ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

Total cash reserves, which include cash, cash equivalents, short-term investments and marketable securities, were $210.0 million as of March 31, 2005, as compared to $186.2 million as of June 30, 2004. The increase is primarily due to net cash provided by operating activities and proceeds from the liquidation of a portion of the shares of NPS Pharmaceuticals, Inc. common stock that we own. We invest our excess cash primarily in United States government-backed securities and investment-grade corporate debt securities and auction rate securities.

During the nine months ended March 31, 2005, net cash provided by operating activities was $12.8 million, compared to $8.5 million for the nine months ended March 31, 2004. Net cash provided by operations was principally due to non-cash charges included in our net loss of $5.7 million for the nine months ended March 31, 2005. Non-cash charges totaled $26.2 million and were primarily attributable to depreciation and amortization of $17.0 million, losses on sales of investments of $3.5 million, amortization of bond premium/discount of $2.0, a loss on our equity collar arrangement related to our investment in NPS common stock of $1.8 million, and amortization of debt issue costs of $1.4 million. Non-cash charges were partially offset by $7.7 million in changes in deferred income taxes and operating assets and liabilities.

Cash used in investing activities totaled $49.4 million for the nine months ended March 31, 2005 compared to cash provided by investing activities of $18.0 million for the nine months ended March 31, 2004. Cash used in investing activities during the nine months ended March 31, 2005, consisted of $2.2 of capital expenditures and investments in marketable securities of $136.5 million, offset by $74.0 million in proceeds from the sale of marketable securities and $15.3 million in proceeds from the liquidation of a portion of our investment in NPS common stock.

As of March 31, 2005, we had $400.0 million of convertible subordinated notes outstanding. The notes bear interest at an annual rate of 4.5%. Interest is payable on January 1 and July 1 of each year. Accrued interest on the notes was $4.5 million as of March 31, 2005. The holders may convert all or a portion of the notes into common stock at any time on or before July 1, 2008. The notes are convertible into our common stock at a conversion price of $70.98 per share, subject to adjustment in certain events. The notes are subordinated to all existing and future senior indebtedness. 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. As of March 31, 2005 the redemption price of the notes is 102.571% of the principal amount. The notes will mature on July 1, 2008 unless converted earlier, redeemed at our option or redeemed at the option of the note holder upon a fundamental change, as described in the indenture for the notes. Neither we nor any of our subsidiaries are subject to any financial covenants under the indenture. In addition, neither we nor any of our subsidiaries are restricted under the indenture from paying dividends, incurring debt, or issuing or repurchasing our securities.

In August 2003, the Company entered into a Zero Cost Protective Collar arrangement with a financial institution to reduce the exposure associated with 1.5 million shares of NPS common stock, which the Company received as part of a merger termination agreement with NPS. During the nine months ended March 31, 2005 we received proceeds of $15.0 million related to the maturation of two portions of the derivative. The remainder of the collar will mature on two separate maturity dates in May 2005 and August 2005, at which time the Company will receive the proceeds from the sale of the securities which we estimate after taking into account the effect of the collar will be in the range of $15.0 million to $19.0 million. The amount due at each maturity date will be determined based on the market value of NPS common stock on such maturity date. The contract requires the Company to maintain a minimum cash balance of $30.0 million and additional collateral of up to $10.0 million, as defined under certain circumstances with the financial institution. The derivative is subject to certain adjustments in the event the Company receives a dividend from NPS.

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

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

OFF-BALANCE SHEET ARRANGEMENTS

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPE"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow limited purposes. As of March 31, 2005, we were not involved in any SPE transactions.

CONTRACTUAL OBLIGATIONS

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

In March 2005, we terminated the agreements we entered into with Inex Pharmaceuticals, Inc. in January 2004 regarding the development and commercialization of Inex's proprietary oncology product MARQIBO(R) (vincristine sulfate liposomes injection). Under the terminated MARQIBO Agreements, we shared the costs of clinical development with Inex and received the exclusive commercialization rights for MARQIBO for all indications in the United States, Canada and Mexico. In January 2005, the United States Food and Drug Administration (the "FDA") provided an action letter detailing MARQIBO as "not approvable" under the FDA's accelerated approval regulations for relapsed aggressive non-Hodgkin's lymphoma. The FDA's response also recommended that additional randomized controlled studies would need to be conducted prior to re-applying for approval. After a strategic analysis of the FDA's recommendation, required investment, development timeframe, and associated development risks, we concluded it would be in the Company's best interest to redirect this investment to pursue other opportunities. In connection with the termination, we paid Inex a final payment of $5.0 million in satisfaction of all of our financial obligations under the MARQIBO Agreements, including development expenses and milestone payments. The payment was charged to research and development in our Condensed Consolidated Statement of Operations.

