<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, 2003          .
                                -----------------------------------

                                       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)

<TABLE>
<S>                                                        <C>
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)
</TABLE>

                                  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 31, 2003 the registrant had outstanding 39,184,863 shares of common
stock, $.01 par value.
<PAGE>
                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

<TABLE>
<S>                                                                                                                    <C>
PART I. FINANCIAL INFORMATION....................................................................................       1

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

                  Consolidated Balance Sheets -
                  June 30, 2003 (unaudited) and September 30, 2002...............................................       1

                  Consolidated Statements of Operations -
                  For The Three Months Ended June 30, 2003 and 2002..............................................       2

                  Consolidated Statements of Operations -
                  For The Nine Months Ended June 30, 2003 and 2002 (Unaudited)...................................       3

                  Consolidated Statements of Cash Flows -
                  For The Nine Months Ended June 30, 2003 and 2002 (Unaudited)...................................       4

                  Notes to Consolidated Financial Statements.....................................................       5


     Item 2.     Management's Discussion and Analysis of Financial Condition and Results of
                 Operations......................................................................................      17

     Item 3.     Quantitative and Qualitative Disclosures About Market Risk......................................      34

     Item 4.     Controls and Procedures.........................................................................      35

PART II. OTHER INFORMATION.......................................................................................      37

     Item 1.     Legal Proceedings...............................................................................      37

     Item 2.     Changes in Securities and Use of Proceeds.......................................................      37

     Item 3.     Defaults Upon Senior Securities.................................................................      37

     Item 4.     Submission of Matters to a Vote of Security Holders.............................................      37

     Item 5.     Other Information...............................................................................      37

     Item 6.     Exhibits and Reports on Form 8-K................................................................      37

SIGNATURES.......................................................................................................      39

EXHIBIT INDEX....................................................................................................      40
</TABLE>

                                       i
<PAGE>
                         PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                          JUNE 30,      SEPTEMBER 30,
                                                                                           2003             2002
                                                                                        -----------     -------------
                                                                                        (UNAUDITED)
<S>                                                                                     <C>             <C>
                                       ASSETS

Current assets:
     Cash and cash equivalents ....................................................      $  58,212       $ 152,578
     Investment securities ........................................................        262,411         304,388
     Restricted investment securities - short-term ................................          7,963           7,938
     Receivables, including amounts due from related parties of $2,918 and $3,000
         at June 30, 2003 and September 30, 2002, respectively ....................          9,507           3,253
     Interest receivable ..........................................................          2,106           3,728
     Inventory ....................................................................          3,576              --
     Prepaid expenses and other current assets ....................................          5,984           3,873
                                                                                         ---------       ---------
              Total current assets ................................................        349,759         475,758
Restricted investment securities - long-term ......................................          8,499          11,373
Property, equipment and leasehold improvements - net ..............................         42,023          46,175
Debt issuance costs - net .........................................................          4,536           5,145
Goodwill ..........................................................................         38,800          38,648
Other intangible assets - net .....................................................         70,632             458
Other assets ......................................................................          2,688           1,487
                                                                                         ---------       ---------
                                                                                         $ 516,937       $ 579,044
                                                                                         =========       =========
                        LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued expenses, including amounts due to related
         parties of $5,914 and $2,190 at June 30, 2003 and September 30, 2002,
         respectively .............................................................      $  40,497       $  22,062
     Unearned revenue - current, including amounts received in advance from related
         parties of $5,000 and $7,687 as of June 30, 2003 and September 30, 2002,
         respectively..............................................................          5,973           8,613
     Loans and capital leases payable - current ...................................            109             527
                                                                                         ---------       ---------
              Total current liabilities ...........................................         46,579          31,202
Other liabilities:
     Unearned revenue - long-term, representing amounts received in advance from
         related parties...........................................................          2,500           6,250
     Convertible senior subordinated notes, and loans and capital leases
        payable-long-term..........................................................        160,012         160,014
     Contingent value rights (see note 5(a)) ......................................         22,047              --
     Accrued post-retirement benefit cost .........................................          2,992           2,470
                                                                                         ---------       ---------
              Total liabilities ...................................................        234,130         199,936
                                                                                         ---------       ---------
Stockholders' equity:
     Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
         June 30, 2003 and September 30, 2002 .....................................             --              --
     Common stock, $.01 par value; 200,000 shares authorized, 40,016 and 37,335
         shares issued at June 30, 2003 and September 30, 2002, respectively.......            400             373
     Additional paid-in capital ...................................................        744,280         708,435
     Deferred compensation ........................................................           (348)            (49)
     Accumulated deficit ..........................................................       (456,610)       (324,223)
     Accumulated other comprehensive income .......................................          1,518           1,005
                                                                                         ---------       ---------
                                                                                           289,240         385,541
Less:  treasury stock, at cost; 940 shares at June 30, 2003 and
         September 30, 2002........................................................         (6,433)         (6,433)
                                                                                         ---------       ---------
              Total stockholders' equity ..........................................        282,807         379,108
                                                                                         ---------       ---------
Commitments and contingencies
                                                                                         $ 516,937       $ 579,044
                                                                                         =========       =========
</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,
                                                                     -----------------------
                                                                       2003           2002
                                                                     --------       --------
<S>                                                                  <C>            <C>
Revenues:
   Sales commissions ..........................................      $  5,491       $     --
   Product sales ..............................................           145             --
   License and other revenues, including $1,250 and $2,083
      from related parties in 2003 and 2002, respectively .....         1,519          2,537
   Collaborative program revenues, including $818 from related
      parties in 2002 .........................................           867          1,974
                                                                     --------       --------
                                                                        8,022          4,511
Expenses:
   Cost of product sales ......................................            55             --
   Research and development ...................................        24,301         25,805
   Acquired in-process research and development (see note 5(a))        31,290             --
   Selling, general and administrative ........................        23,336          8,977
   Amortization of intangibles ................................         3,922            315
                                                                     --------       --------
                                                                       82,904         35,097
                                                                     --------       --------

