<PAGE>
                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended                   June 30, 2005
                                ------------------------------------------------

                                       OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to               .
                               --------------   --------------

Commission file number                           0-15190
                        --------------------------------------------------------

                            OSI Pharmaceuticals, Inc.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

Delaware                                                         13-3159796
--------------------------------------------------------------------------------
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

58 South Service Road, Suite 110, Melville, New York               11747
--------------------------------------------------------------------------------
(Address of principal executive offices)                         (Zip Code)

                                  631-962-2000
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report.)

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ]    No [   ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS:
At July 28, 2005, the registrant had outstanding 51,411,000 shares of common
stock, $.01 par value.
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

                                    CONTENTS

<TABLE>
<CAPTION>
                                                                                                       Page No.
                                                                                                       --------
<S>                                                                                                    <C>
PART I.  FINANCIAL INFORMATION.......................................................................         1

Item 1.    Financial Statements......................................................................         1

           Consolidated Balance Sheets
                -   June 30, 2005 (Unaudited) and September 30, 2004.................................         1
           Consolidated Statements Of Operations
                -   Three Months Ended June 30, 2005 and 2004 (Unaudited)............................         2
           Consolidated Statements Of Operations
                -   Six Months Ended June 30, 2005 and 2004 (Unaudited)..............................         3
           Consolidated Statements Of Cash Flows
                -   Six Months Ended June 30, 2005 and 2004 (Unaudited)..............................         4
           Notes to Consolidated Financial Statements (Unaudited)....................................         5

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.....        18

Item 3.    Quantitative and Qualitative Disclosures About Market Risks...............................        33

Item 4.    Controls and Procedures...................................................................        34

PART II.  OTHER INFORMATION..........................................................................        36

Item 1.    Legal Proceedings.........................................................................        36

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds...............................        36

Item 3.    Defaults Upon Senior Securities...........................................................        36

Item 4.    Submission of Matters to a Vote of Security Holders.......................................        36

Item 5.    Other Information.........................................................................        36

Item 6.    Exhibits..................................................................................        36

SIGNATURES...........................................................................................        38

INDEX TO EXHIBITS....................................................................................        39
</TABLE>


                                       i
<PAGE>
                          PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                          JUNE 30,      SEPTEMBER 30,
                                                                                            2005            2004
                                                                                         -----------    ------------
                                                                                         (UNAUDITED)
<S>                                                                                      <C>            <C>
                                        ASSETS

Current assets:
     Cash and cash equivalents .......................................................   $   131,206    $    84,598
     Investment securities ...........................................................       433,096        163,085
     Restricted investment securities - short-term ...................................         4,843          4,835
     Receivables, including amounts due from related parties of $26,148 and $1,283 at
         June 30, 2005 and September 30, 2004, respectively ..........................        36,232         10,771
     Inventory - net .................................................................        11,131          1,437
     Interest receivable .............................................................         3,696          1,341
     Prepaid expenses and other current assets .......................................         7,642          9,378
                                                                                         -----------    -----------
              Total current assets ...................................................       627,846        275,445
                                                                                         -----------    -----------
Restricted investment securities - long-term .........................................         2,378          4,711
Property, equipment and leasehold improvements - net .................................        40,550         35,356
Debt issuance costs - net ............................................................         3,360          4,156
Goodwill .............................................................................        39,130         39,017
Other intangible assets - net ........................................................        15,851         26,566
Other assets .........................................................................         2,807          2,778
                                                                                         -----------    -----------

                                                                                         $   731,922    $   388,029
                                                                                         ===========    ===========
                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued expenses, including amounts due to related
         parties of $6,693 and $13,903 at June 30, 2005 and September 30, 2004,
         respectively ................................................................   $    36,200    $    46,140
     Unearned revenue - current; including amounts from related parties
         of $6,644 and $500 at June 30, 2005 and September 30, 2004,
         respectively.................................................................         7,172          1,074
     Capital leases payable - current ................................................            --              8
                                                                                         -----------    -----------
              Total current liabilities ..............................................        43,372         47,222
                                                                                         -----------    -----------
Other liabilities:
     Deferred rent expense - long-term ...............................................         2,175          1,873
     Unearned revenue - long-term, representing amounts from related parties .........        16,972          8,750
     Convertible senior subordinated notes - long-term ...............................       150,000        150,000
     Contingent value rights .........................................................        22,047         22,047
     Accrued postretirement benefit cost .............................................         4,778          3,904
                                                                                         -----------    -----------
              Total liabilities ......................................................       239,344        233,796
                                                                                         -----------    -----------

Stockholders' equity:
     Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
         June 30, 2005 and September 30, 2004 ........................................            --             --
     Common stock, $.01 par value; 200,000 shares authorized, 52,820 and 45,030 shares
         issued at June 30, 2005 and September 30, 2004, respectively ................           528            450
     Additional paid-in capital ......................................................     1,389,322        943,994
     Deferred compensation ...........................................................          (936)          (206)
     Accumulated deficit .............................................................      (871,388)      (765,951)
     Accumulated other comprehensive income ..........................................           503          1,397
                                                                                         -----------    -----------
                                                                                             518,029        179,684
Less: treasury stock, at cost;  1,443 shares at June 30, 2005 and September 30, 2004 .       (25,451)       (25,451)
                                                                                         -----------    -----------
              Total stockholders' equity .............................................       492,578        154,233
                                                                                         -----------    -----------
Commitments and contingencies
                                                                                         $   731,922    $   388,029
                                                                                         ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       1
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                                JUNE 30,
                                                                         ----------------------
                                                                           2005          2004
                                                                         --------      --------
<S>                                                                      <C>           <C>
Revenues:
   Net revenue from unconsolidated joint business, from related party    $ 21,707      $     --
   Royalties on product sales, from related party ...................         416            --
   Sales commissions and product sales ..............................       7,567         9,866
   License and milestone revenues, including $294 and $1,250 from
      related parties in 2005 and 2004, respectively ................       4,939         1,300
                                                                         --------      --------
                                                                           34,629        11,166
                                                                         --------      --------

Expenses:
   Cost of goods sold ...............................................       1,749           108
   Research and development .........................................      30,360        25,352
   Acquired in-process research and development (see note 14) .......       3,542            --
   Selling, general and administrative ..............................      21,371        22,655
   Amortization of intangibles ......................................       3,802         4,574
                                                                         --------      --------
                                                                           60,824        52,689
                                                                         --------      --------
         Loss from operations .......................................     (26,195)      (41,523)

Other income (expense):
   Investment income - net ..........................................       4,133         1,271
   Interest expense .................................................      (1,219)       (6,576)
   Other expense - net ..............................................      (1,257)         (517)
                                                                         --------      --------
Net loss ............................................................    $(24,538)     $(47,345)
                                                                         ========      ========


Basic and diluted net loss per common share .........................    $  (0.48)     $  (1.19)
                                                                         ========      ========
Weighted average shares of common stock outstanding .................      51,313        39,643
                                                                         ========      ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       2
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                SIX MONTHS ENDED
                                                                                   JUNE 30,
                                                                            ------------------------
                                                                              2005           2004
                                                                            ---------      ---------
<S>                                                                         <C>            <C>
Revenues:
   Net revenue from unconsolidated joint business, from related party .     $  33,428      $      --
   Royalties on product sales, from related party .....................           499             --
   Sales commissions and product sales ................................        14,544         15,807
   License and milestone revenues, including $530 and $2,500
      from related parties in 2005 and 2004 ...........................         5,225          2,575
                                                                            ---------      ---------
                                                                               53,696         18,382
                                                                            ---------      ---------
Expenses:
   Cost of product sales ..............................................         2,172          2,152
   Research and development ...........................................        57,309         52,073
   Acquired in-process research and development (see note 14) .........         3,542             --
   Selling, general and administrative ................................        44,402         44,459
   Amortization of intangibles ........................................         7,605          9,148
                                                                            ---------      ---------
                                                                              115,030        107,832
                                                                            ---------      ---------
         Loss from operations .........................................       (61,334)       (89,450)

Other income (expense):
   Investment income - net ............................................         8,170          2,698
   Interest expense ...................................................        (2,438)        (9,396)
   Other expense - net ................................................        (1,440)          (901)
                                                                            ---------      ---------
Net loss ..............................................................     $ (57,042)     $ (97,049)
                                                                            =========      =========

Basic and diluted net loss per common share ...........................     $   (1.11)     $   (2.47)
                                                                            =========      =========

Weighted average shares of common stock outstanding ...................        51,205         39,318
                                                                            =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                 SIX MONTHS ENDED
                                                                                     JUNE 30,
                                                                             ------------------------
                                                                               2005           2004
                                                                             ---------      ---------
<S>                                                                          <C>            <C>
Cash flows from operating activities:
   Net loss ............................................................     $ (57,042)     $ (97,049)
   Adjustments to reconcile net loss to net cash
         used in operating activities:
      Gain on sale of investment .......................................           (68)           (11)
      Loss (gain) on sale and disposals of equipment ...................           655            (30)
      Depreciation and amortization ....................................        13,364         16,229
      Acquired in-process research and development .....................         3,542             --
      Provision for inventory obsolescence .............................            --          1,954
      Non-cash compensation charges ....................................         1,095          1,413
      Changes in assets and liabilities:
         Receivables ...................................................       (24,339)          (279)
         Inventory .....................................................        (9,008)           196
         Prepaid expenses and other current assets .....................        (1,972)          (407)
         Other assets ..................................................           120             24
         Accounts payable and accrued expenses .........................        (5,245)        (2,266)
         Unearned revenue ..............................................         4,117         (2,621)
         Accrued postretirement benefit cost ...........................           575            396
                                                                             ---------      ---------
Net cash used in operating activities ..................................       (74,206)       (82,451)
                                                                             ---------      ---------

Cash flows from investing activities:

   Payments for acquisitions ...........................................          (776)            --
   Purchases of investments (restricted and unrestricted) ..............      (303,368)      (131,984)
   Maturities and sales of investments (restricted and unrestricted) ...       188,967        197,807
   Net additions to property, equipment and leasehold improvements .....       (14,959)        (1,463)
   Additions to compound library assets ................................          (377)            --
   Investments in privately-owned companies ............................          (230)          (215)
                                                                             ---------      ---------
Net cash provided by (used in) investing activities ....................      (130,743)        64,145
                                                                             ---------      ---------

Cash flows from financing activities:

   Payment of expenses relating to public offering .....................          (116)            --
   Proceeds from the exercise of stock options, stock warrants, employee
      purchase plan and other...........................................         7,850         29,331
   Debt issuance costs .................................................            --           (101)
   Payments on capital leases payable ..................................            (4)           (28)
                                                                             ---------      ---------
Net cash provided by financing activities ..............................         7,730         29,202
                                                                             ---------      ---------

Net increase (decrease) in cash and cash equivalents ...................      (197,219)        10,896
Effect of exchange rate changes on cash and cash equivalents ...........        (1,131)          (249)
Cash and cash equivalents at beginning of period .......................       329,556        114,238
                                                                             ---------      ---------
Cash and cash equivalents at end of period .............................     $ 131,206      $ 124,885
                                                                             =========      =========
Non-cash activities:
   Issuance of common stock to employees ...............................     $     614      $       5
                                                                             =========      =========
   Issuance of common stock to directors ...............................     $     527      $     475

   Issuance of common stock in connection with acquisition .............     $   4,158             --
                                                                             =========      =========
   Issuance of Prosidion stock to Tanabe ...............................     $      --      $   1,000
                                                                             =========      =========
   Acceleration of options .............................................     $     816      $     177
                                                                             =========      =========
   Cash paid for interest ..............................................     $   2,438      $   5,663
                                                                             =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


      In this Quarterly Report on Form 10-Q, "OSI," "our company," "we," "us,"
and "our" refer to OSI Pharmaceuticals, Inc. and subsidiaries. We own or have
rights to use various copyrights, trademarks and trade names used in our
business, including the following: Tarceva(R) (erlotinib), Novantrone(R)
(mitoxantrone for injection concentrate) and Gelclair(R) Bioadherent Oral Gel.

(1)   Basis of Presentation

      In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles, or GAAP, for interim financial information and
with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
six months ended June 30, 2005 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2005. For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2004. In December 2004, we changed our fiscal year end from
September 30 to December 31. The first fiscal year (which shall henceforth be
the calendar year) affected by this change will end on December 31, 2005.

