific,  technical and managerial personnel.  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.


                                       38
<PAGE>

Risks Related To Our Industry

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

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

     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 pre-clinical  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 $40.0 million for claims arising from
the use of our products in clinical  trials prior to FDA approval and for claims
arising from the use of our products  after FDA  approval.  We cannot assure you
that we will be able to  maintain  our  existing  insurance  coverage  or obtain
coverage for the use of our other products in the future.  Also,  this insurance
coverage  and our  resources  may not be  sufficient  to satisfy  any  liability
resulting from product liability claims,  and a product liability claim may have
a material  adverse  effect on our business,  financial  condition or results of
operations.

     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


                                       39
<PAGE>

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  pre-clinical  testing and  clinical  trials by us, our
          corporate partners or our competitors,

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

     o    the status of corporate collaborations and supply arrangements,

     o    regulatory approvals,

     o    government regulation,

     o    developments in patent or other proprietary rights,

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

     o    litigation,

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

     o    general market conditions in our industry.

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

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

     Our notes are subordinated.

     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


                                       40
<PAGE>

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, 2001, we had no senior indebtedness outstanding.

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

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

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

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

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

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

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


                                       41
<PAGE>

     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 41,990,859  shares of common stock
outstanding as of June 30, 2001. 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, 2001:

     o    Options.  Stock  options to  purchase  3,283,817  shares of our common
          stock at a weighted average exercise price of approximately $24.98 per
          share; of this total, 1,939,502 were exercisable at a weighted average
          exercise price of $6.23 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 15,909
          shares of our common stock as of such date.

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

     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.


                                       42
<PAGE>

                       RATIO OF EARNINGS TO FIXED CHARGES

     The  ratio of  earnings  to fixed  charges  was  negative  for all  periods
presented,  other than the year ended June 30,  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 year ended June 30, 2001 are disclosed below (dollars in thousands):

<TABLE>
<CAPTION>
                                                             Year Ended June 30,
                                       ----------------------------------------------------------------
                                         2001        2000       1999       1998       1997       1996
                                         ----        ----       ----       ----       ----       ----
<S>                                      <C>       <C>        <C>        <C>        <C>        <C>
Ratio of earnings to fixed charges*      22:1        N/A        N/A        N/A        N/A        N/A
Deficiency of earnings available to
    cover fixed charges*                 N/A       ($6,306)   ($4,919)   ($3,617)   ($4,557)   ($5,175)
</TABLE>

     *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, 2001 all of our holdings
were in instruments maturing in 3 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,
2001.

<TABLE>
<CAPTION>
                            2002            2003            2004           Total      Fair Value
                        ----------------------------------------------------------------------------
<S>                     <C>             <C>             <C>             <C>             <C>
Fixed Rate              $124,715,000    $ 46,136,000    $ 30,499,000    $201,350,000    $202,281,000
Average Interest Rate           5.01%           4.29%           5.98%           4.90%             --
Variable Rate              3,920,000              --              --       3,920,000              --
Average Interest Rate            4.0%             --              --             4.8%      3,874,000
                        ----------------------------------------------------------------------------
                        $128,635,000    $ 46,136,000    $ 30,499,000    $205,270,000    $206,155,000
                        ============================================================================
</TABLE>

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.


                                       43
<PAGE>

                                    PART III

     The information  required by Item 10 - Directors and Executive  Officers of
the Registrant;  Item 11 - Executive Compensation;  Item 12 - Security Ownership
of Certain Beneficial Owners and Management; and 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 4, 2001.


                                       44
<PAGE>

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a)(1) and (2).  The  response to this portion of Item 14 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                                             *(4.2)
3(iv)     Amendment to Certificate of Incorporation dated
          January 5, 1998                                                ##3(iv)
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)
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      Employment Agreement with Peter G. Tombros dated
          as of August 10, 2000                                        //(10.15)
10.7      Stock Purchase Agreement dated as of June 30, 1995            ~(10.16)
10.8      Independent Directors' Stock Plan                           ~~~(10.24)
10.9      Underwriting Agreement dated March 20, 2000 with
          Morgan Stanley & Co. Inc., CIBC World Markets
          Corp., and SG Cowen Securities Corporation                    /(10.29)
10.10     Employment Agreement dated May 9, 2001, between
          the Company and Arthur J. Higgins                           ///(10.30)
10.11     Amendment dated May 23, 2001, to Employment
          Agreement between the Company and Arthur J.
          Higgins dated May 9, 2001                                   ///(10.31)
10.12     Form of Restricted Stock Award Agreement between
          the Company and Arthur J. Higgins                            ////(4.3)
10.13     Form of Employee Retention Agreement dated as of
          August 3, 2001 between the Company and certain key
          employees                                                            !
12.1      Computation of Ratio of Earnings to Fixed Charges                    !
21.0      Subsidiaries of Registrant                                           !
23.0      Consent of KPMG LLP                                                  !

!    Filed herewith


                                       45
<PAGE>

*    Previously filed as an exhibit to the Company's Registration Statement on
     Form S-2 (File No. 33-34874) and incorporated herein by reference thereto.

***  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 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 December 31, 1997 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 March 31, 1996 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 Registration Statement on
     Form S-3 (File No. 333-30818) 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 year ended June 30, 2000 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.


                                       46
<PAGE>

(b) Reports on Form 8-K.

     On May 7, 2001, we filed with the  Commission a Current  Report on Form 8-K
dated  May 7, 2001  reporting  the  initiation  of  patient  dosing in a Phase I
clinical   trial  for   PEG-paclitaxel   designed  to   determine   the  safety,
tolerability, and pharmacology of PEG-paclitaxel in patients with advanced solid
tumors and lymphomas.

     On May 9, 2001, we filed with the  Commission a Current  Report on Form 8-K
dated May 8, 2001  reporting  our  financial  results  for the third  quarter of
fiscal year 2001.

     On May 23, 2001, we filed with the  Commission a Current Report on Form 8-K
dated May 22, 2001 reporting that  Schering-Plough  released the interim results
of two ongoing investigational clinical studies with once-weekly  PEG-INTRON(TM)
(peginterferon  alfa-2b)  Injection  plus  daily  REBETOL(R)  (Ribavirin,   USP)
Capsules in  patients  with  chronic  hepatitis C who did not respond to, or had
relapsed following previous  interferon-based  therapy. The study evaluating two
different doses of both  PEG-INTRON(TM) and REBETOL(R) showed that 35 percent of
patients  who did not  respond  to prior  combination  therapy  had a  virologic
response after 24 weeks of treatment (half way through the therapy).