         Loss from operations .................................       (74,882)       (30,586)

Other income (expense):
   Investment income - net ....................................         1,567          3,475
   Interest expense ...........................................        (1,605)        (2,011)
   Other expense - net ........................................          (198)          (317)
                                                                     --------       --------

Net loss ......................................................      $(75,118)      $(29,439)
                                                                     ========       ========

Weighted average shares of common stock outstanding ...........        36,992         36,292
                                                                     ========       ========

Basic and diluted net loss per common share ...................      $  (2.03)      $  (0.81)
                                                                     ========       ========
</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>
                                                                                      NINE MONTHS ENDED
                                                                                          JUNE 30,
                                                                                 -------------------------
                                                                                     2003          2002
                                                                                 ---------       ---------
<S>                                                                              <C>             <C>
Revenues:
   Sales commissions ......................................................      $   6,378       $      --
   Product sales ..........................................................            145              --
   License and other revenues, including $3,750 and $6,250
      from related parties in 2003 and 2002, respectively .................          4,478           8,042
   Collaborative program revenues, including $6,187 and $6,011 from related
      parties in 2003 and 2002, respectively ..............................          9,085           9,131
                                                                                 ---------       ---------
                                                                                    20,086          17,173
                                                                                 ---------       ---------
Expenses:
   Cost of product sales ..................................................             55              --
   Research and development ...............................................         76,297          69,584
   Acquired in-process research and development (see note 5) ..............         31,290         130,200
   Selling, general and administrative ....................................         41,496          21,105
   Amortization of intangibles ............................................          4,666             930
                                                                                 ---------       ---------
                                                                                   153,804         221,819
                                                                                 ---------       ---------

         Loss from operations .............................................       (133,718)       (204,646)

Other income (expense):
   Investment income - net ................................................          6,469          11,514
   Interest expense .......................................................         (4,817)         (3,359)
   Other income (expense) - net ...........................................           (321)            155
                                                                                 ---------       ---------

Net loss ..................................................................      $(132,387)      $(196,336)
                                                                                 =========       =========


Weighted average shares of common stock outstanding .......................         36,618          35,855
                                                                                 =========       =========