(2)   Tarceva Regulatory Approvals

      On November 18, 2004, the United States Food and Drug Administration, or
FDA, approved our New Drug Application, or NDA, for monotherapy use of Tarceva
in the treatment of patients with locally advanced or metastatic non-small cell
lung cancer, or NSCLC, who have failed at least one prior chemotherapy regimen.
We, along with our U.S. partner, Genentech, Inc., launched Tarceva on November
22, 2004.

      On March 22, 2005, we announced that the Swiss health authority,
Swissmedic, approved Tarceva for the treatment of patients with locally advanced
or metastatic NSCLC after failure of at least one prior chemotherapy regimen.
Our partner, Roche, began selling Tarceva in Switzerland in late March 2005. On
June 27, 2005, we also announced that Roche received a positive opinion from the
European Committee for Medicinal Products for Human Use, or CHMP, recommending
approval of Tarceva for sale in the European Union for the treatment of patients
with locally advanced or metastatic NSCLC after failure of at least one prior
chemotherapy regimen. Following the CHMP recommendation, an approval decision
for Tarceva by the European Commission is anticipated within 90 days. Subsequent
to the quarter end, we announced that Health Canada approved Tarceva for the
treatment of patients with locally advanced or metastatic NSCLC following
failure of first or second-line chemotherapy.

      Subsequent to the quarter end, we also announced that the FDA accepted for
filing and review the supplemental New Drug Application, or sNDA, for use of
Tarceva plus gemcitabine chemotherapy for the treatment of advanced pancreatic
cancer in patients who have not received previous treatment. In addition, the
sNDA for Tarceva has been granted a priority review


                                       5
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


classification by the FDA. Based on this priority review status, the FDA has six
months from receipt of the sNDA data, or until November 2, 2005, to take action
on the sNDA filing.

(3)   Revenue Recognition

      Net Revenue from Unconsolidated Joint Business

      Net revenue from unconsolidated joint business is related to our
co-promotion and manufacturing agreements with Genentech for Tarceva. It
consists of our share of the pretax co-promotion profit generated from our
co-promotion arrangement with Genentech for Tarceva, the partial reimbursement
from Genentech of our sales and marketing costs related to Tarceva, and the
reimbursement from Genentech of our manufacturing costs related to Tarceva.
Under the co-promotion arrangement, all U.S. sales of Tarceva and associated
costs and expenses, except for a portion of our sales related costs, are
recognized by Genentech. For the three and six months ended June 30, 2005,
Genentech recorded $70.2 million and $117.8 million, respectively, in net sales
of Tarceva in the United States and its territories. We record our 50% share of
the co-promotion pretax profit on a quarterly basis, as set forth in our
agreement with Genentech. Pretax co-promotion profit under the co-promotion
arrangement is derived by calculating U.S. net sales of Tarceva to third-party
customers and deducting costs of sales, distribution, selling and marketing
expenses, and certain joint development expenses incurred by Genentech and us.
The costs incurred during the respective periods represent estimated costs of
both parties and are subject to further adjustment based on each party's final
review. Based on past experience, we do not believe that these adjustments, if
any, will be significant to our consolidated financial statements. The partial
reimbursement of our sales and marketing costs related to Tarceva is recognized
as revenue as the related costs are incurred. We defer the recognition of the
reimbursement of our manufacturing costs related to Tarceva until the time
Genentech ships the product to third-party customers at which time our risk of
inventory loss no longer exists. The unearned revenue related to shipments by
our third party manufacturers of Tarceva to Genentech that have not been shipped
to third-party customers was $5.5 million as of June 30, 2005 and is included in
unearned revenue-current in the accompanying consolidated balance sheet.

      Net revenues from unconsolidated joint business consist of the following
(in thousands):

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED  SIX MONTHS ENDED
                                                        JUNE 30, 2005      JUNE 30, 2005
                                                      ------------------  ----------------
<S>                                                   <C>                 <C>
Co-promotion profit and reimbursement of sales
   force and marketing related costs ..............        $19,244            $29,043
Reimbursement of manufacturing costs ..............          2,463              4,385
                                                           -------            -------
   Net revenue from unconsolidated joint business..        $21,707            $33,428
                                                           =======            =======
</TABLE>

      Royalties on Product Sales

      We recognize royalties on product sales of Tarceva, which are based on
Roche's net sales of Tarceva outside of the United States and its territories,
as earned in accordance with contract


                                       6
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


terms when third-party sales can be reliably measured and collection of funds is
reasonably assured. For the three and six months ended June 30, 2005, we
recognized $416,000 and $499,000, respectively, in royalties on sales of Tarceva
outside of the United States and its territories.

      Sales Commissions and Product Sales

      Sales commissions represent commissions earned on the sales of the drug,
Novantrone, in the United States for oncology indications pursuant to a
co-promotion agreement with Ares Trading S.A., an affiliate of Serono, S.A.
Sales commissions from Novantrone on net oncology sales are recognized in the
period the sales occur based on the estimated split between oncology sales and
multiple sclerosis sales of Novantrone, as determined by an external third
party. The split between oncology and multiple sclerosis sales is subject to
further adjustment based upon the parties' final review in the subsequent
quarter. Based on past experience, we do not believe these adjustments, if any,
will be significant to our consolidated financial statements. Sales commissions
totaled $7.3 million and $14.0 million, for the three and six months ended June
30, 2005, respectively, compared to $9.5 million and $15.2 million for the three
and six months ended June 30, 2004, respectively.

      Product sales represent sales of Gelclair in accordance with a
distribution agreement with Helsinn Healthcare S.A., which allowed us to market
and distribute Gelclair in North America. We terminated this distribution
agreement effective as of January 31, 2005. Pursuant to the terms of the
distribution agreement, we are continuing to sell off our remaining inventory.
In accordance with SFAS No. 48, "Revenue Recognition When Right of Return
Exists," given the limited sales history of Gelclair, we defer the recognition
of revenue on product shipments of Gelclair to wholesale customers until such
time as the product is sold from the wholesale customer to the retail and
non-retail outlets. The related cost of the product shipped to wholesale
customers that has not been recognized as revenue has been reflected as
inventory subject to return (see note 6). The unearned revenue related to
shipments of Gelclair to wholesale customers was $528,000 and $574,000 as of
June 30, 2005 and September 30, 2004, respectively, and is included in unearned
revenue-current in the accompanying consolidated balance sheets.

      Licenses and Milestone Revenues

      Our revenue recognition policies for all nonrefundable upfront license
fees and milestone arrangements are in accordance with the guidance provided in
the Securities and Exchange Commission's Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," as amended by SEC Staff
Accounting Bulletin No. 104, "Revenue Recognition." In addition, we follow the
provisions of Emerging Issues Task Force Issue 00-21, "Revenue Arrangements with
Multiple Deliverables" for multiple element revenue arrangements entered into or
materially amended after June 30, 2003. We received a total of $25.0 million in
upfront fees from Genentech and Roche in January 2001 which was being recognized
on a straight-line basis over the expected term of our required research and
development efforts under the terms of a tripartite agreement with Genentech and
Roche. As a result of an amendment to our


                                       7
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


collaboration agreement with Genentech in June 2004, the remaining unearned
upfront fee from Genentech of $1.8 million is being recognized in accordance
with EITF 00-21, as discussed further below. The upfront fee from Roche was
fully recognized as of December 31, 2004.

      In September 2004 and December 2004, we also received $7.0 million and $10
million, respectively, in milestone payments from Genentech based upon the FDA's
notice of acceptance for filing and review of our NDA and approval of our NDA
for monotherapy use of Tarceva in the treatment of patients with locally
advanced or metastatic NSCLC who have failed at least one chemotherapy regimen.
As a result of the amendment to our collaboration agreement with Genentech in
June 2004, these payments are, and any future milestone payments will be,
recognized in accordance with EITF 00-21. Milestones which have been received
from Genentech and the remaining unearned upfront fee are being recognized over
the term of our Manufacturing and Supply Agreement with Genentech, under which
the last items of performance to be delivered to Genentech are set forth, on a
straight line basis, which approximates the expected level of performance under
the Manufacturing and Supply Agreement. The unrecognized deferred revenue
related to the milestones and upfront payment received from Genentech was $18.1
million as of June 30, 2005 of which $1.1 million is classified as short-term
and the balance of $17.0 million was classified as long-term in the accompanying
consolidated balance sheet.

      In March 2005, the alliance partners, OSI/Genentech/Roche, agreed to a
further global development plan and budget for the continued development of
Tarceva in earlier stage lung cancer, other cancer indications and in a variety
of combinations, including Tarceva/Avastin(TM) (bevacizumab). The cost of the
development plan will continue to be shared equally by the three partners. For
purposes of EITF 00-21, the revised development plan and budget for Tarceva
constituted a material amendment to our Roche agreement and therefore future
milestones received from Roche will be recognized in accordance with EITF 00-21.
Accordingly, future milestone payments received from Roche will be initially
recorded as unearned revenue and amortized into license revenues over the
remaining term of the related performance obligation.

      During the quarter ended June 30, 2005, our wholly-owned subsidiary,
Prosidion, entered into worldwide non-exclusive license agreements with two
pharmaceuticals companies, under our dipeptidyl peptidase IV, or DPIV, patent
portfolio covering the use of DPIV inhibitors for the treatment of type 2
diabetes and related indications. Under the terms of the agreements we
recognized a total of $4.5 million in upfront payments, which is included in
license and milestone revenues on the accompanying consolidated statement of
operations for the three and six months ended June 30, 2005. In July 2005, we
also announced that Prosidion granted a worldwide non-exclusive license under
our DPIV patent portfolio to a Japanese pharmaceutical company. In addition to
upfront fees from these agreements, we will receive milestone payments upon the
achievement of certain events and royalty payments on net sales. We recognize
revenue from license agreements where we have no future obligations upon the
effective date of the agreements and the collection of payments is reasonably
assured.



                                       8
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(4)   Stock Options

      We follow the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." The provisions of SFAS No. 123 allow us to either expense the
estimated fair value of stock options or to continue to follow the intrinsic
value method set forth in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," but disclose the pro forma effect on
net income (loss) had the fair value of the options been expensed. We have
elected to continue to apply APB No. 25 in accounting for stock options issued
to employees.

      Our stock option grants are generally set at the closing price of our
common stock on the date of grant and the number of shares to be granted under
the option are fixed at that point in time. Therefore, under the principles of
APB No. 25, we currently do not recognize compensation expense associated with
the grant of stock options. Pro forma information regarding net loss and net
loss per share shown below was determined as if we had accounted for our
employee stock options and shares sold under our stock purchase plan under the
fair value method of SFAS No. 123.

      The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED            SIX MONTHS ENDED
                                                                  JUNE 30,                    JUNE 30,
                                                           ----------------------      ----------------------
                                                             2005          2004          2005          2004
                                                           --------      --------      --------      --------
<S>                                                        <C>           <C>           <C>           <C>
Risk-free interest rate ................................       3.92%         3.21%         3.92%         2.99%
Dividend yield .........................................       0.00%         0.00%         0.00%         0.00%
Volatility factors of expected market
  price of our common stock ............................      48.76%        80.00%        56.98%        79.01%
Weighted-average expected life of option (years) .......       4.44             3          4.06             3
Weighted-average exercise price of stock option grants..   $  38.62      $  67.82      $  41.66      $  62.04
Weighted-average fair value of  stock option grants ....   $  17.01      $  36.01      $  18.42      $  32.69
</TABLE>

      For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. Our pro forma
information for the three and six months ended June 30, 2005 and 2004 is as
follows (in thousands, except per share information):

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                    JUNE 30,                      JUNE 30,
                                                            ------------------------      ------------------------
                                                              2005           2004           2005           2004
                                                            ---------      ---------      ---------      ---------
<S>                                                         <C>            <C>            <C>            <C>
Net loss ................................................   $ (24,538)     $ (47,345)     $ (57,042)     $ (97,049)
   Add: stock-based compensation included in net loss ...         978            112          1,095            413
   Compensation cost determined under fair value method        (6,628)        (6,290)       (12,476)       (12,265)
                                                            ---------      ---------      ---------      ---------
   Pro forma net loss ...................................   $ (30,188)     $ (53,523)     $ (68,423)     $(108,901)
                                                            =========      =========      =========      =========
Basic and diluted net loss per common share:
    Net loss - as reported ..............................   $   (0.48)     $   (1.19)     $   (1.11)     $   (2.47)
                                                            =========      =========      =========      =========
    Net loss - pro forma ................................   $   (0.59)     $   (1.35)     $   (1.34)     $   (2.77)
                                                            =========      =========      =========      =========
</TABLE>

      In December 2004, FASB issued SFAS No. 123R, "Share Based Payment," which
replaces SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R requires that the
cost resulting from all share-based payment transactions be recognized in the
consolidated financial statements. SFAS No. 123R applies to all share-based
payment transactions in which an entity acquires goods or services by issuing
its shares, options or other equity instruments. SFAS No.123R establishes fair
value as the measurement objective in accounting for share-based


                                       9
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


payment arrangements and requires all entities to apply a fair-value-based
measurement method in accounting for share-based payment transactions with
employees, except for equity instruments held by employee share ownership plans.
SFAS No. 123R would have been effective as of the beginning of the first interim
or annual reporting period that begins after June 15, 2005. On April 14, 2005,
the SEC, issued a new rule that amended the compliance date for SFAS No. 123R.
The SEC's new rule allows companies to implement SFAS No.123R at the beginning
of their next fiscal year, which is our fiscal year beginning January 1, 2006.
The new rule does not change the accounting required by SFAS No. 123R. We expect
the adoption of SFAS No. 123R to have a material effect on our consolidated
financial statements.