Since June 30, 2004, there have been no other material changes with respect to our contractual obligations as disclosed under Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations in our annual report on Form 10-K/A for the year ended June 30, 2004.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2005 AND 2004

REVENUES. Total revenues for the three months ended March 31, 2005 were $38.7 million, as compared to $44.4 million for the three months ended March 31, 2004. The components of revenues are product sales, manufacturing revenue, royalties we earn on the sale of our products by others and contract revenue.

Net product sales decreased by 24% to $21.2 million for the three months ended March 31, 2005, as compared to $28.0 million for the three months ended March 31, 2004. The decrease in sales was due to decreased sales of ABELCET. Sales of ABELCET in North America decreased by $8.5 million to $9.1 million for the three months ended March 31, 2005, as compared to $17.6 million for the three months ended March 31, 2004 due to increased competition in the intravenous antifungal market. Sales of DEPOCYT increased by $483,000 to $1.8 million for the three months ended March 31, 2005 as compared to $1.4 million for the three months ended March 31, 2004. DEPOCYT's growth over the prior year was primarily attributable to increased sales and marketing efforts, as well as a higher weighted average price. Sales of ONCASPAR increased by $652,000 to $5.5 million for the three months ended March 31, 2005 from $4.9 million for the three months ended March 31, 2004. The increase in sales of ONCASPAR over the prior year was primarily driven by a higher weighted average price. Sales of ADAGEN increased by $644,000 for the three months ended March 31, 2005 to $4.8 million as compared to $4.1 million for the three months ended March 31, 2004 due to the timing of shipments. Historically, quarterly sales of ADAGEN experience volatility because of the small number of patients on therapy.

Manufacturing revenue for the three months ended March 31, 2005 decreased by $676,000 to $4.4 million, as compared to $5.0 million for the comparable period of the prior year, due to reduced orders from our contract manufacturing customers. Manufacturing revenue is related to the manufacture and sale of ABELCET for the international market and other manufacturing revenue.

Royalties for the three months ended March 31, 2005, increased by $1.6 million to $12.7 million as compared to $11.1 million for the three months ended March 31, 2004. Royalties are principally comprised of royalties from sales of PEG-INTRON, which is marketed by Schering-Plough Corporation. The increase in royalties over the prior year was primarily due to the launch of PEG-INTRON combination therapy in Japan in December 2004. Currently, PEG-INTRON combination therapy is the only pegylated interferon-based combination therapy approved in Japan.

Due to the December 2004 launch of PEG-INTRON in Japan, we believe royalties from sales of PEG-INTRON may continue to increase over prior year levels in the near term. In markets outside of Japan, PEG-INTRON combination therapy competes directly with another pegylated interferon-based combination therapy in a highly competitive market. Further, Schering-Plough has reported that the overall hepatitis C market has been contracting. We cannot assure you that these contracting and competitive market conditions will not offset the positive impact of PEG-INTRON in Japan or that any particular sales levels of PEG-INTRON will be achieved or maintained.

We expect North American sales of ABELCET may continue to be negatively impacted by the increasingly competitive conditions in the intravenous antifungal market, namely from the introduction of newer agents from Pfizer, Merck, and Fujisawa, as well as increased pricing pressure in the market for lipid formulations of amphotericin B. We cannot assure you that any particular sales levels of ABELCET, ADAGEN, DEPOCYT, and ONCASPAR will be achieved or maintained.

Contract revenues for the three months ended March 31, 2005 were $452,000 as compared to $248,000 for the three months ended March 31, 2004. The increase was principally due to revenue related to an agreement with Pharmagene plc to apply our PEGylation technology to engineer a long-acting version of Pharmagene's drug candidate, PGN0052.