Basic and diluted net loss per common share ...............................      $   (3.62)      $   (5.48)
                                                                                 =========       =========
</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>
                                                                                      NINE MONTHS ENDED
                                                                                            JUNE 30,
                                                                                       2003           2002
                                                                                    ---------       ---------
<S>                                                                                 <C>             <C>
Cash flow from operating activities:
   Net loss ..................................................................      $(132,387)      $(196,336)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Gain on sale of diagnostic business ....................................             --          (1,000)
      Loss (gain) on sale of investments .....................................           (391)            186
      Loss on sale and disposal of equipment .................................             26               6
      Depreciation and amortization ..........................................         13,564           7,447
      In-process research and development charge on acquisitions .............         31,290         130,200
      Non-cash compensation charges ..........................................            580           1,708
   Changes in assets and liabilities, net of effects of acquisitions:
      Receivables ............................................................         (4,594)          2,760
      Inventory ..............................................................           (604)             --
      Prepaid expenses and other current assets ..............................         (1,640)         (2,579)
      Other assets ...........................................................             53             227
      Accounts payable and accrued expenses ..................................          7,273            (394)
      Unearned revenue .......................................................         (7,058)         (7,581)
      Accrued post-retirement benefit cost ...................................            522             303
                                                                                    ---------       ---------
Net cash used in operating activities ........................................        (93,366)        (65,053)
                                                                                    ---------       ---------

Cash flows from investing activities:
   Payments for acquisitions, net of cash acquired ...........................           (193)       (135,742)
   Payments for acquisition of marketing rights ..............................        (46,009)             --
   Net proceeds from sale of diagnostic business .............................             --           1,000
   Purchases of investments (restricted and unrestricted) ....................       (344,543)       (329,432)
   Maturities and sales of investments (restricted and unrestricted) .........        389,086         312,913
   Net additions to property, equipment and leasehold improvements ...........         (2,571)        (13,632)
   Additions to compound library assets ......................................           (206)             --
   Investments in privately-owned companies ..................................           (130)           (770)
                                                                                    ---------       ---------
Net cash used in investing activities ........................................         (4,566)       (165,663)
                                                                                    ---------       ---------

Cash flows from financing activities:
   Proceeds from issuance of convertible senior subordinated notes ...........             --         200,000
   Debt issuance costs .......................................................             --          (6,974)
   Proceeds from exercise of stock options, stock warrants and
      employee stock purchase plan ...........................................          4,017           5,505
   Payments on loans and capital leases - net ................................           (495)           (432)
                                                                                    ---------       ---------
Net cash provided by financing activities ....................................          3,522         198,099
                                                                                    ---------       ---------

Net decrease in cash and cash equivalents ....................................        (94,410)        (32,617)
Effect of exchange rate changes on cash and cash equivalents .................             44            (263)
Cash and cash equivalents at beginning of year ...............................        152,578         225,150
                                                                                    ---------       ---------
Cash and cash equivalents at end of period ...................................      $  58,212       $ 192,270
                                                                                    =========       =========

Non-cash activities:
   Issuance of common stock to employees .....................................      $      91       $     450
                                                                                    =========       =========
   Issuance of common stock to directors .....................................      $     488       $      --
                                                                                    =========       =========
   Issuance of common stock to consultants ...................................            286              --
                                                                                    =========       =========
   Issuance of common stock in connection with acquisition ...................      $  31,245       $  40,000
                                                                                    =========       =========
   Issuance of contingent value rights in connection with acquisition ........      $  22,047       $      --
                                                                                    =========       =========
   Issuance of warrants in connection with acquisition .......................      $     146       $      --
                                                                                    =========       =========
   Issuance of common stock in satisfaction of deferred acquisition costs ....      $      --       $     375
                                                                                    =========       =========

   Cash paid for interest ....................................................      $   3,221       $      38
                                                                                    =========       =========
</TABLE>

          See accompanying notes to consolidated financial statements.

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

(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 ("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 (consisting
of only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended June
30, 2003 and cash flows for the nine months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2003. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Annual Report on Form
10-K (the "Form 10-K"), as amended, relating to OSI Pharmaceuticals, Inc. and
subsidiaries (the "Company") for the fiscal year ended September 30, 2002.
Certain reclassifications have been made to the prior period financial
statements to conform them to the current presentation.