(5)   Restricted Assets

      In September 2003, in connection with the issuance of $150.0 million in
3.25% convertible senior subordinated notes due 2023, or the 2023 Notes, we
pledged $14.2 million of U.S. government securities, or Restricted Investment
Securities, with maturities at various dates through August 2006. Upon maturity
of the Restricted Investment Securities, the proceeds are used to pay the first
six scheduled interest payments on the 2023 Notes when due. We consider our
Restricted Investment Securities to be held-to-maturity securities, as defined
by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." These securities are reported at their amortized cost, which
includes the direct costs to acquire the securities plus the amortization of any
discount or premium, and accrued interest earned on the securities. The balance
of Restricted Investment Securities decreases as scheduled interest payments are
made. The aggregate fair value and amortized cost of the Restricted Investment
Securities at June 30, 2005 were $7.2 million, of which $4.8 million was
classified as short-term and the balance of $2.4 million was classified as
long-term. The aggregate fair value and amortized cost of the Restricted
Investment Securities at September 30, 2004 were $9.5 million, of which $4.8
million was classified as short-term and the balance of $4.7 million was
classified as long-term.

      With respect to our facility leases in Horsham, Pennsylvania and Oxford,
England, we have outstanding letters of credit issued by a commercial bank which
serve as security for our performance under the leases. The irrevocable letter
of credit for our Horsham, Pennsylvania facility expires annually with a final
expiration date of September 22, 2008. This letter of credit is for $400,000, of
which the full amount was available at June 30, 2005. The irrevocable letter of
credit for our Oxford, England facility expires annually with a final expiration
date of September 27, 2007. This letter of credit is for $2.6 million, of which
the full amount was available on June 30, 2005. The collateral for these letters
of credit are maintained in a restricted investment account. Included in cash
and cash equivalents and investment securities as of June 30, 2005 is $194,000
and $3.3 million, respectively, relating to restricted cash and investments to
secure these letters of credit. Included in cash and cash equivalents and
investment securities as of September 30, 2004 is $132,000 and $3.4 million,
respectively, relating to restricted cash and investments to secure these
letters of credit.



                                       10
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(6)   Inventory

      Inventory is comprised of Tarceva and Gelclair inventory and is stated at
the lower of cost or market, with cost being determined using the weighted
average method and first-in, first-out method, respectively. Included in
inventory are raw materials and work in process for Tarceva that may be used in
the production of pre-clinical and clinical product, which will be expensed to
research and development cost when consumed for these uses. Prior to receipt of
FDA approval of Tarceva for commercial sale on November 18, 2004, we had
expensed all costs associated with the production of Tarceva to research and
development expense in our consolidated statements of operations. Effective
November 18, 2004, we began to capitalize the costs of manufacturing Tarceva as
inventory, including the costs to label, package and ship previously
manufactured bulk inventory which costs had already been expensed as research
and development.

      At June 30, 2005, the cost reflected in a portion of the finished goods
inventory for Tarceva consisted solely of cost incurred to package and label
work-in-process inventory that had been previously expensed. As we continue to
process the inventory that was partially produced and expensed prior to November
18, 2004, we will continue to reflect in inventory only those incremental costs
incurred to complete such inventory into finished goods.

      Inventory-net at June 30, 2005 and September 30, 2004, consisted of the
following (in thousands):

<TABLE>
<CAPTION>
                                                 JUNE 30,       SEPTEMBER 30,
                                                   2005             2004
                                                 --------       -------------
<S>                                              <C>            <C>
Raw materials ..............................     $ 2,656           $    --
Work in process ............................       2,459                --
Finished goods on hand, net ................       2,424             1,263
Inventory subject to return ................       3,592               174
                                                 -------           -------
                                                 $11,131           $ 1,437
                                                 =======           =======
</TABLE>

      Inventory subject to return represents the amount of Tarceva shipped to
Genentech and Gelclair shipped to wholesale customers which has not been
recognized, in accordance with our revenue recognition policy as discussed in
note 3.


                                       11
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(7)   Comprehensive Income (Loss)

      Comprehensive loss for the three and six months ended June 30, 2005 and
2004 was as follows (in thousands):

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED           SIX MONTHS ENDED
                                                          JUNE 30,                    JUNE 30,
                                                   ----------------------      ----------------------
                                                     2005          2004          2005          2004
                                                   --------      --------      --------      --------
<S>                                                <C>           <C>           <C>           <C>
Net loss .....................................     $(24,538)     $(47,345)     $(57,042)     $(97,049)
Other comprehensive income (loss):
  Foreign currency translation adjustments ...       (1,419)         (449)       (1,925)           13
  Unrealized gains (losses) on derivative
     instruments arising during period .......           --            (9)           --            93
  Unrealized holding gains (losses) arising
     during period ...........................          938        (1,834)         (768)       (1,703)
  Less: Reclassification adjustment for losses
     (gains) realized in net loss ............            6           (18)          (62)          (31)
                                                   --------      --------      --------      --------
                                                       (475)       (2,310)       (2,755)       (1,628)
                                                   --------      --------      --------      --------

Total comprehensive loss .....................     $(25,013)     $(49,655)     $(59,797)     $(98,677)
                                                   ========      ========      ========      ========
</TABLE>

      The components of accumulated other comprehensive income were as follows
(in thousands):

<TABLE>
<CAPTION>
                                                        JUNE 30,   SEPTEMBER 30,
                                                          2005         2004
                                                        --------   -------------
<S>                                                     <C>        <C>
Cumulative foreign currency translation adjustment ...  $ 2,334      $ 2,034
Unrealized losses on available-for-sale securities ...   (1,831)        (666)
Unrealized gains on derivative instruments ...........       --           29
                                                        -------      -------
Accumulated other comprehensive income ...............  $   503      $ 1,397
                                                        =======      =======
</TABLE>

(8)   Net Loss per Common Share

      Basic and diluted net loss per share is computed by dividing the net loss
by the weighted average number of common shares outstanding during the
respective period. Common share equivalents (convertible senior subordinated
notes, stock options and warrants) are not included since their effect would be
anti-dilutive. The contingent shares pursuant to the contingent value rights are
not included since the contingency condition has not been satisfied.

      Such common share equivalents (convertible senior subordinated notes,
stock options and warrants) and contingent shares for the three and six months
ended June 30, 2005 and 2004 amounted to (in thousands):

<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED      SIX MONTHS ENDED
                                            JUNE 30,               JUNE 30,
                                       ------------------      -----------------
                                       2005        2004        2005        2004
                                       -----       -----       -----       -----
<S>                                    <C>         <C>         <C>         <C>
Common share equivalents .......       4,148       8,585       4,380       8,113
Contingent shares ..............       1,585       1,585       1,585       1,585
</TABLE>


                                       12
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(9)   Goodwill and Other Intangible Assets

      The components of other intangible assets-net are as follows (in
thousands):

<TABLE>
<CAPTION>
                                              JUNE 30, 2005                              SEPTEMBER 30, 2004
                                              -------------                              ------------------
                                                   NET                                          NET
                                 CARRYING      ACCUMULATED        BOOK         CARRYING     ACCUMULATED       BOOK
                                  AMOUNT      AMORTIZATION        VALUE         AMOUNT      AMORTIZATION      VALUE
                                 --------     ------------      --------       --------     ------------     --------
<S>                              <C>          <C>               <C>            <C>          <C>              <C>
Novantrone rights..............  $ 46,009       $ (34,196)        11,813       $ 46,009      $ (23,004)      $ 23,005
Acquired patent estates........       695             (36)           659            515             (7)           508
Acquired licenses issued to
    other companies............     3,596            (217)         3,379          3,093            (40)         3,053
                                 --------       ---------       --------       --------      ---------       --------
Total..........................  $ 50,300       $ (34,449)      $ 15,851       $ 49,617      $ (23,051)      $ 26,566
                                 ========       =========       ========       ========      =========       ========
</TABLE>

      In April 2005, we completed the acquisition of the minority interest
shares of Prosidion (see note 14). In connection with our acquisition of the
minority interest shares of Prosidion, we recorded intangible assets for the
acquired patent estate of $203,000 and non-exclusive licenses issued to other
companies of $615,000. These intangible assets are being amortized over the
period ending with the earliest patent expiration, which is April 2017.
Amortization expense for our intangible assets for the six months ended June 30,
2005 and 2004 was $7.6 million and $9.1 million, respectively. Amortization
expense for the six months ended June 30, 2004, included $1.7 million of
amortization expense related to our Gelclair rights, which were fully written
off during the three months ended September 30, 2004. Amortization expense is
estimated to be $7.6 million for the remaining six months of 2005, $4.7 million
in 2006 and $340,000 for 2007 through 2010.

(10)  Consolidation of Facilities

      During the quarter ended September 30, 2004, we announced the decision to
consolidate our U.K.-based oncology research and development activities into our
New York locations. During the quarter ended March 31, 2005, we recorded a
charge of $1.8 million for estimated facility lease return costs and remaining
rental obligations net of estimated sublease rental income in accordance with
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." This charge is included in selling, general and administrative
expenses in the accompanying consolidated statement of operations for the six
months ended June 30, 2005.

      During the quarter ended September 30, 2004, we also made the decision not
to further utilize our Uniondale, New York facility. However, we have recently
investigated the possibility of utilizing the facility for certain of our
pre-clinical and clinical manufacturing needs and are currently in discussions
with the landlord. Depending on the results of these discussions, we may record
an adjustment to the remaining restructuring reserve in the quarter ended
September 30, 2005. During the three months ended March 31, 2004, we also
committed to and approved an exit plan for our Horsham, Pennsylvania facility
which we acquired in connection with our acquisition of Cell Pathways, Inc. We
have recognized the rent obligations for the remainder of the lease (through
June 2008), offset by the sublease rental income.


                                       13
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


      The consolidation activity for the three and six months ended June 30,
2005 and June 30, 2004 was as follows (in thousands):

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED         SIX MONTHS ENDED
                                                            JUNE 30,                  JUNE 30,
                                                            --------                  --------
                                                       2005         2004         2005         2004
                                                      -------      -------      -------      -------
<S>                                                   <C>            <C>        <C>          <C>
Opening liability ...............................     $ 4,505        2,103      $ 4,302           --
Provision for rental obligations ................          --           --          761        2,103
Provision for facility refurbishment ............          --           --        1,019           --
Cash paid for rent less sublease income received         (262)        (165)        (560)        (165)
Cash paid for facility refurbishment ............        (350)          --         (350)          --
Cash paid for severance .........................        (113)          --       (1,286)          --
Other ...........................................         (94)          --         (200)          --
                                                      -------      -------      -------      -------
Ending liability ................................     $ 3,686      $ 1,938      $ 3,686      $ 1,938
                                                      =======      =======      =======      =======
</TABLE>

(11)  Derivative Financial Instruments

      From time to time, we enter into forward exchange contracts to reduce
foreign currency fluctuation risks relating to intercompany transactions for the
funding of our research and development activities in the United Kingdom. We
account for these derivative financial instruments in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS No. 137 and SFAS No. 138. As of June 30, 2005, the notional and
fair value of the foreign exchange contract for (pound)3.0 million was $5.7
million and $5.4 million, respectively. The contract matured in July 2005.