During the three months ended March 31, 2005, we had export sales and royalties on export sales of $12.4 million, of which $8.9 million were in Europe. Export sales and royalties recognized on export sales for the three months ended March 31, 2004 were $9.2 million, of which $7.5 million were in Europe.

COST OF PRODUCT SALES AND MANUFACTURING REVENUE. Cost of product sales and manufacturing revenue, as a percentage of net product sales and manufacturing revenue, improved to 35% for the three months ended March 31, 2005 as compared to 38% for the same period last year. The decrease was due to reduced ABELCET costs, as well as improved margins for ADAGEN, ONCASPAR, and DEPOCYT. For each of the three month periods ended March 31, 2005 and March 31, 2004, we have included $1.1 million in cost of product sales and manufacturing revenue, which related to the amortization of intangible assets acquired in connection with the ABELCET acquisition during November 2002.

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

For the three months ended March 31, 2005, research and development expenses increased by $2.2 million to $12.9 million as compared to $10.8 million for the three months ended March 31, 2004. The increase in research and development expenses was primarily due to increased costs related to MARQIBO of $3.3 million, which included the impact of a $5.0 million payment made to Inex Pharmaceuticals Corporation in March 2005 related to the termination of our partnership for the development and commercialization of MARQIBO. The increased research and development costs related to MARQIBO were partially offset by reduced expenditures of approximately $1.1 million, which were primarily due to the discontinuation of certain research and development programs, including our clinical development program for Pegamotecan, which was discontinued in February 2005.

SELLING, GENERAL AND ADMINISTRATIVE. Selling expenses consist primarily of salaries and benefits for our sales and marketing personnel, as well as other commercial expenses and marketing programs to support our sales force. General and administrative expenses consist primarily of salaries and benefits; outside professional services for accounting, audit, tax, legal, and investor activities; and allocations of facilities costs.

For the three months ended March 31, 2005 selling, general and administrative expenses increased by $1.2 million to $13.7 million, as compared to $12.5 million for the three months ended March 31, 2004. The increase was primarily attributable to increased sales and marketing costs of approximately $792,000 and increased general and administrative costs of approximately $366,000. The increase in sales and marketing costs was comprised of a $1.2 million increase in costs related to our oncology sales operations, a $441,000 increase in costs related to MARQIBO, and an $808,000 decrease in costs related to our hospital-based sales operations. The increase in general and administrative costs was primarily attributable to an increase of $242,000 in legal and accounting fees and a net increase of $124,000 in other costs.

Based on the increasingly competitive conditions in the intravenous antifungal market, as previously discussed, as well as the discontinuation of certain research and development projects, in April 2005 we reported that we are realigning our cost structure through a restructuring. As a result of the restructuring, we expect to incur charges of $1.5 million to $2.5 million during the quarter ending June 30, 2005. These costs all involve cash expenditures and are comprised primarily of employee termination benefits.

AMORTIZATION. Amortization expense is related to intangible assets acquired in connection with the ABELCET acquisition in November 2002. Amortization expense remained unchanged at $3.4 million for each of the three month periods ended March 31, 2005 and 2004. A portion of amortization expense is classified in cost of product sales and manufacturing revenue, as discussed above. Amortization of intangible assets is calculated on a straight-line basis over the estimated lives of the assets, which range from 3 to 15 years.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research and development for the three months ended March 31, 2004 of $12.0 million was due to an up-front payment to Inex related to the execution of a strategic partnership and related agreements entered into with Inex related to MARQIBO (a development-stage product). As previously discussed, this partnership was terminated in March 2005.

OTHER INCOME (EXPENSE). Other income (expense) for the three months ended March 31, 2005 was an expense of $7.1 million, as compared to income of $6.3 million for the three months ended March 31, 2004. Other income (expense) includes: net investment income, interest expense, and other expense.

Net investment income decreased by $10.5 million to $1.1 million for the three months ended March 31, 2005 compared with $11.6 million for the three months ended March 31, 2004. The decrease was principally due to the prior year's sale of 880,075 shares of Nektar Therapeutics common stock, which resulted in a net gain of approximately $11.0 million in the three months ended March 31, 2004.

Interest expense was $5.0 million for each of the three months ended March 31, 2005 and 2004. Interest expense is related to $400.0 million in 4.5% convertible subordinated notes, which were outstanding for each of the three month periods ended March 31, 2005 and 2004.