     On May 24, 2001, we filed with the  Commission a Current Report on Form 8-K
dated May 24, 2001  reporting  that Arthur J. Higgins  became our  President and
Chief Executive Officer.

     On June 13, 2001, we filed with the Commission a Current Report on Form 8-K
dated June 7, 2001 reporting that Schering-Plough  completed its Phase III study
comparing  PEG-INTRON(TM)  (peginterferon  alfa-2b)  Injection  to  INTRON(R)  A
(interferon   alfa-2b)  Injection  in  patients  with  newly  diagnosed  chronic
myelogenous leukemia (CML). In the study, although  PEG-INTRON(TM)  administered
once weekly  demonstrated  clinical  comparability  to INTRON(R) A  administered
daily,   the   efficacy   result   for   PEG-INTRON(TM)   did   not   meet   the
protocol-specified  statistical  criteria  for  non-inferiority  -  the  primary
endpoint in the study. In addition,  we reported that Peter Tombros  resigned as
one of our Directors as of June 7, 2001.

     On June 14, 2001, we filed with the Commission a Current Report on Form 8-K
dated June 14, 2001  reporting  that we  intended to make a private  offering of
$400 million of Convertible  Subordinated Notes due 2008 with an option to issue
an additional $60 million of notes.

     On June 21, 2001, we filed with the Commission a Current Report on Form 8-K
dated June 21, 2001  reporting the private  placement of $400 million  principal
amount of 4 1/2 % Convertible Subordinated Notes due 2008 with an option for the
initial purchasers to purchase an additional $60 million of notes.


                                       47
<PAGE>

                                   ENZON, INC.

Dated: September 28, 2001                       by: /s/ ARTHUR J. HIGGINS
                                                    ----------------------------
                                                    Arthur J. Higgins
                                                    President and Chief
                                                    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        President, Chief Executive      September 28, 2001
---------------------------   Officer and Director
Arthur J. Higgins             (Principal Executive Officer)

 /s/ KENNETH J. ZUERBLIS      Vice President, Finance,        September 28, 2001
---------------------------   Chief Financial Officer and
Kenneth J. Zuerblis           Corporate Secretary
                              (Principal Financial and
                              Accounting Officer)

 /s/ RANDY H. THURMAN         Chairman of the Board           September 28, 2001
---------------------------
Randy H. Thurman

 /s/ DAVID S. BARLOW          Director                        September 28, 2001
---------------------------
David S. Barlow

 /s/ ROLF A. CLASSON          Director                        September 28, 2001
---------------------------
Rolf A. Classon

/s/ ROSINA B. DIXON           Director                        September 28, 2001
---------------------------
Rosina B. Dixon

 /s/ DAVID W. GOLDE           Director                        September 28, 2001
---------------------------
David W. Golde

 /s/ ROBERT LEBUHN            Director                        September 28, 2001
---------------------------
Robert LeBuhn


                                       48
<PAGE>

                          ENZON, INC. AND SUBSIDIARIES

                                      Index

                                                                            Page
                                                                            ----

Independent Auditors' Report                                                 F-2

Consolidated Financial Statements:

         Consolidated Balance Sheets - June 30, 2001 and 2000                F-3

         Consolidated Statements of Operations - Years ended
          June 30, 2001, 2000 and 1999                                       F-4

         Consolidated Statements of Stockholders' Equity -
          Years ended June 30, 2001, 2000 and 1999                           F-5

         Consolidated Statements of Cash Flows - Years ended
          June 30, 2001, 2000 and 1999                                       F-7

         Notes to Consolidated Financial Statements - Years ended
          June 30, 2001, 2000 and 1999                                       F-8


                                       F-1
<PAGE>

                          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, 2001 and 2000, and the results of their  operations
and their cash flows for each of the years in the  three-year  period ended June
30, 2001, in conformity with  accounting  principles  generally  accepted in the
United States of America.

KPMG LLP


Short Hills, New Jersey
August 21, 2001


                                       F-2
<PAGE>

                          ENZON, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             June 30, 2001 and 2000

<TABLE>
<CAPTION>
                                                                     2001             2000
                                                                -------------    -------------
<S>                                                             <C>              <C>
ASSETS
 Current assets:
   Cash and cash equivalents                                    $ 310,223,837    $  31,935,410
   Short-term investments                                         129,520,083       16,986,278
   Accounts receivable                                             11,087,748        5,442,455
   Inventories                                                      1,852,144          946,717
   Other current assets                                             2,837,199        2,269,884
                                                                -------------    -------------
Total current assets                                              455,521,011       57,580,744
                                                                -------------    -------------
Property and equipment                                             13,181,671       12,439,729
  Less accumulated depreciation and amortization                    9,761,999       10,650,859
                                                                -------------    -------------
                                                                    3,419,672        1,788,870
Other assets:
  Investments                                                      76,675,557       69,557,482
  Deposits                                                            528,150          426,731
  Deferred offering costs                                          12,774,951               --
  Patents, net                                                        756,476          898,423
                                                                -------------    -------------
                                                                   90,735,134       70,882,636
                                                                -------------    -------------
   Total assets                                                 $ 549,675,817    $ 130,252,250
                                                                =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                               $   4,670,259    $   2,465,360
 Accrued expenses                                                   4,740,081        5,706,811
                                                                -------------    -------------
   Total current liabilities                                        9,410,340        8,172,171
                                                                -------------    -------------
Accrued rent                                                          581,438          607,914
Unearned revenue                                                      694,814          510,001
Notes payable                                                     400,000,000               --
                                                                -------------    -------------
                                                                  401,276,252        1,117,915
                                                                -------------    -------------
Commitments and contingencies

Stockholders' equity:
 Preferred stock-$.01 par value, authorized 3,000,000 shares;
  issued and outstanding 7,000 shares in 2001 and 2000
  (liquidation preference aggregating $333,000 in 2001 and
  $319,000 in 2000)                                                        70               70
 Common stock-$.01 par value, authorized 60,000,000 shares;
  shares issued and outstanding 41,990,859 shares in 2001
  and 40,838,115 shares in 2000                                       419,909          408,381
 Additional paid-in capital                                       257,682,479      250,567,774
 Accumulated other comprehensive income                               884,935               --
 Deferred compensation                                             (1,509,171)              --
 Accumulated deficit                                             (118,488,997)    (130,014,061)
                                                                -------------    -------------
   Total stockholders' equity                                     138,989,225      120,962,164
                                                                -------------    -------------
   Total liabilities and stockholders' equity                   $ 549,675,817    $ 130,252,250
                                                                =============    =============
</TABLE>