(12)  Employee Post-Retirement Plan

      We have a plan which provides post-retirement medical and life insurance
benefits to eligible employees, board members and qualified dependents.
Eligibility is determined based on age and service requirements. These benefits
are subject to deductibles, co-payments and other limitations.

      Under SFAS No. 106, "Employer's Accounting for Post-Retirement Benefits
Other Than Pensions," the cost of post-retirement medical and life insurance
benefits is accrued over the active service periods of employees to the date
they attain full eligibility for such benefits.

      In May 2004, the FASB issued FASB Staff Position No.106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." FSP No.106-2 provides guidance on the accounting
for the effects of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003, or the MMA, for employers that sponsor post-retirement health care
plans that provide prescription drug benefits. It requires those employers to
provide certain disclosures regarding the effect of the Federal subsidy provided
by the MMA. The accumulated post-retirement benefits obligation or net
post-retirement benefits cost in the consolidated financial statements or
accompanying notes do not reflect the effects of the MMA on our post-retirement
benefit plan. We are in the process of determining the impact of the MMA on the
accumulated post-retirement benefits obligation and net post-retirement benefits
cost to be recorded.


                                       14
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


      Net post-retirement benefit costs for the three and six months ended June
30, 2005 and 2004 includes the following components (in thousands):

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                             JUNE 30,               JUNE 30,
                                                                        ------------------       ----------------
                                                                         2005         2004       2005        2004
                                                                         ----         ----       ----        ----
<S>                                                                      <C>          <C>        <C>         <C>
Service costs for benefits earned during the period ..................   $210         $143       $420        $286
Interest costs on accumulated post-retirement benefits obligation.....     88           66        176         132
Amortization of initial benefits attributed to past services .........      1            1          2           2
Amortization of loss .................................................     16           10         32          20
                                                                         ----         ----       ----        ----
Net post-retirement benefit cost .....................................   $315         $220       $630        $440
                                                                         ====         ====       ====        ====
</TABLE>

(13)  Litigation

      In December 2004, several purported shareholder class action lawsuits were
filed in the United States District Court for the Eastern District of New York
against us, certain of our current and former executive officers and the members
of our Board of Directors. The lawsuits were brought on behalf of those who
purchased or otherwise acquired our common stock during certain periods in 2004,
which periods differ in the various complaints. The complaints allege that
defendants have made material misstatements concerning the survival benefit
associated with Tarceva and the size of Tarceva's potential market upon the
FDA's approval of the drug. The complaints allege violations of Sections 11,
12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
complaints seek unspecified compensatory damages and other relief. We intend to
vigorously defend these actions. Based on the early stage of this litigation,
the ultimate outcome cannot be determined and accordingly no provision has been
recorded in the consolidated financial statements.

(14)  Purchase of Minority Interest in Prosidion

      On April 14, 2005, we completed the acquisition of the minority interest
shares of Prosidion. We issued a total of 84,940 shares of our common stock in
exchange for 286,200 shares of Prosidion, representing approximately 2.8% of the
Prosidion shares outstanding. In addition, we paid $176,000 in cash to one of
the minority shareholders of Prosidion, who is a director of our company, in
exchange for 11,000 shares of Prosidion. The 84,940 common shares of our common
stock were valued at $4.2 million, which was based on the average five-day
closing price of our common stock around the date of the announcement of the
acquisition, which occurred on March 10, 2005. The acquisition of the minority
interest resulted in Prosidion becoming our wholly-owned subsidiary. The
acquisition of the minority interest was accounted for under the purchase method
of accounting. The purchase price was allocated to the assets acquired and
assumed liabilities based on the fair value as of the acquisition date. We
incurred professional costs of $650,000 in connection with the acquisition,
resulting in a total acquisition cost of $5.0 million.

      The purchase price for the minority interest acquired was allocated as
follows (in thousands):


                                       15
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


<TABLE>
<S>                                                            <C>
      License agreements ...................................   $  615
      Patent estate ........................................      203
      Acquired in-process research and development..........    3,694
      Minority interest ....................................      322
      Goodwill .............................................      149
                                                               ------
      Common stock and cash paid ...........................   $4,983
                                                               ======
</TABLE>

      In advance of the acquisition of the minority interest, we paid $1.4
million to Prosidion employees in exchange for all outstanding in-the-money
options. This compensation charge has been reflected in the statement of
operations for the three and six months ended June 30, 2005, of which $577,000
is included in research and development expense and $803,000 is included in
selling, general and administrative expense.

      The value assigned to the acquired in-process R&D was determined by
identifying the acquired in-process research projects for which: (a)
technological feasibility had not been established at the acquisition date, (b)
there was no alternative future use, and (c) the fair value was estimable based
on reasonable assumptions. The acquired in-process R&D was assigned entirely to
three clinical candidates. The value of the acquired in-process R&D and the
other identifiable intangible assets was determined by estimating the projected
net cash flows, based upon the future revenues to be earned upon
commercialization. In determining the value of the in-process R&D, the assumed
commercialization date for the products ranged from 2010 to 2012. Given the
risks associated with the development of new drugs, the revenue and expense
forecasts were probability-adjusted to reflect the risk of advancement through
the approval process. The risk adjustments applied were based on the compounds'
stage of development at the time of assessment and the historical probability of
successful advancement for compounds at that stage. The modeled cash flows were
discounted back to the net present value. The projected net cash flows from such
projects were based on management's estimates of revenues and operating profits
related to such project. The value of the in-process R&D was based on the income
approach that focuses on the income-producing capability of the asset. The
underlying premise of this approach is that the value of an asset can be
measured by the present worth of the net economic benefit (cash receipts less
cash outlays) to be received over the life of the asset. Significant assumptions
and estimates used in the valuation of in-process R&D included: the stage of
development for the project, future revenues, growth rates, product sales
cycles, the estimated life of a product's underlying technology, future
operating expenses, probability adjustments to reflect the risk of developing
the acquired technology into commercially viable products, and a discount rate
of 23.5% to reflect present value.

(15)  Purchase of Corporate Headquarters

      On March 15, 2005, we entered into an Agreement of Sale and Purchase with
Swissair, Swiss Air Transport Co., Ltd. for the purchase of certain property
located in Melville, New York. The property includes a building containing
approximately 60,000 square feet of space and other improvements. The purchase
price for the property was $11.3 million, which was paid in cash as of the
closing of the transaction on April 28, 2005. Upon the completion of the
renovations, estimated at approximately $16.0 million, the building will serve
as our corporate headquarters.


                                       16
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


      In order to obtain certain economic benefits offered by the Suffolk County
Industrial Development Agency, or the Agency, including, but not limited to,
real estate tax abatements and sales tax incentives, at the closing we entered
into certain agreements whereby we acquired the leasehold interest in the
property from Swiss Air and the Agency retained title to the property. At the
end of the term of the lease, as may be amended, modified and extended, we have
the right to acquire the property from the Agency for $1.00. There are no lease
payments required under the lease. As the substance of the lease agreement with
the Agency was principally to obtain certain economic development incentives and
not to transfer ownership of the property, the costs associated with the
purchase and renovation of the property are included in property, plant and
equipment in the accompanying balance sheet as of June 30, 2005.

      We expect to complete renovations of the building in the fourth quarter of
2005 at which time we will vacate our current leased headquarter facility in
Melville, New York. Upon vacating the leased facility, we may, if necessary,
recognize a charge and related liability for committed rental obligations in
excess of estimated sublease rental income.


                                       17
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004

OVERVIEW

        We are a biotechnology company committed to discovering, developing and
commercializing high-quality and novel pharmaceutical products that extend life
or improve the quality of life for cancer and diabetes patients worldwide. We
operate through two business teams, (OSI) Oncology and (OSI) Prosidion. (OSI)
Oncology is focused on developing molecular targeted therapies designed to
change the paradigm of cancer care. (OSI) Prosidion is committed to the
generation of novel, targeted therapies for the treatment of type 2 diabetes and
obesity. Our flagship product, Tarceva(R) (erlotinib), an oral once-a-day small
molecule inhibitor of the epidermal growth factor receptor, or HER1/EGFR, is the
first drug discovered and developed by us to obtain approval from the U.S. Food
and Drug Administration, or FDA, and the only EGFR inhibitor to have
demonstrated the ability to improve survival in both non-small cell lung cancer
patients, or NSCLC, and, in combination with gemcitabine for pancreatic cancer
patients. Tarceva is currently approved for sale in, among others, the United
States, Canada and Switzerland. We market Tarceva through partnerships with
Genentech, Inc. in the United States and with Roche throughout the rest of the
world. (OSI) Prosidion's lead compound, PSN9301, is a Dipeptidyl Peptidase IV,
or DPIV, inhibitor currently in Phase II clinical trials. (OSI) Prosidion owns
or has licensing rights to a portfolio of DPIV medical use patents with claims
covering DPIV as a target for anti-diabetes therapy and the use of combinations
of DPIV inhibitors with other anti-diabetes drugs such as metformin. A number of
non-exclusive licenses to the patent estate have been granted to major
pharmaceutical companies.

QUARTERLY UPDATE

Pipeline Update

        Tarceva

        In May 2005, we, submitted a supplemental New Drug Application, or sNDA,
with the FDA for use of Tarceva plus gemcitabine chemotherapy for the treatment
of advanced pancreatic cancer in patients who have not received any previous
treatment. Tarceva is the only EGFR therapy shown to provide a statistically
significant survival benefit in a Phase III trial when added to gemcitabine
chemotherapy in first-line pancreatic cancer compared to gemcitabine alone. In
July 2005, the FDA accepted for filing and review the sNDA for use of Tarceva
plus gemcitabine chemotherapy for the treatment of advanced pancreatic cancer in
patients who have not received previous treatment. The sNDA for Tarceva has been
granted a priority review classification by the FDA. Based on this priority
review status, the FDA has six months from receipt of the sNDA data, or until
November 2, 2005, to take action on the sNDA filing. We expect to learn within
the next month whether the submission will be discussed as part of the agenda
for the September meeting of the FDA's oncology drug advisory committee.


                                       18
<PAGE>
        In June 2005, our partner for Tarceva, Roche, received a positive
opinion from the European Committee for Medicinal Products for Human Use, or
CHMP, recommending approval of Tarceva for sale in the European Union for the
treatment of patients with locally advanced or metastatic NSCLC after failure of
at least one prior chemotherapy regimen. Following the CHMP recommendation, an
approval decision for Tarceva by the European Commission is anticipated within
90 days. Subsequent to quarter end, we announced that Health Canada has approved
Tarceva for the treatment of patients with locally advanced or metastatic NSCLC,
following failure of first or second-line chemotherapy.

        In April 2005, presentations were made on our behalf at this year's
Annual Meeting of the American Association for Cancer Research, or AACR,
relating to pre-clinical data showing that cell lines and tumor xenografts that
express epithelial markers may be more sensitive to Tarceva than cell lines and
tumor xenografts that express mesenchymal markers. These biological markers are
associated with a process termed Epithelial Mesenchymal Transition, or EMT. EMT
is thought to be a marker of tumor progression, with tumors that express
mesenchymal markers having a greater tendency to be invasive and metastasize
than those tumors only expressing epithelial markers. This new data supports the
hypothesis that Tarceva may be effective in earlier-stage disease, such as an
adjuvant or front-line setting in lung cancer, since these earlier-stage tumors
are likely to be more epithelial-like in their histology.

        In May 2005, presentations on Tarceva were made on our behalf at the
41st Annual Meeting of the American Society of Clinical Oncology, or ASCO. The
presentations included data from two separate single-arm Phase II studies of
monotherapy Tarceva in chemotherapy-naive or front-line NSCLC patients. Both
studies indicated encouraging indications of anti-tumor activity for monotherapy
Tarceva in this setting. Another presentation based on data from the BR.21 study
concluded that patients on Tarceva had slower deterioration of their
disease-related symptoms of cough, dyspnea and pain and that these differences
were clinically and statistically significant. Encouraging indications of
anti-tumor activity were also reported in several Phase II studies outside of
NSCLC including combination therapy data for Tarceva with Avastin(TM) in renal
cell carcinoma, Tarceva with chemotherapy in head and neck cancer and
monotherapy use of Tarceva in colorectal and hepatocellular cancer. The
presentations also included the first detailed assessment of the characteristics
of EGFR expression in a large randomized, placebo-controlled, Phase III trial
and have provided additional insights into the role EGFR plays in NSCLC.
Additional data from a randomized Phase III clinical trial of Tarceva in
advanced pancreatic cancer was also presented.