Other expense increased to $3.2 million for the three months ended March 31, 2005, as compared to $337,000 for the three months ended March 31, 2004. The increase in the expense was related to a realized loss on the liquidation of 375,000 shares of our investment in NPS common stock during the quarter ended March 31, 2005, as well as an increase in the unrealized loss associated with a derivative instrument we formed as a protective collar arrangement to reduce our investment risk associated with our investment in these shares.

INCOME TAXES. During the three months ended March 31, 2005, we recognized a tax benefit of approximately $2.7 million, as compared to a tax benefit of $5.5 million for the three months ended March 31, 2004. We recognized a tax benefit for the three months ended March 31, 2005 at an estimated annual effective tax rate of 37%, which is based on the projected income tax benefit and taxable loss for the fiscal year ending June 30, 2005.

During the three months ended March 31, 2004, the Company recorded a net tax benefit of approximately $5.5 million related primarily to the reversal of a $3.8 million deferred tax asset valuation allowance for the write-down in a prior year of Enzon's equity investment in Nektar Therapeutics, which was sold during the quarter ended March 31, 2004. The sale resulted in a gain of approximately $11.0 million. The benefit was also due to the reduction of Enzon's estimated taxable income and effective tax rate to 29% as compared to 35% used in previous quarters and a payment during the three months ended March 31, 2004 of $12.0 million to Inex Pharmaceuticals related to acquired in-process research and development.

NINE MONTHS ENDED MARCH 31, 2005 AND 2004

REVENUES. Total revenues for the nine months ended March 31, 2005 were $122.1 million, as compared to $126.7 million for the nine months ended March 31, 2004. The components of revenues are product sales, manufacturing revenue, royalties we earn on the sale of our products by others and contract revenues.

Net product sales decreased by 6% to $75.7 million for the nine months ended March 31, 2005, as compared to $80.7 million for the nine months ended March 31, 2004. The decrease in sales was due to decreased sales of ABELCET(R). Sales of ABELCET in North America decreased by $10.7 million to $39.9 million for the nine months ended March 31, 2005, as compared to $50.6 million for the nine months ended March 31, 2004 due to weaker demand for the product as a result of increased competition in the intravenous antifungal market. Sales of DEPOCYT increased by $1.8 million to $5.8 million for the nine months ended March 31, 2005 as compared to $4.0 million for the nine months ended March 31, 2004. DEPOCYT'S growth over the prior year was primarily attributable to increased sales and marketing efforts and to a lesser extent a higher weighted average price. Sales of ONCASPAR increased by $2.0 million to $15.3 million for the nine months ended March 31, 2005, as compared to $13.3 million for the nine months ended March 31, 2004. The increase in sales of ONCASPAR over the prior year was due to a higher weighted average price as well as increased sales and marketing efforts. Sales of ADAGEN increased by $1.9 million to $14.7 million for the nine months ended March 31, 2005 as compared to $12.8 million for the nine months ended March 31, 2004 due to an increase in the number of patients receiving ADAGEN therapy and the timing of shipments.

Manufacturing revenue for the nine months ended March 31, 2005 increased by $3.5 million to $12.3 million, as compared to $8.8 million for the comparable period of the prior year due to the timing of orders from our contract manufacturing customers. Manufacturing revenue is related to the manufacture and sale of ABELCET for the international market and other manufacturing revenue.

Royalties for the nine months ended March 31, 2005, decreased to $32.9 million as compared to $36.4 million for the nine months ended March 31, 2004. The decrease was primarily due to decreased sales of PEG-INTRON by Schering-Plough, our marketing partner, due to competitive pressure from another pegylated alpha interferon product and contracting market conditions. The competitive and contracting market conditions were partially offset by the launch of PEG-INTRON combination therapy in Japan in December 2004.

Contract revenues for the nine months ended March 31, 2005 increased by $394,000 to $1.2 million as compared to $769,000 for the nine months ended March 31, 2004 principally due to revenue related to an agreement we entered into with Pharmagene to apply our PEGylation technology to engineer a long-acting version of Pharmagene's drug candidate, PGN0052.

During the nine months ended March 31, 2005, we had export sales and royalties on export sales of $34.9 million, of which $26.0 million were in Europe. Export sales and royalties recognized on export sales for the prior year were $28.0 million, of which $23.4 million were in Europe.