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


                                       F-3
<PAGE>

                          ENZON, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    Years ended June 30, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                    2001            2000            1999
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
Revenues:
 Net sales                                      $ 20,940,633    $ 15,557,906    $ 12,855,995
 Royalties                                         8,254,368          33,582              --
 Contract revenue                                  2,392,708       1,426,309         302,212
                                                ------------    ------------    ------------
    Total revenues                                31,587,709      17,017,797      13,158,207
                                                ------------    ------------    ------------
Costs and expenses:
 Cost of sales                                     3,864,284       4,888,357       4,309,956
 Research and development expenses                13,051,714       8,382,772       6,835,521
 Selling, general and administrative expenses     11,795,398      12,956,118       8,133,366
                                                ------------    ------------    ------------
    Total costs and expenses                      28,711,396      26,227,247      19,278,843
                                                ------------    ------------    ------------
    Operating income (loss)                        2,876,313      (9,209,450)     (6,120,636)
                                                ------------    ------------    ------------
Other income (expense):
 Interest and dividend income                      8,401,526       2,943,311       1,145,009
 Interest expense                                   (275,049)         (4,051)         (8,348)
 Other                                                10,627         (36,274)         64,767
                                                ------------    ------------    ------------
                                                   8,137,104       2,902,986       1,201,428
                                                ------------    ------------    ------------

    Net income (loss) before taxes                11,013,417      (6,306,464)     (4,919,208)

Tax benefit                                          511,647              --              --
                                                ------------    ------------    ------------

Net income (loss)                               $ 11,525,064    ($ 6,306,464)   ($ 4,919,208)
                                                ============    ============    ============

Basic earnings (loss) per common share                 $0.28          ($0.17)         ($0.14)
                                                ============    ============    ============

Diluted earnings (loss) per common share               $0.26          ($0.17)         ($0.14)
                                                ============    ============    ============

Weighted average number of common
 shares outstanding - basic                       41,602,104      38,172,515      35,699,133
                                                ============    ============    ============

Weighted average number of common shares
 and dilutive potential common shares
 outstanding                                      43,606,194      38,172,515      35,699,133
                                                ============    ============    ============
</TABLE>

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


                                       F-4
<PAGE>

                          ENZON, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    Years ended June 30, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                               Preferred stock                                Common stock
                               ---------------------------------------------    --------------------------------------------
                                                                                                                Additional
                                 Amount    Number of       Par      Amount       Number of        Par             paid-in
                               per share     Shares       Value    per share       Shares        Value            capital
                               ---------     ------       -----    ---------       ------        -----            -------
<S>                              <C>        <C>          <C>         <C>        <C>            <C>              <C>
Balance, July 1, 1998                        107,000     $1,070                 31,341,353      313,414         $123,453,874
Common stock issued for
  exercise of non-qualified
  stock options                     --            --         --       4.40       1,000,919       10,009            4,396,477
Common stock issued for
  exercise of common
  stock warrants                    --            --         --       2.50         150,000        1,500              373,500
Net proceeds from Private
  Placement, July 1998              --            --         --       4.75       3,983,000       39,830           17,510,265
Common stock issued for
  Independent Directors'
  Stock Plan                        --            --         --       8.88           8,514           84               75,539
Common stock options and
  warrants issued for
  consulting services               --            --         --         --              --           --            1,130,683
Common stock issued for
  consulting services               --            --         --       6.13           4,898           49               29,951
Net loss                            --            --         --         --              --           --                   --
                                 -----      --------     ------     ------      ----------     --------         ------------
Balance, June 30, 1999                       107,000      1,070                 36,488,684      364,886          146,970,289
Common stock issued for
  exercise of non-qualified
  stock options                     --            --         --       4.25         807,181        8,072            3,286,246
Common stock issued for
  conversion of Series A
  preferred stock                25.00      (100,000)    (1,000)     11.00         227,271        2,273               (1,273)
Dividends issued on Series A
  preferred stock                   --            --         --         --              --           --                   --
Common stock issued for
  exercise of common stock
  warrants                          --            --         --       4.57       1,012,116       10,121            4,395,803
Net Proceeds from common
  stock offering                                                     44.50       2,300,000       23,000           95,647,262
Common stock issued for
  Independent Directors'
  Stock Plan                        --            --         --      30.82           2,863           29               88,208
Common stock options issued
  for consulting services           --            --         --         --              --           --              181,239
Net loss                            --            --         --         --              --           --                   --
Balance, June 30, 2000,          -----      --------     ------     ------      ----------     --------         ------------
  carried forward                              7,000        $70                 40,838,115     $408,381         $250,567,774

<CAPTION>
                                        Other
                                    Comprehensive     Deferred         Accumulated
                                        Income      Compensation         Deficit               Total
                                        ------      ------------         -------               -----
<S>                                       <C>             <C>         <C>                  <C>
Balance, July 1, 1998                     --              --          ($116,841,818)         $6,926,540
Common stock issued for
  exercise of non-qualified
  stock options                           --              --                     --           4,406,486
Common stock issued for
  exercise of common
  stock warrants                          --              --                     --             375,000
Net proceeds from Private
  Placement, July 1998                    --              --                     --          17,550,095
Common stock issued for
  Independent Directors'
  Stock Plan                              --              --                     --              75,623
Common stock options and
  warrants issued for
  consulting services                     --              --                     --           1,130,683
Common stock issued for
  consulting services                     --              --                     --              30,000
Net loss                                  --              --             (4,919,208)         (4,919,208)
                                        ----            ----          -------------        ------------
Balance, June 30, 1999                                                 (121,761,026)         25,575,219
Common stock issued for
  exercise of non-qualified
  stock options                           --              --                     --           3,294,318
Common stock issued for
  conversion of Series A
  preferred stock                         --              --                     --                  --
Dividends issued on Series A
  preferred stock                                                        (1,946,571)         (1,946,571)
Common stock issued for
  exercise of common stock
  warrants                                --              --                     --           4,405,924
Net Proceeds from common
  stock offering                          --              --                     --          95,670,262
Common stock issued for
  Independent Directors'
  Stock Plan                              --              --                     --              88,237
Common stock options issued
  for consulting services                 --              --                     --             181,239
Net loss                                  --              --             (6,306,464)         (6,306,464)
Balance, June 30, 2000,                 ----            ----          -------------        ------------
  carried forward                         --              --          ($130,014,061)       $120,962,164