        In June 2005, we announced the issuance of U.S. Patent No. 6,900,221 by
the United States Patent and Trademark Office, or the U.S. PTO. The patent is
directed to a crystalline polymorph of Tarceva, methods for treating various
cancers, and processes for production of the crystalline polymorph. The claims
in the patent will extend exclusive protection of Tarceva until 2020.

        In July 2005, The New England Journal of Medicine published results
assessing the role of EGFR expression, amplification, and mutation in a subset
of patients from the pivotal Phase III study showing Tarceva improved survival
in patients with advanced NSCLC. The findings were reported in a companion paper
published with the clinical results of the BR.21 study.


                                       19
<PAGE>
        Oncology (other than Tarceva)

        In April 2005, we received a Notice of Allowance by the U.S. PTO for our
patent application covering claims for OSI-930, our Phase I clinical candidate
focused on the identification of dual c-kit/VEGFR inhibitors. The resulting
patent will cover the compound, compositions containing the compound, and
methods of treating cancers with the compound. The issuance of this patent
provides protection of OSI-930 until 2024. Both OSI-930 and OSI-817, a second
agent from our c-kit/VEGFR program, are designed to target both cancer cell
proliferation and blood vessel growth, or angiogenesis. Our current strategy is
to move both candidates through early stages of development before selecting one
of the two candidates for full clinical development in cancer patients.

        In April 2005, presentations were made on our behalf at this year's
Annual Meeting of the AACR relating to data on OSI-930. The data demonstrated
that OSI-930 can be administered safely and effectively with current standard
therapeutic regimens in pre-clinical models and suggest the potential for use of
OSI-930 in combination with chemotherapeutics or as maintenance therapy.

        We have recently made the decision to cease development of OSI-461, the
pro apoptotic cyclic GMP phosphodiesterase inhibitor that we acquired in the
Cell Pathways, Inc. acquisition. OSI-461 was the follow on candidate to
Aptosyn(R). We have been conducting additional clinical studies to examine
whether we could increase exposure of the drug in patients by administering it
with food. Although this demonstrated some improvement in exposure, we have
concluded that our continued development of the agent in the oncology setting is
not warranted. We will, therefore, actively seek a partner for potential
development of our OSI-461 in inflammatory bowel disease, where data from a
small Phase II study suggested some activity.

        Diabetes and Obesity

        In May 2005, we announced the issuance of US Patent No. 6,890,898 which
claims combination therapy for modifying glucose metabolism comprising
administration of a DPIV inhibitor and a further therapeutic agent e.g.
metformin. We, through Prosidion, have an exclusive sub-licensable license under
US Patent No. 6,890,898 and corresponding equivalents worldwide for the use of
non-boronic acid DPIV inhibitors.

        During the quarter ended June 30, 2005, Prosidion entered into two
worldwide non-exclusive license agreements with two pharmaceuticals companies
under our DPIV patent portfolio covering the use of DPIV inhibitors for the
treatment of type 2 diabetes and related indications. In July 2005, Prosidion
also granted a worldwide non-exclusive license under its DPIV patent portfolio
to a Japanese pharmaceutical company. In addition to upfront fees from these
agreements, we will receive milestone payments upon the achievement of certain
events and royalty payments on net sales.

        In June 2005, at the American Diabetes Association's 65th Annual
Scientific Meeting, there were abstracts presented on our behalf, relating to
our diabetes drug candidate PSN010, which is a glucokinase activators. PSN010
modulates the activity of glucokinase, an enzyme


                                       20
<PAGE>
which plays a key role as the body's glucose sensor in the liver and pancreas.
Data were also presented on PSN357, a glycogen phosphorylase inhibitor, which is
designed to rapidly lower blood glucose levels by preventing glycogen breakdown
to glucose in the liver. Subsequent to the quarter end, PSN357 entered Phase I
clinical trials and we expect PSN010 to enter clinical trials by the end of the
year.

Corporate Update

        Change in Our Fiscal Year End

        On December 14, 2004, pursuant to a resolution approved by our Board of
Directors, we changed our fiscal year end from September 30 to December 31. The
decision to change our fiscal year end was made primarily for the purpose of
aligning our operating cycle with that of our principal alliance partners and
our industry sector. The first fiscal year, which will henceforth be the
calendar year, affected by this change will end December 31, 2005. This report
on Form 10-Q includes the results of operations of the first and second quarters
of our fiscal year ending December 31, 2005.

        Purchase of Corporate Headquarters

        On March 15, 2005, we entered into an Agreement of Sale and Purchase
with Swissair, Swiss Air Transport Co., Ltd., for the purchase of certain
property located in Melville, New York. The property includes a building
containing approximately 60,000 square feet of space and other improvements. The
purchase price for the property is $11.3 million, which was paid in cash as of
the closing of the transaction on April 28, 2005. Upon the completion of the
renovations, estimated at approximately $16.0 million, the building will serve
as our corporate headquarters. We expect to complete renovations of the building
in the fourth quarter of 2005 at which time we will vacate our current leased
headquarter facility in Melville, New York. Upon vacating the leased facility,
we may, if necessary, recognize a charge and related liability for committed
rental obligations in excess of estimated sublease rental income.

        Purchase of Remaining Minority Interest in Prosidion

        On April 14, 2005, we completed the acquisition of the minority interest
shares of Prosidion. We issued a total of 84,940 shares of OSI common stock in
exchange for 286,200 shares of Prosidion, representing approximately 2.8% of the
Prosidion shares outstanding. In addition, we paid $176,000 in cash to one of
the minority shareholders of Prosidion, who is a director of OSI, in exchange
for 11,000 ordinary shares of Prosidion. The acquisition of the minority
interest, which resulted in Prosidion becoming our wholly-owned subsidiary, was
accounted for under the purchase method of accounting. The purchase price was
allocated to the assets acquired and assumed liabilities based on the fair value
of Prosidion's assets and liabilities, including in-process research and
development, as of the acquisition date.

CRITICAL ACCOUNTING POLICIES

        We prepare our consolidated financial statements in accordance with U.S.
generally accepted accounting principles. As such, we are required to make
certain estimates, judgments


                                       21
<PAGE>
and assumptions that we believe are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the periods presented. Actual
results could differ significantly from our estimates and the estimated amounts
could differ significantly under different assumptions and conditions. We
believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results of operations and which require our most
difficult and subjective judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. Note 1 to
the consolidated financial statements included in our Annual Report on Form 10-K
for the fiscal year ended September 30, 2004 includes a summary of the
significant accounting policies used in the preparation of the consolidated
financial statements.

        Revenue Recognition

        Net revenues from unconsolidated joint business are related to our
co-promotion and manufacturing agreements with Genentech for Tarceva. It
consists of our share of the pretax co-promotion profit generated from our
co-promotion arrangement with Genentech for Tarceva, the partial reimbursement
from Genentech of our sales and marketing costs related to Tarceva and the
reimbursement from Genentech of our manufacturing costs related to Tarceva.
Under the co-promotion arrangement, all U.S. sales of Tarceva and associated
costs and expenses, except for a portion of our sales related costs, are
recognized by Genentech. We record our 50% share of the co-promotion pretax
profit on a quarterly basis, as set forth in our agreement with Genentech.
Pretax co-promotion profit under the co-promotion arrangement is derived by
calculating U.S. net sales of Tarceva to third-party customers and deducting
costs of sales, distribution, selling and marketing expenses, and certain joint
development expenses incurred by Genentech and us. The costs incurred during the
respective periods represent estimated costs of both parties and are subject to
further adjustment based on each party's final review. Based on past experience,
we do not believe that these adjustments, if any, will be significant to our
consolidated financial statements. The partial reimbursement of sales and
marketing costs related to Tarceva is recognized as revenue as the related costs
are incurred. We defer the recognition of the reimbursement of our manufacturing
costs related to Tarceva until the time Genentech ships the product to
third-party customers at which time our risk of inventory loss no longer exists.

        Sales commissions from Novantrone on net oncology sales are recognized
in the period the sales occur based on the estimated split between oncology
sales and multiple sclerosis sales, as determined on a quarterly basis by an
external third party. The split between oncology and multiple sclerosis sales is
subject to further adjustment based on the parties' final review in the
subsequent quarter. Based on past experience, we do not believe these
adjustments, if any, will be significant to our consolidated financial
statements.

        Our revenue recognition policies for all nonrefundable upfront license
fees and milestone arrangements are in accordance with the guidance provided in
the Securities and Exchange Commission's Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," as amended by SEC Staff
Accounting Bulletin No. 104, "Revenue Recognition." In addition, we follow the
provisions of Emerging Issues Task Force Issue 00-21, "Revenue Arrangements with
Multiple Deliverables" for multiple element revenue arrangements entered


                                       22
<PAGE>
into or materially amended after June 30, 2003. As a result of an amendment to
our collaboration agreement with Genentech in June 2004, the Genentech
milestones already received and the remaining portion of the unearned upfront
fee are being recognized, in accordance with EITF 00-21. Milestones received
from Genentech and the remaining unearned upfront fee are being recognized over
the term of our Manufacturing and Supply Agreement with Genentech, under which
the last items of performance to be delivered to Genentech are set forth, on a
straight line basis, which approximates the expected level of performance under
the Manufacturing and Supply Agreement. All future milestone payments received
from Genentech will be recognized in the same manner. In March 2005, we agreed
to a further global development plan and budget with our partners, Genentech and
Roche, for the continued development of Tarceva. For purposes of EITF 00-21, the
revised development plan and budget for Tarceva, constituted a material
amendment to our Roche agreement and therefore future milestones received from
Roche will be recognized in accordance with EITF 00-21. Accordingly, future
milestone payments received from Roche will be initially recorded as unearned
revenue and amortized into license revenues over the remaining term of the
related performance obligation.

        Inventory

        Our current inventory is comprised of Tarceva and Gelclair inventory and
is stated at the lower of cost or market value, and our inventory costs are
determined by the weighted average method and first-in, first-out method,
respectively. We analyze our inventory levels quarterly and write down inventory
that has become obsolete, inventory that has a cost basis in excess of its
expected net realizable value, and inventory in excess of expected requirements.
Expired inventory is disposed of and the related costs are written off.
Provisions for excess or expired inventory are primarily based on our estimates
of forecasted sales levels.

        Prior to receipt of FDA approval of Tarceva for commercial sale on
November 18, 2004, we had expensed all costs associated with the production of
Tarceva to research and development expense. Effective November 18, 2004, we
began to capitalize the costs of manufacturing Tarceva as inventory, including
the costs to label, package and ship previously manufactured bulk inventory
whose costs had already been expensed as research and development. Although it
is our policy to state inventory reflecting full absorption costs, until we sell
all of our existing inventory for which all or a portion of the costs were
previously expensed, certain components of inventory will continue to reflect
only those costs incurred to process into finished goods previously expensed raw
materials and work in process.

        Accruals for Clinical Research Organization and Clinical Site Costs

        We make estimates of costs incurred to date but not yet invoiced in
relation to external clinical research organizations, or CROs, and clinical site
costs. We analyze the progress of clinical trials, including levels of patient
enrollment, invoices received and contracted costs when evaluating the adequacy
of the accrued liabilities. Significant judgments and estimates must be made and
used in determining the accrued balance in any accounting period.


                                       23
<PAGE>
        Goodwill and Other Long-Lived Assets

        SFAS No. 142, "Goodwill and Other Intangible Assets," requires that
goodwill and certain other intangibles with indefinite useful lives are not
amortized into results of operations but instead are reviewed for impairment at
least annually and written down, and charged to results of operations in periods
in which the recorded value of goodwill and certain other intangibles is more
than their implied fair value. We completed our annual impairment review of
goodwill during the three months ended December 31, 2004 and determined that no
impairment charge was required.

        Our identifiable intangible assets are subject to amortization. SFAS
No.142 requires that intangible assets with determinable useful lives be
amortized over their respective estimated useful lives and reviewed for
impairment in accordance with SFAS No.144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No.144 requires, among other things, that
long-lived assets be measured at the lower of carrying amount or fair value,
less cost to sell, whether reported in continuing operations or in discontinued
operations. We review our intangibles with determinable lives and other
long-lived assets for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable.