(2)      Revenue Recognition

         Sales commissions represent commissions earned on the sales of the
drug, Novantrone(R) (mitoxantrone for injection concentrate), in the United
States for oncology indications pursuant to a Co-Promotion Agreement dated March
11, 2003 with Ares Trading S.A., an affiliate of Serono S.A. ("Serono"). Under
the agreement, the Company has the exclusive rights to market and promote the
drug for approved oncology indications in the United States. The drug is also
approved for advanced forms of multiple sclerosis. Serono will continue to be
responsible for the marketing of the multiple sclerosis indication of
Novantrone(R) and will record all U.S. sales for all indications including
oncology indications. Sales commissions from Novantrone(R) are recognized based
on estimated net oncology sales in the period the sales occur. Sales commissions
may be subject to further adjustment based on final information regarding the
split between oncology and multiple sclerosis sales of Novantrone(R), as
determined by an independent third party.

         Product sales represent sales of Gelclair(TM) Concentrated Oral Gel
("Gelclair") in accordance with an exclusive distribution agreement with
Sinclair Pharmaceuticals, Ltd. ("Sinclair") to promote and distribute
Gelclair(TM) in North America. The Company acquired the rights under this
agreement on June 12, 2003 in connection with the acquisition of Cell Pathways,
Inc. ("Cell Pathways"). Subsequently, Sinclair licensed its worldwide rights to
Gelclair(TM) to Helsinn Healthcare S.A. in July 2003. In accordance with SFAS
No. 48, "Revenue Recognition When Right of Return Exists", given the limited
sales history of Gelclair(TM), the Company at this time defers the recognition
of revenue on product shipments of Gelclair(TM) to wholesale customers until
such time as the product is prescribed to the end user.

                                      -5-
<PAGE>
For each reporting period, the Company monitors shipments from wholesale
customers to pharmacies and hospitals, wholesale customer reorder history and
prescriptions filled by pharmacies based on prescription data from external,
independent sources. When this data shows a flow of product through the supply
chain to the end user, which indicates that returns are less likely to occur,
product sales are recognized. 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 7). The unearned revenue related to
shipments of Gelclair(TM) to wholesale customers was $538,000 as of June 30,
2003.

         The Company accounts for upfront nonrefundable technology access and
other upfront fees over the term of the related research and development
collaboration period 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. The Company received a total
of $25.0 million in upfront fees from Genentech, Inc. and Roche in January 2001
which was originally being recognized on a straight-line basis evenly over the
expected three-year term of the Company's required research and development
efforts under the terms of the agreement. In the fourth quarter of fiscal 2002,
the expected term was changed to four years to reflect the Company's revised
estimate of the term of the continued involvement in the research and
development efforts under the Tripartite Agreement with Genentech and Roche. In
accordance with Accounting Principle Board Opinion No. 20, "Accounting Changes,"
the remaining unearned revenue is being recognized prospectively over the
revised term. As a result, the Company recorded revenues of $1.3 million and
$3.8 million for the three and nine months ended June 30, 2003, respectively.

         Collaborative program revenues represent funding arrangements for
research and development in the field of biotechnology and are recognized when
earned in accordance with the terms of the contracts and related research and
development activities undertaken.

(3)      Stock Options

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by SFAS No. 123, "Accounting for Stock-Based Compensation."
Additionally, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure in both the annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. The Company adopted the disclosure portion
of this statement in the fiscal quarter ended March 31, 2003. The FASB recently
decided that they will require stock-based employee compensation to be recorded
as a charge to earnings beginning as early as 2004.

         Stock option grants are generally set at the closing price of the
Company's common stock on the date of grant and the related number of shares
granted are fixed at that point in time. Under the principles of APB Opinion No.
25, the Company does not recognize compensation expense associated with the
grant of stock options. SFAS No. 123 requires the

                                      -6-
<PAGE>
use of option valuation models to determine the fair value of options granted
after 1995. Pro forma information regarding net loss and net loss per share
shown below was determined as if the Company had accounted for its employee
stock options and shares sold under its stock purchase plan under the fair value
method set forth in SFAS No. 123.