</TABLE>

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


                                       F-5
<PAGE>

                          ENZON, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
                    Years ended June 30, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                               Preferred stock                                Common stock
                               ---------------------------------------------     ------------------------------------------
                                                                                                                Additional
                                 Amount    Number of       Par      Amount       Number of        Par             paid-in
                               per share     Shares       Value    per share       Shares        Value            capital
                               ---------     ------       -----    ---------       ------        -----            -------
<S>                               <C>         <C>          <C>       <C>         <C>            <C>            <C>
Balance June 30, 2000,
  brought forward                             7,000        $70        5.25       40,838,115     $408,381       $250,567,774
Common stock issued for
  exercise of non-qualified
  stock options                    --            --         --          --        1,032,468       10,325          5,345,647
Issuance of restricted
  common stock                     --            --         --       61.40           25,000          250          1,534,750
Common stock issued on
  conversion of common
  stock warrants                   --            --         --        1.79           93,993          940            167,810
Common stock issued for
  Independent Directors'
  Stock Plan                       --            --         --       51.84            1,283           13             66,498
Amortization of deferred
  compensation                     --            --         --          --               --           --                 --
Unrealized gain on
  securities                       --            --         --          --               --           --                 --
Net income                         --            --         --          --               --           --                 --
                                 ----         -----        ---                   ----------     --------       ------------
Balance, June 30, 2001                        7,000        $70                   41,990,859     $419,909       $257,682,479
                                 ====         =====        ===                   ==========     ========       ============

<CAPTION>
                                    Other
                                Comprehensive     Deferred         Accumulated
                                    Income      Compensation         Deficit            Total
                                    ------      ------------         -------            -----
<S>                               <C>           <C>              <C>                <C>
Balance June 30, 2000,
  brought forward                       --               --      ($130,014,061)     $120,962,164
Common stock issued for
  exercise of non-qualified
  stock options                         --               --                 --         5,355,972
Issuance of restricted
  common stock                          --       (1,534,750)                --               250
Common stock issued on
  conversion of common
  stock warrants                        --               --                 --           168,750
Common stock issued for
  Independent Directors'
  Stock Plan                            --               --                 --            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            $884,935      ($1,509,171)     ($118,488,997)     $138,989,225
                                  ========      ============     ==============     ============
</TABLE>

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


                                       F-6
<PAGE>

                          ENZON, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    Years Ended June 30, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                           2001             2000             1999
                                                       ------------      -----------      -----------
<S>                                                     <C>              <C>              <C>
Cash flows from operating activities:
 Net income (loss)                                      $11,525,064      ($6,306,464)     ($4,919,208)
 Adjustments to reconcile net income (loss) to
  net cash provided by (used in) operating
  activities:
    Depreciation and amortization                           587,495          499,245          835,503
    Amortization of Bond Premium/Discount                  (830,481)              --               --
    Loss (gain) on retirement of assets                       2,746           36,274          (38,521)
    Non-cash expense for issuance of restricted
      common stock, warrants, and options                    92,090          269,476        1,236,306
Changes in operating assets and liabilities:
   Increase in accounts receivable                       (5,645,293)        (837,608)      (2,304,801)
   (Increase) decrease in inventories                      (905,427)         379,884         (304,071)
   Increase in other current assets                        (567,315)      (1,232,483)        (586,375)
   (Increase) decrease in deposits                         (101,419)         326,952         (288,936)
   Increase in accounts payable                           2,204,899          749,271            4,233
   (Decrease) Increase in accrued expenses                 (966,730)        (473,442)       2,691,353
   Decrease in accrued rent                                 (26,476)         (26,476)         (92,770)
   Increase (decrease) in unearned revenue                  184,814         (300,363)         (76,558)
                                                       ------------      -----------      -----------
     Net cash provided by (used in) operating
          Activities                                      5,553,967       (6,915,734)      (3,843,845)
                                                       ------------      -----------      -----------
Cash flows from investing activities:
   Capital expenditures                                  (2,082,621)        (768,415)        (424,670)
   Proceeds from sale of equipment                            3,525               --          131,932
   Proceeds from sale of investments                         24,972               --               --
   Purchase of investments                             (163,244,000)     (90,478,010)              --
   Maturities of investments                             45,303,000        4,000,000               --
   Decrease in long-term investments                        (20,437)              --              179
                                                       ------------      -----------      -----------
       Net cash used in investing activities           (120,015,561)     (87,246,425)        (292,559)
                                                       ------------      -----------      -----------
Cash flows from financing activities:
   Proceeds from issuance of common stock                 5,524,972      103,370,504       22,331,581
   Proceeds from issuance of notes                      400,000,000               --               --
   Deferred offering costs                              (12,774,951)              --               --
   Preferred stock dividends paid                                --       (1,946,571)              --
                                                       ------------      -----------      -----------
       Net cash provided by financing activities        392,750,021      101,423,933       22,331,581
                                                       ------------      -----------      -----------
       Net increase in cash and cash equivalents        278,288,427        7,261,774       18,195,177
Cash and cash equivalents at beginning of year           31,935,410       24,673,636        6,478,459
                                                       ------------      -----------      -----------
Cash and cash equivalents at end of year               $310,223,837      $31,935,410      $24,673,636
                                                       ============      ===========      ===========
</TABLE>

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


                                       F-7
<PAGE>

                          ENZON, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                    Years ended June 30, 2001, 2000 and 1999

(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

     Consolidated Financial Statements

          The  consolidated  financial  statements  include the  accounts of the
     Company and its wholly-owned  subsidiaries.  All intercompany  transactions
     and balances are 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.

     Accounting for Derivative and Hedging Activities

          Effective  July  1,  2000,  the  Company  adopted  the  provisions  of
     Statement  of  Financial  Accounting  Standards  No. 133,  "Accounting  for
     Derivative   Instruments  and  Hedging   Activities"  ("SFAS  133"),  which
     establishes   new  accounting  and  reporting   guidelines  for  derivative
     instruments,  including certain  derivative  instruments  embedded in other
     contracts, and hedging activities. SFAS 133 requires the recognition of all
     derivative  financial  instruments  as either assets or  liabilities in the
     consolidated  balance sheet and  measurement  of those  derivatives at fair
     value.  The  adoption of SFAS 133 did not have any effect on the  Company's
     results of  operations or financial  position,  as the Company does not use
     any derivatives.