        Our judgments regarding the existence of impairment indicators are based
on historical and projected future operating results, changes in the manner of
our use of the acquired assets or our overall business strategy, and market and
economic trends. Our most significant intangible asset is our rights to
Novantrone and therefore, we continually monitor sales activity and market and
regulatory conditions for this product for the existence of any impairment
indicators. In the future, events could cause us to conclude that impairment
indicators exist and that certain other intangibles with determinable lives and
other long-lived assets are impaired which may result in an adverse impact on
our financial condition and results of operations.

REVENUES

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED                   SIX MONTHS ENDED
                                             ------------------                   ----------------
                                                   JUNE 30,                            JUNE 30,
                                                   --------                            --------
                                           2005      2004      $ CHANGE       2005       2004     $ CHANGE
                                         -------    -------    --------     -------    -------    --------
<S>                                      <C>        <C>        <C>          <C>        <C>        <C>
Net revenue from unconsolidated joint
business ............................    $21,707    $    --    $ 21,707     $33,428    $    --    $ 33,428
Royalties on product sales ..........        416         --         416         499         --         499
Sales commission and product sales ..      7,567      9,866      (2,299)     14,544     15,807      (1,263)
License and milestone revenues ......      4,939      1,300       3,639       5,225      2,575       2,650
                                         -------    -------    --------     -------    -------    --------
Total Revenues ......................    $34,629    $11,166    $ 23,463     $53,696    $18,382    $ 35,314
                                         -------    -------    --------     -------    -------    --------
</TABLE>

        Net Revenue from Unconsolidated Joint Business

        Net revenue from unconsolidated joint business is related to our
co-promotion and manufacturing agreements with Genentech for Tarceva. For the
three and six months ended June 30, 2005, Genentech recorded $70.2 million and
$117.8 million, respectively, in net sales of Tarceva in the United States and
its territories. The U.S. net sales for Tarceva recorded by Genentech of $70.2
million for the three months ended June 30, 2005 represent an increase of $22.6
million or 47% compared to net sales for the quarter ended March 31, 2005. Our
share of


                                       24
<PAGE>
these net sales is reduced by the significant costs incurred on the sales and
marketing of the product in order to maximize the value with an effective launch
and product growth strategy. For the three and six month periods ended June 30,
2005, we reported net revenues of $21.7 million and $33.4 million, respectively,
from our unconsolidated joint business for Tarceva arising from our co-promotion
arrangement with Genentech. The current quarter revenues from our unconsolidated
joint business of $21.7 million represent an increase of $10.0 million or 85%
compared to the quarter ended March 31, 2005. We expect that there will continue
to be significant sales and marketing expenses incurred by both Genentech and us
relative to sales in this launch year.

        Effective April 5, 2005, Genentech implemented a price increase to
wholesalers for the sale of Tarceva in the United States. The price for a 30-day
supply of 150 mg tablets increased from the launch price of $2,026 to $2,330.
The prices for a 30-day supply of the 100 mg and 25mg tablet strengths increased
from $1,783 to $2,060 and $648 to $750, respectively.

        Royalties on Product Sales

        In March 2005, the Swiss health authority, Swissmedic, approved Tarceva
for treatment of patients with locally advanced or metastatic NSCLC after
failure of at least one prior chemotherapy regimen. Our partner, Roche, began
selling in Switzerland in late March 2005. We recorded royalty revenues of
$416,000 and $499,000 for the three and six months ended June 30, 2005,
respectively, related to sales of Tarceva by Roche outside of the United States.

        Sales Commissions and Product Sales

        Sales commissions represent commissions earned on the sales of
Novantrone in the United States for oncology indications. Sales commissions for
the three and six months ended June 30, 2005 were $7.3 million and $14.0
million, respectively, compared to sales commissions of $9.5 million and $15.2
million for the three and six months ended June 30, 2004, respectively. Sales
commissions for the three and six months ended June 30, 2005 were lower compared
to the prior year periods and may continue to decrease as we approach patent
expiration. The patent for Novantrone is scheduled to expire in April 2006. The
expiration of a product patent normally results in a loss of market exclusivity
for the covered pharmaceutical product; and therefore, we expect a significant
decrease in our commissions related to Novantrone as we approach patent
expiration or shortly thereafter as a result of an expected decrease in oncology
sales. We also believe that a worsening reimbursement environment under the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 may be
contributing to the current decrease. In July 2005, Serono implemented a 6%
price increase on all Novantrone line items. The last price increase on
Novantrone was approximately one year ago. We do not believe that this price
increase will have a material impact on Novantrone oncology sales.

        Product sales represent sales of Gelclair in accordance with our
distribution agreement with Helsinn Healthcare S.A., which we terminated
effective as of January 31, 2005. Under the terms of the distribution agreement,
we are continuing to sell off our remaining inventory. Net sales of Gelclair for
the three and six months ended June 30, 2005 were $228,000 and $576,000,
respectively, compared to $335,000 and $602,000, for the comparable prior year
periods.


                                       25
<PAGE>
        License and Milestone Revenues

        Included in license and milestone revenues for the three and six months
ended June 30, 2005 is $4.5 million of upfront fees related to two separate
worldwide non-exclusive license agreements entered into by Prosidion and two
pharmaceuticals companies, under our DPIV patent portfolio covering the use of
DPIV inhibitors for the treatment of type 2 diabetes and related indications.
Also included in license and milestone revenues is the recognition of the
ratable portion of the $25.0 million upfront fees from Genentech and Roche and
the ratable portion of the $17.0 million of milestone payments received from
Genentech to date. We recognized revenues of $294,000 and $530,000, for the
three and six months ended June 30, 2005, respectively, compared to $1.3 million
and $2.5 million, for the three and six months ended June 30, 2004,
respectively, relating to the upfront fees and milestone received from Genentech
and Roche. The unrecognized deferred revenue related to the milestones and
upfront payments received from Genentech was $18.1 million as of June 30, 2005.

        Additional milestone payments will be paid by Roche upon registration of
Tarceva in the European Union, and upon successful filing and registration of
Tarceva in Japan. Further milestones from both Genentech and Roche are also due
upon the successful filing and approval of Tarceva in a second oncology
indication and upon the approval of the first two adjuvant oncology indications
in the United States, European Union and Japan. In July 2005, the FDA accepted
for filing and review the sNDA for use of Tarceva plus gemcitabine chemotherapy
for the treatment of advanced pancreatic cancer in patients who have not
received previous treatment. The acceptance of the sNDA filing satisfies
provisions for a $7.0 million milestone payment by Genentech to us.

EXPENSES

<TABLE>
<CAPTION>
                                     THREE MONTHS ENDED JUNE 30,         SIX MONTHS ENDED JUNE 30,
                                     ---------------------------         -------------------------
                                     2005       2004     $ CHANGE       2005        2004     $ CHANGE
                                    -------    -------    -------     --------    --------    -------
<S>                                 <C>        <C>        <C>         <C>         <C>         <C>
Cost of goods sold .............    $ 1,749    $   108    $ 1,641     $  2,172    $  2,152    $    20
Research and development .......     30,360     25,352      5,008       57,309      52,073      5,236
Acquired in-process research and
development ....................      3,542         --      3,542        3,542          --      3,542
Selling, general and
administrative .................     21,371     22,655     (1,284)      44,402      44,459        (57)
Amortization of intangibles ....      3,802      4,574       (772)       7,605       9,148     (1,543)
                                    -------    -------    -------     --------    --------    -------
Total Expenses .................    $60,824    $52,689    $ 8,135     $115,030    $107,832    $ 7,198
                                    -------    -------    -------     --------    --------    -------
</TABLE>

        Cost of Goods Sold

        Cost of goods sold include manufacturing-related expenses associated
with the sale of Tarceva to Genentech as well as the costs of product sales
related to Gelclair. Prior to receipt of approval of Tarceva for commercial sale
on November 18, 2004, we had expensed all costs associated with the production
of Tarceva to research and development. Effective November 18, 2004, we began to
capitalize the costs of manufacturing Tarceva as inventory, including the costs
to label, package and ship previously manufactured bulk inventory whose costs
had already been expensed as research and development. Although it is our policy
to state inventory reflecting full absorption costs, until we sell all of our
existing inventory for which all or a portion of the costs were previously
expensed, certain components of inventory will continue to reflect costs
incurred to process into finished goods previously expensed raw materials and
work in process.


                                       26
<PAGE>
We anticipate that our cost of goods will continue to increase during 2005 from
quarter to quarter as we work through our previously expensed inventory and
sales of Tarceva increase. Cost of goods sold for the three and six months ended
June 30, 2005 would have been $849,000 and $2.2 million higher, respectively, if
the Tarceva inventory sold had reflected the full absorption manufacturing
costs. The increased costs presented in this manner are more reflective of our
cost of goods sold going forward.

        The increase in cost of goods sold for the three months ended June 30,
2005 compared to the prior year period is related to sales of Tarceva, which
commenced in November 2004. Included in the six months ended June 30, 2004 is a
provision of $2.0 million recorded in the quarter ended March 31, 2004 related
to Gelclair inventory that we deemed in excess of forecasted demand, based on
the expiration date of the product.

        Research and Development

        We consider the active management and development of our clinical
pipeline crucial to the long-term approval process for drug candidates. We
manage our overall research, development and in-licensing efforts in a manner
designed to generate a constant flow of clinical candidates into development to
offset the anticipated attrition rate of drug candidates that fail in clinical
trials or are terminated for business reasons.

        Because we manage our pipeline in a dynamic manner, it is difficult to
give accurate guidance on the anticipated proportion of our research and
development investments assigned to any one program prior to the Phase III stage
of development, or to the future cash inflows from these programs. For the three
and six months ended June 30, 2005, we invested a total of $12.2 million and
$22.9 million, respectively, in research and $18.2 million and $34.4 million,
respectively, in pre-clinical and clinical development. For the three and six
months ended June 30, 2004, we invested a total of $13.1 million and $26.6
million, respectively, in research and $12.2 million and $25.4 million,
respectively, in pre-clinical and clinical development. We consider this level
of investment suitable for a company with our pipeline of clinical and
pre-clinical candidates.

        Research and development expenses increased $5.0 million and $5.2
million during the three and six months ended June 30, 2005 compared to the
three and six months ended June 30, 2004, respectively. This increase was
primarily due to the increased development costs associated with our diabetes
pre-clinical and clinical pipeline, including PSN9301 and PSN357, which
accounted for an increase of $6.2 million for the three month period and $10.4
million for the six month period. In January 2005, we announced that we
initiated a Phase II proof-of-concept and dose range finding study with the DPIV
inhibitor, PSN9301. Offsetting this increase was a net decrease in our oncology
research and development programs (excluding Tarceva) of $4.1 million for the
three month period and $8.8 million for the six month period, primarily due to
the consolidation of our U.K.-based oncology activities into our New York
locations and the decision to deprioritize or cease development of certain
clinical candidates. Included in research and development expenses for the three
and six months ended June 30, 2005 is a charge of $577,000 relating to the
cashout of the outstanding Prosidion stock options in advance of our acquisition
of the minority interest of Prosidion in April 2005.


                                       27
<PAGE>
        Our development expenses relating to Tarceva increased $2.3 million and
$3.1 million for the three and six month period ended June 30, 2005. The
significant perceived market potential for Tarceva has resulted in the
OSI/Genentech/Roche alliance committing to a large and comprehensive global
development plan for the candidate. In March 2005, the alliance partners agreed
to an additional commitment of expenditures for the continued development of
Tarceva in earlier stage lung cancer and other indications. The cost of the
continued development will be shared equally by the three parties. We have made
and will continue to make additional research and development investments
outside of the global development plan with the consent of the other parties. As
of June 30, 2005, we invested in excess of $126 million in the development of
Tarceva since the return of the full rights to the product from Pfizer Inc. in
June 2000, representing our share of the costs incurred to date in the
tripartite global development plan and additional investments outside the plan.

        Acquired In-Process Research and Development

        In connection with the acquisition of the minority interest of
Prosidion, we recorded an in-process research and development charge of $3.5
million representing the estimated fair value of the acquired in-process
technology related to the acquired interest, that had not yet reached
technological feasibility and had no alternative future use (see note 14 to the
accompanying consolidated financial statements).