COST OF PRODUCT SALES AND MANUFACTURING REVENUE. Cost of product sales and manufacturing revenue, as a percentage of net sales and manufacturing revenue, decreased to 37% for the nine months ended March 31, 2005 compared to 39% for the nine months ended March 31, 2004 due to lower ABELCET costs. For each of the nine month periods ended March 31, 2005 and March 31, 2004, we have included $3.4 million in cost of product sales and manufacturing revenue, which related to the amortization of intangible assets acquired in connection with the ABELCET acquisition during November 2002.

RESEARCH AND DEVELOPMENT. Research and development expenses increased by $7.2 million to $31.9 million for the nine months ended March 31, 2005, as compared to $24.7 million for the nine months ended March 31, 2004. The increase in research and development expenses was primarily due to $6.2 million in costs related to MARQIBO, which included the impact of a $5.0 million payment made to Inex in March 2005 related to the termination of our partnership, and an increase of $2.0 million in employee compensation expenses. These increases were partially offset by a $1.0 million decrease in costs due to the discontinuation of research and development programs, including our clinical development program for Pegamotecan, which was discontinued in February 2005.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by $4.4 million to $39.6 million for the nine months ended March 31, 2005, as compared to $35.2 million for the nine months ended March 31, 2004. The increase was primarily attributable to a $4.5 million increase in sales and marketing costs, which was comprised of a $3.4 million increase in costs related to our oncology sales operations, a $1.3 million increase in costs related to MARQIBO, and a $300,000 decrease in costs related to our hospital-based sales operations.

AMORTIZATION. Amortization expense remained unchanged at $10.1 million for the nine months ended March 31, 2005 and 2004. Amortization expense for both periods relates to intangible assets acquired in connection with the ABELCET acquisition during November 2002. A portion of amortization is classified in cost of product sales and manufacturing revenue. Amortization of intangible assets is calculated on a straight-line basis over the estimated lives of the assets, which range from 3 to 15 years.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research and development was $12.0 million for the nine months ended March 31, 2004 due to an up-front payment, which we made in January 2004 for the execution of an agreement with Inex for the development and commercialization of MARQIBO. As previously discussed, this partnership was terminated in March 2005.

OTHER INCOME (EXPENSE). Other income (expense) for the nine months ended March 31, 2005 was an expense of $17.2 million, as compared to an expense of $2.1 million for the nine months ended March 31, 2004. Other income (expense) includes: net investment income, interest expense, and other income (expense).

Net investment income for the nine months ended March 31, 2005 decreased to $2.9 million from $12.7 million for the nine months ended March 31, 2004. The decrease was principally due to the prior year's sale of 880,075 shares of Nektar Therapeutics common stock, which resulted in a net gain of approximately $11.0 million recorded in the nine months ended March 31, 2004. This decrease was offset in part by $1.2 million increase in interest income for the nine months ended March 31, 2005, as compared to the nine months ended March 31, 2004.

Interest expense was $14.9 million for each of the nine months ended March 31, 2005 and 2004. Interest expense is related to $400.0 million in 4.5% convertible subordinated notes, which were outstanding for both periods.

Other expense amounted to $5.2 million for the nine months ended March 31, 2005, as compared to other income of $71,000 for the nine months ended March 31, 2004. The increase in the expense was related to a realized loss on the liquidation of 750,000 shares of our investment in NPS common stock during the nine months ended March 31, 2005, which was offset in part by an increase in the unrealized loss associated with a derivative instrument we formed as a protective collar arrangement to reduce our risk associated with our investment in these shares.

INCOME TAXES. During the nine months ended March 31, 2005 we recognized a tax benefit of $3.3 million compared to a tax benefit of $2.7 million, for the nine months ended March 31, 2004. We recognized a tax benefit for the nine months ended March 31, 2005 at an estimated annual effective tax rate of 37%, which is based on the projected income tax benefit and taxable loss for the fiscal year ending June 30, 2005.