     Investments

          The Company  classifies its debt and marketable equity securities into
     held-to-maturity  or  available-for-sale  categories.  Debt and  marketable
     equity  securities  classified  as  available-for-sale  are carried at fair
     market value, with the unrealized gains and losses, net of tax, included in
     the  determination  of  comprehensive  income and reported in stockholders'
     equity.  As of June 30,  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
<PAGE>

                          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, 2001 were as follows:

<TABLE>
<CAPTION>
                                                     Gross
                                                  Unrealized         Gross
                                 Amortized          Holding        Unrealized        Fair Market
                                    Cost             Gains       Holding Losses         Value
                                ------------     ------------    --------------      ------------
<S>                             <C>                <C>               <C>            <C>
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
                                ============     ============     ============      ============

</TABLE>

     Maturities  of debt  securities  classified as  available-for-sale  were as
follows at June 30, 2001:

Years ended June, 30                        Amortized Cost     Fair Market Value
                                            --------------     -----------------
2002                                          $128,635,000          $129,485,000
2003                                            46,136,000            46,108,000
2004                                            30,499,000            30,562,000
                                            --------------     -----------------
                                              $205,270,000          $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.

     At June 30, 2000, the Company's debt and marketable  equity securities were
classified  as  held-to-maturity.  Held-to-maturity  securities  are recorded as
either  short-term  or  long-term  on the  balance  sheet  based on  contractual
maturity date and are stated at amortized cost.

     As of June 30, 2000, the amortized cost, gross unrealized  holding gains or
losses,  and fair value for securities  held-to-maturity  by major security type
were as follows:

<TABLE>
<CAPTION>
                                                     Gross
                                                  Unrealized         Gross
                                 Amortized          Holding        Unrealized       Fair Market
                                    Cost             Gains       Holding Losses        Value
                                ------------     ------------    --------------     ------------
<S>                             <C>                <C>               <C>            <C>

U.S. Government agency debt       $3,630,000         $134,000               --        $3,764,000
U.S. Corporate debt               87,881,000          112,000         (143,000)       87,850,000
Foreign corporate debt            13,649,000               --          (86,000)       13,563,000
                                ------------     ------------     ------------      ------------
                                $105,160,000         $246,000        ($229,000)     $105,177,000
                                ============     ============     ============      ============
</TABLE>

     Included in cash and cash  equivalents at June 30, 2000 were $18,681,000 of
debt securities, which matured prior to October 30, 2000.


                                       F-9
<PAGE>

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

          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

          Inventories  are  stated  at the  lower  of  cost or  market.  Cost is
     determined  using the first-in,  first-out  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,
     2001 and 2000 was $1,372,000 and $1,230,000, 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 carried at cost.  Depreciation  is computed
     using the  straight-line  method.  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

          The Company reviews  long-lived assets for impairment  whenever events
     or changes in business  circumstances occur that indicate that the carrying
     amount of the assets  may not be  recoverable.  The  Company  assesses  the
     recoverability   of  long-lived  assets  held  and  to  be  used  based  on
     undiscounted  cash  flows  and  measures  the  impairment,  if  any,  using
     discounted cash flows.


                                      F-10
<PAGE>

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

     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 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 10).

          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

          Research and development costs are expensed as incurred.

     Stock Compensation

          The Company  maintains a  Non-Qualified  Stock Option Plan (the "Stock
     Option  Plan") for which it applies  Accounting  Principles  Board  ("APB")
     Opinion No. 25,  "Accounting  for Stock Issued to  Employees,"  and related
     interpretations  in  accounting  for the Stock Option Plan.  Stock  options
     issued to employees are granted with an exercise  price equal to the market
     price  and in  accordance  with APB No.  25,  compensation  expense  is not
     recognized.  The Company records compensation expense equal to the value of
     stock options  granted for consulting  services  rendered to the Company by
     non-employees.  The  value  of the  options  granted  to  non-employees  is
     determined by the Black-Scholes option-pricing model.

          The Company issued 25,000 shares of restricted  stock to its President
     and  Chief  Executive  Officer  in  conjunction  with his  commencement  of
     employment. The fair value of the shares on the grant date will be expensed
     over the vesting period of the stock.

     Financial Instruments

          The  carrying  amounts  of  cash  and  cash  equivalents,   short-term
     investments,  accounts  receivable,  accounts  payable and accrued expenses
     approximate fair value because of the short maturity of these  instruments.
     The interest rates on notes payable approximates rates for similar types of
     borrowing arrangements at June 30, 2001 and therefore the fair value of the
     notes payable approximates the carrying value at June 30, 2001.

     Cash Flow Information

          The Company  considers  all highly  liquid  securities  with  original
     maturities of three months or less to be cash equivalents.


                                      F-11
<PAGE>

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

          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,  2001 and 1999.  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.

          Cash  payments for interest  were  approximately  $25,000,  $4,000 and
     $8,000 for the years  ended  June 30,  2001,  2000 and 1999,  respectively.
     There were no income tax  payments  made for the years ended June 30, 2001,
     2000 and 1999.

(3)  Comprehensive Income

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

                                                Years ended June 30,
                                        --------------------------------------
                                            2001         2000          1999
                                        -----------  -----------   -----------
     Net income (loss)                  $11,525,000  ($6,306,000)  ($4,919,000)
     Unrealized gain on securities          885,000           --            --
                                        -----------  -----------   -----------

     Total comprehensive income (loss)  $12,410,000  ($6,306,000)  ($4,919,000)
                                        ===========  ===========   ===========

(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 year ended
     June 30, 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 years ended June 30, 2000 and 1999,  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 those
     periods.  As of June 30, 2001, the Company had 9,866,000 dilutive potential
     common shares outstanding that could potentially dilute future earnings per
     share calculations.


                                      F-12
<PAGE>

                          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,
                                       ----------------------------------------
                                           2001          2000           1999
                                       ----------------------------------------
     Net income (loss)                 $11,525,000   ($6,306,000)   ($4,919,000)
     Less:  preferred stock dividends
                                            14,000        14,000        214,000
                                       -----------  ------------   ------------
     Net income (loss) available
        to common stockholders         $11,511,000   ($6,320,000)   ($5,133,000)
                                       ===========  ============   ============

     Weighted average number of
        common shares issued and
        outstanding - basic             41,602,104    38,172,515     35,699,133
     Effect of dilutive common stock
     equivalents:
        Conversion of preferred stock       16,000            --             --
        Exercise of non-qualified
          stock options                  1,988,090            --             --
                                       -----------  ------------   ------------
                                        43,606,194    38,172,515     35,699,133
                                       ===========  ============   ============

(5)  Inventories

     Inventories consist of the following:

                                   June 30,
                          ------------------------
                                2001          2000
                                ----          ----
     Raw materials          $421,000      $283,000
     Work in process         737,000       504,000
     Finished goods          694,000       160,000
                          ----------      --------
                          $1,852,000      $947,000
                          ==========      ========

(6)  Property and Equipment

     Property and equipment consist of the following:

                                ---------------------------     Estimated
                                    2001            2000        useful lives
                                    ----            ----        ------------
     Equipment                   $8,692,000      $8,356,000        3-7 years
     Vehicles                     1,446,000       1,440,000          7 years
     Leasehold improvements          24,000          24,000          3 years
                                  3,020,000       2,619,000       3-15 years
                                -----------     -----------
                                $13,182,000     $12,439,000
                                ===========     ===========

          During the years ended June 30,  2001 and 2000,  the  Company's  fixed
     asset disposals were approximately $991,000 and $383,000, respectively.