        Selling, General and Administrative

        Selling, general and administrative expenses decreased $1.3 million for
the three months ended June 30, 2005 and remained relatively constant for the
six months ended June 30, 2005 compared to the comparable periods of 2004. The
decrease for the three months was primarily related to our share of Genentech's
commercial expenses relating to Tarceva no longer being included in selling,
general and administrative expense and now being included as part of the
co-promotion profit and included in the calculation of net revenues from
unconsolidated joint business in the accompanying consolidated statement of
operations for the three and six months ended June 30, 2005. Offsetting these
decreases was an increase in costs resulting from a net increase in sales and
marketing efforts related to Tarceva. The three months ended June 30, 2005 also
included a charge of $803,000 relating to the cashout of the outstanding
Prosidion stock options in advance of our acquisition of the minority interest
of Prosidion in April 2005. The six months ended June 30, 2005 included a charge
of $1.8 million for estimated facility lease return costs and the remaining
rental obligations net of estimated sublease rental income for the unused
portion of our Oxford facility resulting from the consolidation of our
U.K.-based oncology operations. The six months ended March 31, 2004 included a
charge of $1.8 million for the remaining rental obligations net of estimated
sublease rental income for our Horsham facility which we assumed in the Cell
Pathways acquisition.

        Amortization of Intangibles

        Amortization expense for the three and six months ended June 30, 2005
primarily relates to amortization expense for our rights to Novantrone. The
decrease from the prior year's periods is primarily related to amortization
expense related to our rights to Gelclair. During the three


                                       28
<PAGE>
months ended September 30, 2004, we recorded an impairment charge for the
remaining carrying value of the Gelclair rights.

OTHER INCOME AND EXPENSE

<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED JUNE 30,         SIX MONTHS ENDED JUNE 30,
                                    ---------------------------         -------------------------
                                  2005        2004      $ CHANGE       2005        2004     $ CHANGE
                                 -------     -------     -------     -------     -------     -------
<S>                              <C>         <C>         <C>         <C>         <C>         <C>
Investment income - net .....    $ 4,133     $ 1,271     $ 2,862     $ 8,170     $ 2,698     $ 5,472
Interest expense ............     (1,219)     (6,576)      5,357      (2,438)     (9,396)      6,958
Other expense - net .........     (1,257)       (517)       (740)     (1,440)       (901)       (539)
                                 -------     -------     -------     -------     -------     -------
Total Other Income (Expense)     $ 1,657     $(5,822)    $ 7,479     $ 4,292     $(7,599)    $11,891
                                 -------     -------     -------     -------     -------     -------
</TABLE>

        The increase in investment income for the three months and six months
ended June 30, 2005 was primarily due to an increase in the funds available for
investment and an increase in the average rate of return on our investments. The
increase in funds available for investment was the result of the public offering
completed in November 2004 for net proceeds of approximately $419.5 million. The
decrease in interest expense resulted from the full conversion of the
outstanding $160.0 million of our 4% convertible senior subordinated notes due
2009, or the 2009 Notes, in July 2004. As a result of the conversion, interest
expense for the three and six months ended June 30, 2005 represented interest
expense only on our 3.25% convertible senior subordinated notes due 2023, or the
2023 Notes. Interest expense for the three and six months ended June 30, 2004
included interest expense on both the 2009 Notes and 2023 Notes, as well as $3.7
million representing the guaranteed interest on the 2009 Notes. Other
expense-net for the periods include the amortization of debt issuance costs
related to the convertible senior subordinated notes.

LIQUIDITY AND CAPITAL RESOURCES

        At June 30, 2005, working capital, representing primarily cash, cash
equivalents, and short-term investments, aggregated $584.5 million compared to
$228.2 million at September 30, 2004. The increase of $356.3 million was
primarily due to the net proceeds of $419.5 million from our public offering and
proceeds of $19.3 million from the exercise of options and other equity
transactions, offset by net cash used in operating activities of $106.0 million
and capital expenditures of $16.7 million.

        We expect to incur continued losses during the two-year period following
the launch of Tarceva as we continue to invest in the commercialization and
development of Tarceva and other product candidates in our pipeline as well as
our research programs and our commercial operations. While we have established a
goal of achieving profitability and positive cash flow within two years of our
launch of Tarceva, the time required to reach profitability cannot be assessed
with certainty at this time. We also continue to pursue strategic in-licensing
and acquisition opportunities that would bring additional products, clinical
development candidates and research technologies to our cancer and diabetes
portfolio. We may choose to use some of our available cash and/or equity
securities to execute transactions arising from this effort.

        In the past, we have funded our research, development, commercial and
administrative support efforts through public and private sales of our
securities, including debt and equity securities. On November 12, 2004, we
concluded a public offering of 6.0 million shares of


                                       29
<PAGE>
common stock at a price of $64.50 per share. Gross proceeds totaled $387.0
million with net proceeds of $364.6 million after all related fees. In addition,
on November 17, 2004, underwriters associated with the offering exercised their
over-allotment option to purchase an additional 900,000 shares of our common
stock at a price of $64.50 per share. Gross proceeds from the exercise of the
over-allotment option totaled $58.1 million with net proceeds of $54.9 million.
We believe that our existing cash resources and projected cash flows from
Tarceva will be sufficient to fund our existing operations. In September 2003,
we issued a total of $150.0 million aggregate principal amount of the 2023 Notes
in a private placement for net proceeds of $144.8 million. The 2023 Notes bear
interest at 3.25% per annum, payable semi-annually, and mature on September 8,
2023. The 2023 Notes are convertible into shares of our common stock at a
conversion price of $50.02 per share, subject to normal and customary
adjustments such as stock dividends or other dilutive transactions. The related
debt issuance costs of $5.3 million were deferred and are being amortized on a
straight-line basis over a five-year term, which represents the earliest date
the holders can redeem the 2023 Notes. With respect to the 2023 Notes, we
pledged $14.2 million of U.S. government securities with maturities at various
dates through August 2006. Upon maturity, the proceeds of these restricted
investment securities will be sufficient to pay the first six scheduled interest
payments on the 2023 Notes when due. The aggregate fair value and amortized cost
of the restricted investment securities at June 30, 2005 were $7.2 million. If
all or any portion of the 2023 Notes have not been converted into common stock
prior to their maturity date, we will be required to pay, in cash, the
outstanding principal amounts of the notes plus any accrued and unpaid interest.
This could have a significant impact on our liquidity depending on our cash
position at time of maturity. If we do not have sufficient cash to repay the
debt, we may need to borrow additional funds or sell additional equity in order
to meet our debt obligations.

        Commitments and Contingencies

        Our major outstanding contractual obligations relate to our continuing
support for the global development plan for Tarceva, the 2023 Notes and our
facility leases. The following table summarizes our significant contractual
obligations at June 30, 2005 and the effect such obligations are expected to
have on our liquidity and cash flow in future periods (in thousands):

<TABLE>
<CAPTION>
                                                                               2010 &
                                  2005     2006     2007     2008     2009    THEREAFTER   TOTAL
                                  ----     ----     ----     ----     ----    ----------   -----
<S>                              <C>      <C>      <C>     <C>        <C>     <C>         <C>
Contractual Obligations:
  Senior convertible debt (a)    $ 2,438  $ 4,875 $ 4,875   $ 4,875    $4,875  $218,250  $240,188
  Purchase obligations (b)...     19,266   37,814  24,087     8,087     5,187    13,829   108,270
  Operating leases...........      4,152    5,704   5,791     6,053     5,537    47,267    74,504
  Capital commitments (c)....     11,147       --      --        --        --        --    11,147
  Obligations related to exit
    activities (d)...............     --       --      --        --       958        --       958
                                 -------  -------  ------- --------   -------  --------  --------
Total contractual obligations    $37,003  $48,393  $34,753 $ 19,015   $16,557  $279,346  $435,067
                                 =======  =======  ======= ========   =======  ========  ========
</TABLE>

------

(a)  Includes interest payments at a rate of 3.25% per annum relating to the
     2023 Notes.

(b)  Purchase obligations include commercial and research and development
     commitments and other significant purchase commitments.

(c)  Includes estimated construction commitments relating to renovation of our
     new corporate headquarters.

(d)  Includes payments for facility refurbishments.

                                       30
<PAGE>

Other significant commitments and contingencies include the following:

      -     Under agreements with external CROs we will continue to incur
            expenses relating to clinical trials of Tarceva and other clinical
            candidates. The timing and amount of these disbursements can be
            based upon the achievement of certain milestones, patient
            enrollment, services rendered or as expenses are incurred by the
            CROs and therefore we cannot reasonably estimate the potential
            timing of these payments.

      -     We have outstanding letters of credit issued by a commercial bank
            totaling $3.0 million of which the full amounts were available on
            June 30, 2005. One is an irrevocable letter of credit related to our
            Oxford, England facility which expires and is renewed annually with
            a final expiration date of September 27, 2007. Another is an
            irrevocable letter of credit related to our Horsham, Pennsylvania
            facility, whose lease we assumed through the acquisition of Cell
            Pathways. The letter expires and is renewed annually with a final
            expiration date of September 22, 2008.

      -     We have a retirement plan which provides post-retirement medical and
            life insurance benefits to eligible employees, board members and
            qualified dependents. Eligibility is determined based on age and
            years of service. We have accrued postretirement benefit costs of
            $4.8 million at June 30, 2005.

      -     In connection with our acquisition of Cell Pathways, we provided
            additional consideration in the form of five-year contingent value
            rights through which each share of Cell Pathways' common stock will
            be eligible for an additional 0.04 share of OSI common stock in the
            event of a filing of a new drug application by June 12, 2008 for
            either of the two clinical candidates acquired from Cell Pathways,
            OSI-461 or Aptosyn(R) (exisulind).

      -     Under certain license and collaboration agreements with
            pharmaceutical companies and educational institutions, we are
            required to pay royalties and/or milestone payments upon the
            successful development and commercialization of products. However,
            successful research and development of pharmaceutical products is
            high risk, and most products fail to reach the market. Therefore, at
            this time the amount and timing of the payments, if any, are not
            known.

      -     Under certain license and other agreements, we are required to pay
            license fees for the use of technologies and products in our
            research and development activities or milestone payments upon the
            achievement of certain predetermined conditions. These license fees
            are not deemed material to our consolidated financial statements and
            the amount and timing of the milestone payments, if any, are not
            known due to the uncertainty surrounding the successful research,
            development and commercialization of the products.

        ACCOUNTING PRONOUNCEMENTS

        In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting
for Conditional Asset Retirement Obligations," or FIN No. 47. FIN No. 47
clarifies that an entity must record a liability for a "conditional" asset
retirement obligation if the fair value of the obligation can be reasonably
estimated. The provision is effective for no later than the end of fiscal years
ending after December 15, 2005, which is our year ending December 31, 2005. We
are currently evaluating the effect that this interpretation will have on our
consolidated financial statements.

        In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation"
and supersedes


                                       31
<PAGE>
APB No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all
stock-based compensation to be recognized as an expense in the financial
statements and that such cost be measured according to the fair value of stock
options. SFAS 123R would have been effective for quarterly periods beginning
after June 15, 2005. On April 14, 2005 the SEC issued a new rule that amended
the compliance date for SFAS No. 123R. The SEC's new rule allows companies to
implement SFAS No.123R at the beginning of their next fiscal year, which is our
fiscal year beginning January 1, 2006. The new rule does not change the
accounting required by SFAS No. 123R. We currently provide the pro forma
disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," on a quarterly and annual basis, and we are
currently evaluating the impact this statement will have on our consolidated
financial statements. We expect the adoption of SFAS No. 123R to have a material
effect on our consolidated financial statements.

        In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" - an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 requires all companies to
recognize a current-period charge for abnormal amounts of idle facility expense,
freight, handling costs and wasted materials. This statement also requires that
the allocation of fixed production overhead to the costs of conversion be based
on the normal capacity of the production facilities. SFAS No. 151 will be
effective for fiscal years beginning after June 15, 2005, which is our calendar
year 2006. We are currently evaluating the effect that this statement will have
on our consolidated financial statements.

        In December 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, or the MMA. The
MMA introduced both a Medicare prescription drug benefit and a federal subsidy
to sponsors of retiree health care plans that provide a benefit at least
"actuarially equivalent" to the Medicare benefit. These provisions of the new
law will affect accounting measurements. In May 2004, the FASB issued FASB Staff
Position, or FSP, No. 106-2, "Accounting and Disclosure Requirements Related to
the Improvement and Modernization Act of 2003." FSP No. FAS 106-2 provides
guidance on the accounting for the effects of the MMA, for employers that
sponsor post-retirement health care plans that provide prescription drug
benefits. It requires those employers to provide certain disclosures regarding
the effect of the Federal subsidy provided by the MMA. The accumulated
post-retirement benefits obligation or net post-retirement benefits cost in the
consolidated financial statements or accompanying notes do not reflect the
effects of the MMA on our post-retirement benefit plan. We are in the process of
determining the impact of the MMA on the accumulated post-retirement benefits
obligation and net post-retirement benefits cost.