During the nine months ended March 31, 2004, the Company recorded a net tax benefit of approximately $2.7 million related primarily to the reversal of a $3.8 million deferred tax asset valuation allowance for the write-down in a prior year of Enzon's equity investment in Nektar Therapeutics, which was sold during the nine months ended March 31, 2004. The sale resulted in a gain of approximately $11.0 million. The benefit was also due to the reduction of Enzon's estimated taxable income and effective tax rate to 29% as compared to 35% used in previous quarters and a payment during the three months ended March 31, 2004 of $12.0 million to INEX Pharmaceuticals related to acquired in-process research and development.

CRITICAL ACCOUNTING POLICIES

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

Our consolidated financial statements are presented in accordance with accounting principles that are generally accepted in the United States. All professional accounting standards effective as of March 31, 2005 have been taken into consideration in preparing the consolidated financial statements. The preparation of the consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures including those related to contingent assets and liabilities. Some of those estimates are subjective and complex, and, consequently, actual results could differ from those estimates. The following accounting policies have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect our consolidated financial statements.

Revenue from product sales and manufacturing revenue is recognized upon passage of title and risk of loss to customers. This is generally at the time products are shipped to customers. Provisions for discounts or chargebacks, rebates and sales incentives to customers, and returns and other adjustments are provided for in the period the related sales are recorded. Historical data is readily available and reliable, and is used for estimating the amount of the reduction in gross sales.

The majority of our net product sales are to wholesale distributors who resell the products to the end customers. We provide chargeback payments to these distributors based on their sales to members of buying groups at prices determined under a contract between Enzon and the member. Administrative fees are paid to buying groups based on the total amount of purchases by their members. Chargeback amounts are based upon the volume of purchases multiplied by the difference between the wholesaler acquisition cost and the contract price for a product. We estimate the amount of the chargeback that will be paid using historical trends, adjusted for current changes, and record the amounts as a reduction to accounts receivable and a reduction of gross sales when we record the sale of the product. The settlement of the chargebacks generally occurs within three months after the sale to the wholesaler. We regularly analyze the historical chargeback trends and make adjustments to recorded reserves for changes in trends.

In addition, state agencies, which administer various programs, such as the U.S. Medicaid and Medicare program, also receive rebates. Medicaid rebates and administrative fees are recorded as a liability and a reduction of gross sales when we record the sale of the product. Medicaid rebates are typically paid within six to nine months after sale. In determining the appropriate accrual amount we consider our historical Medicaid rebate and administration fee payments by product as a percentage of our historical sales as well as any significant changes in sales trend. Current Medicaid rebate laws and interpretations, and the percentage of our products that are sold to Medicaid patients are also evaluated. Factors that complicate the rebate calculations are the timing of the average manufacturer pricing computation, the estimated lag time between sale and payment of a rebate and the level of reimbursement by state agencies.

The following is a summary of reductions of gross sales accrued as of March 31, 2005 and June 30, 2004 (the end of our last fiscal year):

                                                     March 31, 2005            June 30, 2004
                                                  ----------------------    ---------------------
Accounts Receivable Reductions
     Chargebacks                                           $6,812                   $7,802
     Cash Discounts                                           183                      414
     Other (including returns)                              1,407                    1,323
                                                  ----------------------    ---------------------
           Total                                           $8,402                   $9,539
                                                  ----------------------    ---------------------
Accrued Liabilities
      Medicaid Rebates                                     $2,299                   $2,011
      Administrative Fees                                     425                      640
                                                  ----------------------    ---------------------
           Total                                           $2,724                   $2,651
                                                  ----------------------    ---------------------

There were no revisions to the estimates for gross to net sales adjustments that would be material to income from operations for the three and nine months ended March 31, 2005 and 2004.

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

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

Under the asset and liability method of Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes", deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance on net deferred tax assets is provided for when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We have significant net deferred tax assets, primarily related to net operating loss and other carryforwards. Events, such as a sustained decline in the Company's product revenues and/or increased expenses could result in a revision to the Company's projected future taxable income, and accordingly, the need for a valuation allowance based upon the ultimate realizability of its net operating loss carryforwards, research and development tax credits and other deferred tax assets. The Company's federal and state operating loss carryforwards will begin to expire in 2009 and 2006, respectively, and the federal and state research and development credits will begin to expire in 2006 and 2021, respectively. The Company will continue to assess the need for such valuation allowance based on analyses of operating results and projections of future operating performance of the Company.