          Depreciation  and  amortization  charged  to  operations  relating  to
     property  and  equipment  totaled  $442,000,  $348,000 and $692,000 for the
     years ended June 30, 2001, 2000 and 1999, respectively.


                                      F-13
<PAGE>

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

(7)  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  $250,000 as of June 30, 2001. 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.

(8)  Stockholders' Equity

          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 shall be recognized over the five year vesting period.

          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.

          During the year ended June 30, 1999, the Company sold 3,983,000 shares
     of Common Stock in a private  placement to a small group of investors.  The
     private placement  resulted in gross proceeds of approximately  $18,919,000
     and net proceeds of approximately $17,550,000.

          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.

     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


                                      F-14
<PAGE>

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


     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, 2001 and 2000,  undeclared  accrued  dividends  in
     arrears were $158,000 or $22.54 per share and $144,000 or $20.54 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

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

          As of June 30, 2001,  the Company has  reserved its common  shares for
     special purposes as detailed below:

                Shares issuable upon conversion of
                Series A Preferred Shares                          30,000
                Non-Qualified Stock Option Plan                 4,201,000
                Shares issuable upon conversion of Notes        5,635,000
                                                                ---------
                                                                9,866,000
                                                                =========

     Common Stock Warrants

          As of June 30, 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 our 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.

          During the year ended June 30, 1999,  150,000  warrants were exercised
     to  purchase  150,000  shares of the  Company's  Common  Stock at $2.50 per
     share.  These  warrants were issued during the year ended June 30, 1996, as
     part of the commission  due to a real estate broker in connection  with the
     termination of the Company's former lease at 40 Kingsbridge Road.


                                      F-15
<PAGE>

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

          During  the year ended  June 30,  1999,  the  Company  issued  200,000
     five-year  warrants to purchase  its Common  Stock at $6.50 per share,  the
     closing  price of the Common  Stock on the date of grant.  The warrants are
     consideration for consulting services to be rendered through February 2002.
     The estimated fair value of the warrants of approximately $917,000 is being
     amortized over the service period of three years.  The unamortized  portion
     is included as a component of other assets with the  corresponding  current
     portion included in other current assets on the consolidated  balance sheet
     as of June 30, 2001 and 2000.

(9)  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,  2001,  2000 and 1999,  the Company
     issued  1,000,  3,000 and 9,000 shares of Common  Stock,  respectively,  to
     independent directors, pursuant to the Independent Directors' Stock Plan.

(10) Non-Qualified Stock Option Plan

          In  November  1987,  the  Company's  Board  of  Directors   adopted  a
     Non-Qualified  Stock Option Plan (the "Stock Option Plan").  As of June 30,
     2001,  4,201,000 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.  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.

          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.


                                      F-16
<PAGE>

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

          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.

<TABLE>
<CAPTION>
                                                        2001           2000            1999
                                                        ----           ----            ----
<S>                                                 <C>           <C>              <C>
Net income (loss) - as reported                     $11,525,000    ($6,306,000)    ($4,919,000)
Net income (loss) - pro forma                         1,609,000   ($10,008,000)    ($7,289,000)
Net income (loss) per diluted share - as reported         $0.26         ($0.17)         ($0.14)
Net income (loss) per diluted share - pro forma           $0.04         ($0.26)         ($0.21)
</TABLE>

          The fair value of each  option  granted  during the three  years ended
     June 30, 2001 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 83%, 84% and 86%
     and (iv) a risk-free  interest rate of 5.72%, 6.19% and 5.06% for the years
     ended June 30, 2001, 2000 and 1999, respectively. The weighted average fair
     value at the date of grant for options  granted during the years ended June
     30,  2001,  2000  and  1999  was  $56.79,   $33.78  and  $9.68  per  share,
     respectively.

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

<TABLE>
<CAPTION>
                                                               Weighted
                                                                Average
                                                               Exercise        Range of
                                                   Shares        Price          Prices
                                                   ------        -----          ------
<S>                                              <C>             <C>       <C>
Outstanding at July 1, 1998                       4,422,000       4.06     $ 1.88 to $14.88
Granted at exercise prices which equaled the
   fair market value on the date of grant           475,000       9.68     $ 4.88 to $15.75
Exercised                                        (1,001,000)      4.40     $  2.00 to $9.88
Canceled                                           (172,000)      7.25     $ 2.81 to $14.50
                                                -----------
Outstanding at June 30, 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
                                                ===========
</TABLE>


                                      F-17
<PAGE>

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

     As of June 30,  2001,  the Stock  Option Plan 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
          ------      -----------     ----       -----    -----------   -----
       $1.88 - $2.69      418,000     3.22       $2.43        418,000    $2.43
       $2.75 - $2.94      451,000     4.76       $2.86        451,000    $2.86
       $3.38 - $3.50       82,000     4.11       $3.47         82,000    $3.47
       $3.56 - $4.50      442,000     2.93       $4.41        442,000    $4.41
      $4.63 - $14.13      452,000     6.93       $7.52        412,000    $6.87
     $15.75 - $44.75      707,000     8.74       $38.81       132,000   $34.73
     $47.19 - $70.00      692,000     9.68       $63.39         2,000   $59.60
     $70.69 - $73.22       40,000     9.32       $71.20                     --
                        ---------                           ---------
                        3,284,000     6.55       $24.98     1,939,000    $6.23
                        =========                           =========

(11) 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 Company was
     profitable  for the year ended June 30, 2001, and  accordingly  the Company
     recognized  a tax  provision  for the year  ended  June 30,  2001.  The tax
     provision  represents  the Company's  anticipated  Alternative  Minimum Tax
     liability  based on the fiscal 2001 taxable  income.  The tax provision was
     offset by the sale of a portion of our net  operating  losses for the state
     of New Jersey. During March 2001, the Company sold approximately $9,255,000
     of its state net operating loss carry forwards and recognized a tax benefit
     of $728,000 from this sale.