         The fair value of the options was estimated at the date of grant using
a Black-Scholes option pricing model. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized over the options' vesting
periods. The Company's pro forma information is as follows (in thousands, except
per share information):

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED                    NINE MONTHS ENDED
                                                       JUNE 30,                             JUNE 30,
                                              -----------------------------       -----------------------------
                                                 2003               2002             2003               2002
                                              -----------       -----------       -----------       -----------
<S>                                           <C>               <C>               <C>               <C>
Net loss ...............................      $   (75,118)      $   (29,439)      $  (132,387)      $  (196,336)
Compensation cost determined under fair
   value method ........................      $    (5,033)      $    (4,606)      $   (14,334)      $   (12,590)
                                              -----------       -----------       -----------       -----------

Pro forma net loss .....................      $   (80,151)      $   (34,045)      $  (146,721)      $  (208,926)
                                              ===========       ===========       ===========       ===========

Basic and diluted loss per common share:

   Net loss ............................      $     (2.03)      $     (0.81)      $     (3.62)      $     (5.48)
   Compensation cost ...................      $     (0.14)      $     (0.13)      $     (0.39)      $     (0.35)
                                              -----------       -----------       -----------       -----------
   Pro forma net loss ..................      $     (2.17)      $     (0.94)      $     (4.01)      $     (5.83)
                                              ===========       ===========       ===========       ===========
</TABLE>

(4)      Co-Promotion Agreement

         On March 11, 2003, the Company entered into the Co-Promotion Agreement
with Serono to market and promote Novantrone(R) for approved oncology
indications in the United States through December 2017. In consideration for
these exclusive rights, the Company paid $45.0 million in cash. This payment and
related professional fees are included in other intangible assets in the
accompanying consolidated balance sheet as of June 30, 2003 and are being
amortized on a straight-line basis through expiration of the Novantrone(R)
patent in April 2006. In consideration for certain transition services required
to be provided by Serono, the Company also paid a fee of $10.0 million, which
was included in prepaid expenses and other current assets, and is being
recognized over a four-month transition period from the effective date of the
agreement. Under the terms of the agreement, the Company will also pay quarterly
maintenance fees to Serono until the later of the expiration of the last valid
patent claim or the first generic date, as defined in the agreement. Such
maintenance fees will be expensed as incurred. The Company receives commissions
on net sales of Novantrone(R) in the United States for oncology indications.

                                      -7-
<PAGE>
(5)      Acquisitions

(a) Cell Pathways, Inc.

         On June 12, 2003, the Company completed its acquisition of Cell
Pathways pursuant to the terms of an Agreement and Plan of Merger dated February
7, 2003. The acquisition was structured as a merger of a wholly-owned subsidiary
of the Company with and into Cell Pathways. The resulting subsidiary of the
Company was merged with and into the Company on July 14, 2003. Cell Pathways was
a development stage biotechnology company focused on the research and
development of products to treat and prevent cancer, and the future
commercialization of such products.

         The assets purchased and liabilities assumed by the Company included:
(a) two drug candidates in clinical development, Aptosyn(R) (exisulind) and
OSI-461 (formerly CP461), and the related technology platform and patent estate;
(b) exclusive distribution rights to a marketed product, Gelclair(TM), in North
America; (c) rights to Cell Pathways' leased facility in Horsham, Pennsylvania,
as well as leasehold improvements and certain equipment; (d) inventory; and (e)
certain other assets and liabilities. The Company also retained three Cell
Pathways employees and entered into consulting agreements with former Cell
Pathways employees. Certain of these agreements also provide, at the Company's
discretion based on the successful integration of Cell Pathway's assets,
the forgiveness of loans to these employees, which were acquired in the
acquisition. The results of operations of Cell Pathways have been included in
the consolidated statements of operations commencing as of June 12, 2003.

         Cell Pathways marketed and sold Gelclair(TM), the manufacturing rights
of which were held by Sinclair. Gelclair(TM) is a bio-adherent oral gel that
provides relief for the treatment of pain associated with oral mucositis, a
debilitating side effect often seen in patients undergoing chemotherapy or
radiation treatment. In January 2002, Cell Pathways entered into a ten-year
exclusive distribution agreement with Sinclair to promote and distribute
Gelclair(TM) in North America (United States, Canada and Mexico). Sinclair
licensed its worldwide rights to Gelclair(TM) to Helsinn Healthcare S.A. in July
2003. Cell Pathways entered into a four-year marketing agreement with John O.
Butler Company ("Butler"), underwhich Butler markets Gelclair(TM) to the dental
market within the United States and will market in Canada if and when
Gelclair(TM) is approved for marketing in Canada. In October 2002, Cell Pathways
entered into a three-year agreement with Celgene Corporation ("Celgene") for the
promotion of Gelclair(TM), primarily in the U.S. oncology market. On June 12,
2003, the Company entered into an agreement with Celgene by which the Company
recovered full rights to market and promote Gelclair(TM) in the oncology setting
in North America. This agreement requires the Company to make payments to
Celgene upon the return of certain sales and marketing data and upon the first
anniversary of the effective date provided the transition services, as defined
in the agreement, have been provided to the Company. The agreement also provides
for a milestone payment to Celgene upon the achievement of a specified amount of
net sales of Gelclair(TM).