FORWARD LOOKING STATEMENTS

        A number of the matters and subject areas discussed in this Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this report that are not historical or current
facts deal with potential future circumstances and developments. The discussion
of these matters and subject areas is qualified by the inherent risks and
uncertainties surrounding future expectations generally, and these discussions
may materially differ from our actual future experience involving any one or
more of these matters and subject areas. These forward looking statements are
also subject generally to the other risks


                                       32
<PAGE>
and uncertainties that are described in our annual report on Form 10-K for the
fiscal year ended September 30, 2004.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

        Our cash flow and earnings are subject to fluctuations due to changes in
interest rates in our investment portfolio of debt securities, the fair value of
equity instruments held and foreign currency exchange rates. We maintain an
investment portfolio of various issuers, types and maturities. These securities
are generally classified as available-for-sale as defined by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and,
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a component of accumulated other comprehensive
income (loss) included in stockholders' equity. With respect to our 2023 Notes,
we pledged U.S. government securities, or Restricted Investment Securities, with
maturities at various dates through August 2006. Upon maturity, the proceeds of
the Restricted Investment Securities are sufficient to pay the first six
scheduled interest payments of the 2023 Notes when due. We consider our
Restricted Investment Securities to be held-to-maturity as defined by SFAS No.
115. These securities are reported at their amortized cost, which includes the
direct costs to acquire the securities, plus the amortization of any discount or
premium, and accrued interest earned on the securities. We have not used or held
derivative financial instruments in our investment portfolio.

        At June 30, 2005, we maintained a portion of our cash and cash
equivalents in financial instruments with original maturities of three months or
less. We also maintained an investment portfolio principally comprised of
government and government agency obligations and corporate obligations that are
subject to interest rate risk and will decline in value if interest rates
increase. A hypothetical 10% change in interest rates during the periods would
have resulted in a $413,000 and $817,000 change in our net loss for the three
and six months ended June 30, 2005, respectively.

        In March 2004, we began to enter into forward exchange contracts to
reduce foreign currency fluctuation risks relating to intercompany transactions
for the funding of our research activities in the United Kingdom. We account for
these derivative financial instruments in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS No. 137 and SFAS No. 138. As of June 30, 2005, the notional and
fair value of the foreign exchange contract for (pound) 3.0 million was $5.7
million and $5.4 million, respectively. The contract matured in July 2005.

        Our limited investments in certain biotechnology companies are carried
on the equity method or cost method of accounting using the guidance of
applicable accounting literature. Other-than-temporary losses are recorded
against earnings in the same period the loss was deemed to have occurred.

        Our long-term debt totaled $150.0 million at June 30, 2005 and consists
of our 2023 Notes which bear interest at a fixed rate of 3.25%. Underlying
market risk exists related to an increase in our stock price or an increase in
interest rates which may make the conversion of the 2023 Notes to common stock
beneficial to the note holders. Conversion of the 2023 Notes would have a
dilutive effect on any future earnings and book value per common share.


                                       33
<PAGE>
ITEM 4.  CONTROLS AND PROCEDURES

        CEO and CFO Certifications. Attached to this Quarterly Report as
Exhibits 31.1 and 31.2, there are two certifications, or the Section 302
Certifications, one by each of our Chief Executive Officer, or CEO, and our
Chief Financial Officer, or CFO. This Item 4 contains information concerning the
evaluation of our disclosure controls and procedures and internal control over
financial reporting that is referred to in the Section 302 Certifications and
this information should be read in conjunction with the Section 302
Certifications for a more complete understanding of the topics presented.

        Evaluation of Our Disclosure Controls and Procedures. The Securities and
Exchange Commission requires that as of the end of the period covered by this
Quarterly Report on Form 10-Q, the CEO and the CFO evaluate the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rule 13(a)-15(e)) under the Securities Exchange Act of 1934, or the Exchange
Act, and report on the effectiveness of the design and operation of our
disclosure controls and procedures. Accordingly, under the supervision and with
the participation of our management, including our CEO and CFO, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q.

        CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls
and Procedures. Based upon their evaluation of the disclosure controls and
procedures, our CEO and CFO have concluded that, despite the limitations noted
below, our disclosure controls and procedures are at the reasonable assurance
level to ensure that material information relating to OSI and our consolidated
subsidiaries is made known to management, including the CEO and CFO, on a timely
basis and during the period in which this Quarterly Report on Form 10-Q was
being prepared.

        Limitations on the Effectiveness of Controls. Our management, including
the CEO and CFO, does not expect that our disclosure controls and procedures or
our internal control over financial reporting will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, as opposed to absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, a system of controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. Accordingly, our disclosure


                                       34
<PAGE>
controls and procedures are designed to provide reasonable, not absolute,
assurance that the objectives of our disclosure control system are met.

        Changes in Internal Control Over Financial Reporting. There were no
changes in our internal control over financial reporting (as defined in Rule
13(a)-15(f)) under the Exchange Act identified in connection with the evaluation
of such internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.


                                       35
<PAGE>
                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

        On or about December 16, 2004, several purported shareholder class
action lawsuits were filed in the United States District Court for the Eastern
District of New York against us, certain of our current and former executive
officers (Colin Goddard, Robert L. Van Nostrand, Gabriel Leung and Nicole
Onetto) and the members of our Board of Directors. The lawsuits were brought on
behalf of those who purchased or otherwise acquired our common stock during
certain periods in 2004, which periods differ in the various complaints. The
complaints allege that defendants have made material misstatements concerning
the survival benefit associated with our product, Tarceva and the size of the
potential market of Tarceva upon FDA approval of the drug. The complaints allege
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. The complaints seek unspecified compensatory damages and
other relief. We intend to vigorously defend these actions.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

        On April 14, 2005, we completed the acquisition of all of the minority
interest shares of our then majority owned UK-based diabetes and obesity
subsidiary, Prosidion Limited. We issued a total of 84,940 shares of OSI common
stock, $0.01 par value, to the minority shareholders of Prosidion in exchange
for 286,200 shares of their Prosidion common stock. The exchange was exempt from
the registration requirements of the Securities Act of 1933, as amended, or the
Act, pursuant to (i) Regulation S promulgated under the Act for those minority
shareholders who were not U.S. persons as defined under Regulation S and (ii)
Regulation D promulgated under the Act for all other minority shareholders.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

        Not applicable.

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

        Not applicable.

ITEM 5.  OTHER INFORMATION

        Not applicable.

ITEM 6.  EXHIBITS

<TABLE>
<S>         <C>
      3.1   Certificate of Incorporation, as amended, filed by OSI
            Pharmaceuticals, Inc. as an exhibit to the Form 10-K for the fiscal
            year ended September 30, 2001 (file no. 000-15190), and incorporated
            herein by reference.
</TABLE>


                                       36
<PAGE>
<TABLE>
<S>         <C>
      3.2   Amended and Restated Bylaws, filed by OSI Pharmaceuticals, Inc. as
            an exhibit to the Form 10-K for the fiscal year ended September 30,
            2001 (file no. 000-15190), and incorporated herein by reference.

      10.1* Deed of Share Purchase Agreement between OSI Pharmaceuticals, Inc.
            and Dr. Daryl Granner, dated April 14, 2005, filed by OSI
            Pharmaceuticals, Inc. as an exhibit to the Form 8-K, dated April 14,
            2005 (file no. 000-15190), and incorporated herein by reference.

      10.2* Amended and Restated Stock Incentive Plan Stock Award Agreement
            between OSI Pharmaceuticals, Inc. and Dr. Daryl Granner, dated April
            14, 2005, filed by OSI Pharmaceuticals, Inc. as an exhibit to the
            Form 8-K, dated April 14, 2005 (file no. 000-15190), and
            incorporated herein by reference.

      10.3* Restricted Stock Agreement, dated May 31, 2005, by and between OSI
            Pharmaceuticals, Inc. and Michael G. Atieh. (Filed herewith)

      10.4* Amended and Restated Employment Agreement, dated May 31, 2005, by
            and between OSI Pharmaceuticals, Inc. and Michael G. Atieh. (Filed
            herewith)

      10.5* Form of Non-Qualified Stock Option Agreement issued under the
            Amended and Restated Stock Incentive Plan for employees of OSI
            Pharmaceuticals, Inc. (Filed herewith)

      10.6* Compensatory Arrangements of Executive Officers, as amended. (Filed
            herewith)

      10.7  Amendment No. 2 to OSI Pharmaceuticals, Inc. Amended and Restated
            Stock Incentive Plan. (Filed herewith)

      31.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
            or 15d-14(a). (Filed herewith)

      31.2  Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
            or 15d-14(a). (Filed herewith)

      32.1  Certification of Chief Executive Officer pursuant to 18
            U.S.C. Section 1350. (Filed herewith)

      32.2  Certification of Chief Financial Officer pursuant to 18
            U.S.C. Section 1350. (Filed herewith)
</TABLE>

--------

*    Indicates a management contract or compensatory plan, contract or
     arrangement in which a director or executive officers participate.


                                       37
<PAGE>
                                   SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.



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



Date:  August 9, 2005               /s/ Colin Goddard, Ph.D.
                                    --------------------------------------------
                                            Colin Goddard, Ph.D.
                                            Chief Executive Officer



Date:  August 9, 2005               /s/ Michael G. Atieh
                                    --------------------------------------------
                                            Michael G. Atieh
                                            Executive Vice President and Chief
                                            Financial Officer (Principal
                                            Financial Officer)


                                       38
<PAGE>
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
-------

<S>         <C>
      3.1   Certificate of Incorporation, as amended, filed by OSI
            Pharmaceuticals, Inc. as an exhibit to the Form 10-K for the fiscal
            year ended September 30, 2001 (file no. 000-15190), and incorporated
            herein by reference.

      3.2   Amended and Restated Bylaws, filed by OSI Pharmaceuticals, Inc. as
            an exhibit to the Form 10-K for the fiscal year ended September 30,
            2001 (file no. 000-15190), and incorporated herein by reference.

      10.1* Deed of Share Purchase Agreement between OSI Pharmaceuticals, Inc.
            and Dr. Daryl Granner, dated April 14, 2005, filed by OSI
            Pharmaceuticals, Inc. as an exhibit to the Form 8-K, dated April 14,
            2005 (file no. 000-15190), and incorporated herein by reference.

      10.2* Amended and Restated Stock Incentive Plan Stock Award Agreement
            between OSI Pharmaceuticals, Inc. and Dr. Daryl Granner, dated April
            14, 2005, filed by OSI Pharmaceuticals, Inc. as an exhibit to the
            Form 8-K, dated April 14, 2005 (file no. 000-15190), and
            incorporated herein by reference.

      10.3* Restricted Stock Agreement, dated May 31, 2005, by and between OSI
            Pharmaceuticals, Inc. and Michael G. Atieh. (Filed herewith)

      10.4* Amended and Restated Employment Agreement, dated May 31, 2005, by
            and between OSI Pharmaceuticals, Inc. and Michael G. Atieh. (Filed
            herewith)

      10.5* Form of Non-Qualified Stock Option Agreement issued under the
            Amended and Restated Stock Incentive Plan for employees of OSI
            Pharmaceuticals, Inc. (Filed herewith)

      10.6* Compensatory Arrangements of Executive Officers, as amended. (Filed
            herewith)

      10.7  Amendment No. 2 to OSI Pharmaceuticals, Inc. Amended and Restated
            Stock Incentive Plan. (Filed herewith)

      31.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
            or 15d-14(a). (Filed herewith)

      31.2  Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
            or 15d-14(a). (Filed herewith)

      32.1  Certification of Chief Executive Officer pursuant to 18
            U.S.C. Section 1350. (Filed herewith)
</TABLE>
<PAGE>
<TABLE>
<S>         <C>
      32.2  Certification of Chief Financial Officer pursuant to 18
            U.S.C. Section 1350. (Filed herewith)
</TABLE>

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*    Indicates a management contract or compensatory plan, contract or
     arrangement in which a director or executive officers participate.