                                      F-18
<PAGE>

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

     At June 30, 2001 and 2000,  the tax effects of temporary  differences  that
give rise to the  deferred  tax  assets  and  deferred  tax  liabilities  are as
follows:

                                                          2001          2000
                                                          ----          ----
Deferred tax assets:
Inventories                                           $   116,000   $   603,000
Investment valuation reserve                               78,000        86,000
Contribution carryover                                     36,000        28,000
Compensated absences                                      190,000       157,000
Excess of financial statement over tax depreciation       862,000       924,000
Royalty advance - Aventis                                 396,000       395,000
Non-deductible expenses                                   315,000     1,025,000
Federal and state net operating loss carryforwards     63,662,000    50,808,000
Research and development and investment tax
Credit carryforwards                                    9,851,000     8,860,000
                                                      -----------   -----------
Total gross deferred tax assets                        75,506,000    62,886,000

Less valuation allowance                              (74,800,000)  (62,180,000)
                                                      -----------   -----------

Net deferred tax assets                                   706,000       706,000
                                                      -----------   -----------

Deferred tax liabilities:

Book basis in excess of tax basis of acquired assets     (706,000)     (706,000)
                                                      -----------   -----------

Net deferred tax                                      $         0   $         0
                                                      ===========   ===========

          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.  The
     net change in the total  valuation  allowance  for the years ended June 30,
     2001 and 2000 was an increase of $12,620,000 and $6,775,000,  respectively.
     The tax benefit  assumed  using the federal  statutory  tax rate of 34% has
     been reduced to an actual  benefit of zero  excluding sale of net operating
     losses referred to above, due principally to the  aforementioned  valuation
     allowance.  Subsequently  recognized  tax  benefits  as of  June  30,  2001
     attributed  to stock  option  deductions  of  $26,500,000  relating  to the
     valuation allowance for deferred tax assets will be allocated to additional
     paid-in capital.

          At  June  30,  2001,  the  Company  had  federal  net  operating  loss
     carryforwards  of approximately  $168,901,000  for tax reporting  purposes,
     which expire in the years 2002 to 2021. The Company also has investment tax
     credit  carryforwards  of  approximately  $3,200 and federal  research  and
     development tax credit  carryforwards of  approximately  $7,784,000 for tax
     reporting  purposes,  which expire in the years 2002 to 2021.  In addition,
     the  Company has  $2,067,000  state  research  and  development  tax credit
     carryforwards,  which  expire  in the  years  2001 to 2008.  The  Company's
     ability  to use  such net  operating  loss,  investment  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
     valuation  allowance  related  to the  net  operating  loss  carryforwards,
     approximately  $66,479,000  relates to a tax  deduction  for  non-qualified
     stock options.  The Company will increase capital  contributed in excess of
     par when these benefits are deemed to be realizable.


                                      F-19
<PAGE>

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

          In addition,  the net  operating  loss  carryforward  of  $168,901,000
     includes  $39,945,000  from the  acquisition of Enzon,  Labs, Inc. which is
     limited to a maximum of $4,921,000.

(12) 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  lawsuits,  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-20
<PAGE>

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

     Aventis Agreement

          Under the Company's Amended Aventis  Pharmaceuticals,  (formerly Rhone
     Poulenc Rorer  Pharmaceuticals,  Inc.) U.S. License Agreement (the "Amended
     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 is 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 will include
     Aventis' cost of purchasing ONCASPAR under a separate supply agreement. The
     agreement was also extended until 2016.  Additionally,  the Amended License
     Agreement  eliminated  the super  royalty of 43.5% on net sales of ONCASPAR
     which exceed certain agreed-upon  amounts. The Amended Aventis U.S. License
     Agreement  also provides for a payment of $3,500,000 in advance  royalties,
     which was received in January 1995.

          The payment of royalties to Enzon under the Amended License  Agreement
     will be offset by an original  credit of $5,970,000,  which  represents the
     royalty advance plus  reimbursement of certain amounts due to Aventis under
     the original License Agreement and interest expense. The royalty advance is
     shown as a long-term  liability,  with the  corresponding  current  portion
     included in accrued expenses on the Consolidated  Balance Sheets as of June
     30, 2001 and 2000.  The royalty  advance will be reduced as  royalties  are
     recognized  under the Amended License  Agreement.  Through June 30, 2001 an
     aggregate of  $4,307,000  in  royalties  payable by Aventis has been offset
     against the original credit.

          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.  The Amended License Agreement terminates in December 2016 but
     automatically  renews for additional  one-year  periods unless either party
     notifies the other in writing that it intends not to renew the agreement at
     least  three  months  prior  to  the  end of the  current  term.  It can be
     terminated  earlier  by  either  party due to a default  by the  other.  In
     addition,  Aventis may terminate the Amended License  Agreement at any time
     upon one year's  prior notice to the Company or if the Company is unable to
     supply  product for more than 60 days under the Company's  separate  supply
     agreement with Aventis. When the Amended License Agreement terminates,  all
     rights granted to Aventis under the agreement will revert to Enzon. Under a
     separate supply  agreement,  Aventis is required to purchase from Enzon all
     of its product  requirements for sales of ONCASPAR in North America. If the
     Company is unable to supply product to Aventis,  under the supply agreement
     for more than 60 days for any  reason  other  than a force  majeure  event,
     Aventis may terminate the supply agreement and the Company will be required
     to  exclusively  license  Aventis  the  know-how  required  to  manufacture
     ONCASPAR  for the  period of time  during  which the  agreement  would have
     continued had the license agreement not been terminated.


                                      F-21
<PAGE>

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

     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 is 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 calls for a payment of $100,000  beginning in May
     2000 and for each  month that  expires  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 will allow
     for resumption of normal  distribution  and labeling of this  production by
     Aventis,  which is expected to occur  during the first  quarter of calendar
     2002.

          Under separate  license  agreements,  Aventis has exclusive  rights to
     sell ONCASPAR in Canada and Mexico. These agreements provide for Aventis to
     seek to obtain marketing  approval of ONCASPAR in Canada and Mexico and for
     the Company to receive  royalties on sales of ONCASPAR in these  countries,
     if any. These agreements expire 10 years after the first commercial sale of
     ONCASPAR in each country, but automatically renew for consecutive five-year
     periods unless either party elects to terminate at least three months prior
     to the end of the current term.  Aventis may terminate these  agreements on
     one year's prior notice to the Company.