         As consideration for the merger, each share of Cell Pathways common
stock was exchanged for (i) 0.0567 shares of the Company's common stock and (ii)
a contingent value

                                      -8-
<PAGE>
right to receive 0.04 shares of the Company's common stock in the event a new
drug application is accepted for filing with the U.S. Food and Drug
Administration by June 12, 2008 for either of the two newly acquired clinical
candidates, Aptosyn(R) or OSI-461. Based on the exchange ratio of 0.0567,
approximately 2.2 million shares of the Company's common stock were issued to
Cell Pathways' stockholders in connection with the merger. The 2.2 million
common shares were valued at $31.2 million which was based on the average
five-day closing price of the Company's common stock around the date of the
announcement of the merger which occurred on February 10, 2003. Any outstanding
options that were not exercised prior to the effective date of the merger were,
in accordance with their terms, terminated. The Company assumed approximately
44,000 outstanding and unexercised warrants to purchase shares of Cell Pathways
common stock under the same terms and conditions as the original Cell Pathways'
warrants except that the exercise price of the warrants and the number of shares
of the Company's common stock for which the warrants are exercisable were
adjusted based on the exchange ratio described above.

         The acquisition was accounted for under the purchase method of
accounting. The purchase price was allocated to the acquired assets and assumed
liabilities based on the fair values as of the date of the acquisition. The
excess of the fair value of the net identifiable assets acquired over the
purchase price paid represented negative goodwill of approximately $49.3
million. Since a portion of the negative goodwill is a result of not recognizing
contingent consideration (i.e., the contingent value rights), the maximum value
of the contingent value rights at the date of the acquisition has been recorded
as if it were a liability, thereby reducing the negative goodwill. The value of
the contingent value rights of $22.0 million was based on the average five day
closing price of the Company's common stock around the date of the announcement
of the merger which occurred on February 10, 2003. The remaining negative
goodwill of $27.3 million was allocated proportionately to reduce the value of
the non-current assets acquired and the in-process research and development
which was charged to operations.

The preliminary purchase price was allocated as follows (in thousands):

<TABLE>
<S>                                                        <C>
Acquired in-process R&D .............................      $ 31,290
Gelclair(TM) rights .................................        28,809
Inventory ...........................................         2,972
Fixed assets ........................................           400
Cash ................................................         1,791
Prepaid expenses and other assets ...................         1,420
                                                           --------
Total assets and acquired in-process R&D ............        66,682
Less liabilities assumed ............................       (11,677)
                                                           --------
Common stock & contingent rights issued and cash paid      $ 55,005
                                                           ========
</TABLE>

         The value assigned to the acquired in-process R&D was determined by
identifying those 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 valued at $31.3
million after the allocation of the negative goodwill, expensed on the
acquisition date, and included in the accompanying consolidated statements of
operations for the three and nine

                                      -9-
<PAGE>
months ended June 30, 2003. The portion of the purchase price assigned to the
acquired in-process R&D was allocated to the following two clinical candidates:
Apotsyn(R) ($3.7 million), currently in a Phase III trial in combination with
Taxotere(R) for the treatment of advanced non-small cell lung cancer, and
OSI-461 ($27.6 million), a more potent, second-generation molecule that is
currently being evaluated in dose ranging Phase I studies and a series of
exploratory Phase II studies in chronic lymphocytic leukemia, renal cell
carcinoma and prostate cancer. In addition, OSI-461 is being evaluated in a
Phase II study for inflammatory bowel disease where there has been encouraging
initial indications of activity in the form of symptom improvement and a
remission.

         The value of the acquired in-process R&D was determined by estimating
the projected net cash flows related to products under development, based upon
the future revenues to be earned upon commercialization of such products. In
determining the value of the in-process R&D, the assumed commercialization dates
for these products ranged from 2005 to 2006. 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 each compound's stage of
development at the time of assessment and the historical probability of
successful advancement for compounds at that stage. These modeled cash flows
were discounted back to their 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 projects. The value of the in-process R&D was
based on the income approach that focuses on the income-producing capability of
the assets. 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 each of the two projects; future
revenues; growth rates for each product; 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 25% to
reflect present value.