We assess the carrying value of our cost method investments in accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity" and SEC Staff Accounting Bulletin ("SAB") No. 59 "Accounting for Non-current Marketable Equity Securities". An impairment write-down is recorded when a decline in the value of an investment is determined to be other-than-temporary. These determinations involve a significant degree of judgment and are subject to change as facts and circumstances change.

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

We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, in accounting for our fixed plan stock options. As such, compensation expense would be recorded on the date of grant of options to employees and members of the Board of Directors only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation", established accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS No. 123, as amended in December 2004.

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

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS (CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995)

Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations or forecasts of future events. These statements use words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "project," "intend," "plan," "potential," "will," and other words and terms of similar meaning in connection with a discussion of potential future events or circumstances or future operating or financial performance. You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts.

Specific examples of such forward looking statements include statements in this report relating to the potential impact on our revenues of Schering-Plough's launch of PEG-INTRON in Japan, the potential impact on our ability to sustain or grow our ABELCET revenues in light of continuing competitive and pricing pressure in the intravenous antifungal market, the future sales performance of our other products, the potential impact of the manufacturing and stability problems with ONCASPAR we continue to experience, the performance of our protective collar arrangement relating to the shares of NPS common stock we hold, the continued sufficiency of our capital resources and our ability to access the capital markets in the future. This is not necessarily inclusive of all examples of forward looking statements that are or may be contained in this report.

Any or all forward-looking statements contained in this discussion may turn out to be wrong. Actual results may vary materially, and there are no guarantees about our financial and operating performance or the performance of our stock. All statements are made as of the date of signing of this report and we do not assume any obligation to update any forward-looking statement.

Many factors could cause actual results to differ from the results or developments discussed or predicted in the forward looking statements made in this report. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. Although it is not possible to predict or identify all such factors, many of them are described under the caption "Risk Factors" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K/A for the fiscal year ended June 30, 2004, which we filed with the SEC and which is incorporated herein by reference. Readers of this report are advised to read such Risk Factors in connection with this report. The following information supplements and updates such Risk Factors:

o Although Schering-Plough has received approval for PEG-INTRON in Japan in combination with REBETOL for the treatment of hepatitis C, there can be no assurance that Schering-Plough will successfully market PEG-INTRON in Japan. It is anticipated that a competing pegylated interferon-based combination therapy will receive marketing approval in Japan for hepatitis C in the next one to two years. Even if Schering-Plough is successful in launching PEG-INTRON in Japan, it is likely that the future launch of a competing pegylated interferon-based combination therapy will have a negative impact on PEG-INTRON's Japanese market share and sales.

o We have been experiencing increasing pricing pressure with respect to ABELCET. In particular, Fujisawa Healthcare Inc. and Gilead Sciences, Inc., which jointly market a competing liposomal amphotericin B product have aggressively lowered the price of their product in certain regions and for certain customers in the U.S. This has resulted in the shrinkage or loss of certain of our customer accounts. Further, ABELCET sales may also continue to be negatively impacted by newer agents from Pfizer, Merck, and Fujisawa. We are developing strategies to address these competitive threats, but there can be no assurance as to when or whether we will be successful in stopping or reversing this trend.

o We have received a notice from Bristol-Myers Squibb Company ("BMS") terminating our amphotericin B supply agreement with BMS effective March 1, 2006. We currently have an alternative source of supply of amphotericin B and are seeking to qualify at least one additional source of supply. The termination by BMS may give rise to future increased costs for the acquisition of amphotericin B as well as increased capital expenditures related to readying a new supplier's facilities for cGMP production and regulatory approval of ABELCET incorporating the alternative amphotericin B. Although there can be no assurance as to the timing of these increased costs and additional capital expenditures, we anticipate that these may be incurred beginning in calendar 2007.

o Manufacturing and stability problems required us to implement a voluntary recall for one ONCASPAR batch March 2005. To date, we have been unable to identify the cause of the manufacturing and stability problems related to the batches of ONCASPAR that we voluntarily recalled in March 2005, September 2004, and July 2004 and preliminary indicators do not rule out that an additional batch of ONCASPAR may also be affected by manufacturing and stability problems, which we may also voluntarily recall in the near term. We cannot assure you that future product recalls will not materially adversely affect our business, our financial conditions, results of operations or our reputation and relationships with our customers.