          The Company also has a license  agreement with Aventis for the Pacific
     Rim region, specifically,  Australia, New Zealand, Japan, Hong Kong, Korea,
     China, Taiwan, Philippines,  Indonesia,  Malaysia,  Singapore, Thailand and
     Vietnam,  (the  "Pacific  Rim").  The  agreement  provides  for  Aventis to
     purchase  ONCASPAR  for  the  Pacific  Rim  from  the  Company  at  certain
     established  prices which increase over the ten year term of the agreement.
     Under the  agreement,  Aventis  is  responsible  for  obtaining  additional
     approvals and indications in the licensed  territories.  The agreement also
     provides for minimum purchase  requirements for the first four years of the
     agreement.

     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.


                                      F-22
<PAGE>

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

     Gentiva Agreement

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

(13) 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.

          During  fiscal  2001,  the FDA gave final  approval  to  manufacturing
     changes  which the Company  made to correct  these  manufacturing,  and all
     previous  imposed  restrictions  were  lifted.  This  will  allow  for  the
     resumption  of normal  distribution  and  labeling  of this  product by the
     Company's  partner,  Aventis,  which is expected to occur  during the first
     quarter of calendar 2002.

          During August 2000, the Company made a $1.5 million payment to Aventis
     which was accrued for at June 30,  2000 to settle a  disagreement  over the
     purchase  price of  ONCASPAR  under  the  supply  agreement  and to  settle
     Aventis'  claim that the Company  should be  responsible  for Aventis' lost
     profits  while  ONCASPAR is under the temporary  labeling and  distribution
     modifications  described  above. The settlement also calls for a payment of
     $100,000  beginning  in May 2000 and for each month that  expires  prior to
     Aventis' resumption of marketing and distribution of ONCASPAR.

          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


                                      F-23
<PAGE>

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

     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 which provides for severance  payments in addition to the
     change in control provisions discussed above. In addition,  the Company has
     entered into retention agreements with certain employees, which provide for
     payment in the event the employee is terminated prior to May 30, 2002.

(14) Leases

          The Company has several leases for office,  warehouse,  production and
     research facilities and equipment.

          Future minimum lease  payments,  net of subleases,  for  noncancelable
     operating  leases with  initial or  remaining  lease terms in excess of one
     year as of June 30, 2001 are:

          Year ending                                           Operating
          June 30,                                                leases
          --------                                                ------
            2002                                                  $717,000
            2003                                                   779,000
            2004                                                   766,000
            2005                                                   765,000
            2006                                                   765,000
          Later years, through 2007                              1,222,000
                                                                ----------
          Total minimum lease payments                          $5,014,000
                                                                ==========

          Rent expense  amounted to $856,000,  $1,055,000 and $1,394,000 for the
     years ended June 30, 2001, 2000 and 1999, respectively.

          For the year ended June 30,  1999,  rent  expense is net of  subrental
     income of $110,000.  As of June 30, 1999,  the Company no longer  subleased
     any portion of its facilities.

(15) 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, 2001,  2000 and 1999 were  $156,000,  $128,000 and $115,000,
     respectively.


                                      F-24
<PAGE>

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

(16) Accrued Expenses

          Accrued expenses consist of:

                                                  June 30,
                                          -----------------------
                                             2001         2000
                                             ----         ----

          Accrued wages and vacation      $1,596,000   $1,238,000
          Accrued Medicaid rebates           943,000      962,000
          Unearned revenue                   630,000      854,000
          Contract and legal accrual              --    1,500,000
          Accrued costs associated with
          subordinated notes offering        371,000           --
          Accrued interest payable           250,000           --
          Other                              950,000    1,153,000
                                          ----------   ----------
                                          $4,740,000   $5,707,000
                                          ==========   ==========

(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, 2001,  2000 and 1999,  the Company had
     export  sales and  royalties  recognized  on export  sales of  $11,115,000,
     $4,137,000  and  $3,075,000,  respectively.  Of these  amounts,  sales  and
     royalties in Europe and royalties recognized on sales in Europe represented
     $10,418,000,  $3,617,000  and  $2,559,000  during the years  ended June 30,
     2001, 2000 and 1999, respectively.

          ADAGEN sales represent approximately 64%, 78% and 90% of the Company's
     total  net  sales  for the  year  ended  June  30,  2001,  2000  and  1999,
     respectively.  ADAGEN's Orphan Drug  designation  under the Orphan Drug Act
     expired in March 1997.  The Company  believes  the  expiration  of ADAGEN's
     Orphan  Drug  designation  will not have a material  impact on the sales of
     ADAGEN.  A portion of the  Company's  ADAGEN sales for the years ended June
     30, 2001, 2000 and 1999, were made to Medicaid patients.


                                      F-25
<PAGE>

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

(18) Quarterly Financial Data (unaudited)

          The tables below summarize the Company's unaudited quarterly operating
results for fiscal years 2001 and 2000.

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                September 30,  December 31,    March 31,      June 30,     Fiscal Year
                                     2000          2000           2001          2001           2001
                               ------------------------------------------------------------------------
<S>                              <C>            <C>            <C>           <C>            <C>
Revenues                        $ 5,173,614    $ 6,019,145    $ 9,931,754   $ 10,463,196   $ 31,587,709
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           0.08           0.28
     Diluted                           0.01           0.05           0.13           0.08           0.26

                                                         Three Months Ended
<CAPTION>
                                September 30,  December 31,    March 31,      June 30,     Fiscal Year
                                     1999          1999           2000          2000           2000
                               ------------------------------------------------------------------------
<S>                            <C>            <C>            <C>            <C>            <C>
Revenues                       $ 2,913,813    $ 3,765,072    $ 5,723,117    $ 4,615,795    $ 17,017,797
Net loss                        (1,950,463)    (1,509,731)    (1,684,944)    (1,161,326)    (6,306,464)
Net loss per common share:
     Basic                           (0.05)         (0.04)         (0.04)         (0.03)         (0.17)
     Diluted                         (0.05)         (0.04)         (0.04)         (0.03)         (0.17)
</TABLE>


                                      F-26
<PAGE>

                                  EXHIBIT INDEX

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

10.13    Form of Employee Retention Agreement dated as of
         August 3, 2001 between the Company and certain key employees      E-2
12.1     Computation of Ratio of Earnings to Fixed Charges                 E-13
21.0     Subsidiaries of Registrant                                        E-14
23.0     Consent of KPMG LLP                                               E-15


                                       E-1


</TEXT>
</DOCUMENT>