(b) Gilead's Oncology Assets

         On December 21, 2001, the Company acquired certain assets from Gilead,
pursuant to the terms of an Asset Purchase Agreement dated as of November 26,
2001. The results of operations of Gilead's oncology assets have been included
in the consolidated statement of operations commencing as of the date of the
closing. In consideration for the assets, the Company paid $135.7 million, which
includes professional fees and the assumption of certain liabilities, and issued
925,000 shares of common stock, valued at $40.0 million.

         The acquisition was accounted for under the purchase method of
accounting. The purchase price was allocated to the acquired assets and
liabilities assumed based on the fair values as of the date of the acquisition.
The value assigned to the acquired in-process R&D was determined by identifying
those acquired in-process research projects for which: (a) technological
feasibility had not been established at the acquisition date, (b) there was no

                                      -10-
<PAGE>
alternative future use, and (c) the fair value was estimable based on reasonable
assumptions. The acquired in-process R&D was valued at $130.2 million and
expensed at the acquisition date and is included in the accompanying
consolidated statement of operations for the nine months ended June 30, 2002.

(c) Unaudited Pro Forma Financial Information

         The following unaudited pro forma financial information presents a
summary of the consolidated results of operations of the Company for the three
and nine months ended June 30, 2003 and 2002, assuming the (i) Cell Pathways
acquisition had taken place as of April 1, 2003 and 2002, respectively, and
October 1, 2002 and 2001, respectively, and (ii) the acquisition of certain
assets from Gilead Sciences, Inc. ("Gilead") had taken place as of October 1,
2001 (in thousands, except per share information):

<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED            NINE MONTHS ENDED
                                                                          JUNE 30,                     JUNE 30,
                                                                  -----------------------       ------------------------
                                                                    2003           2002           2003          2002
                                                                  --------       --------       ---------       --------
<S>                                                               <C>            <C>            <C>             <C>
Revenues ...................................................      $  8,433       $  4,814       $  21,467       $ 17,795
Loss before non-recurring charge related to the
   acquisitions ............................................      $(54,245)      $(31,228)      $(122,832)      $(97,648)
Basic and diluted loss per share before non-recurring charge
   related to acquisitions .................................      $  (1.40)      $  (0.81)      $   (3.17)      $  (2.54)
</TABLE>

         The unaudited pro forma financial information has been prepared for
comparative purposes only. The pro forma information includes the historical
unaudited results of Cell Pathways and certain assets from Gilead for the
respective periods. The pro forma financial information includes adjustments to
the Company's historical results to reflect the issuance of approximately 2.2
million shares of common stock and excludes the non-recurring charge of $31.3
million related to the acquired in-process R&D related to Cell Pathways and the
issuance of 925,000 shares of common stock and the charge of $130.2 million
related to the acquired in process R&D related to Gilead. The pro forma
information does not purport to be indicative of operating results that would
have been achieved had the acquisition taken place on the dates indicated or the
results that may be obtained in the future.

(6)      Restricted Assets

         With respect to the convertible senior subordinated notes issued in
February 2002, the Company originally pledged $22.9 million of U.S. government
securities (the "Restricted Investment Securities") with maturities at various
dates through November 2004. The aggregate amortized cost of the Restricted
Investment Securities at June 30, 2003 and September 30, 2002 was $16.5 million
and $19.3 million, respectively.

         With respect to the Company's facility leases at Oxford, England, and
Horsham, Pennsylvania, which was assumed in connection with our acquisition of
Cell Pathways (see note 5(a)), the Company has outstanding letters of credit
issued by a commercial bank. The

                                      -11-
<PAGE>
collateral for these letters of credit are maintained in a restricted investment
account. Included in cash and cash equivalents as of June 30, 2003 is $760,000,
relating to restricted cash to secure these letters of credit. Included in
investment securities as of June 30, 2003 and September 30, 2002 is $2.7 million
and $3.0 million, respectively, relating to restricted investments to secure
these letters of credit.

(7)      Inventory

         Inventory is comprised solely of Gelclair(TM) and is stated at the
lower of cost or market, as determined using the first-in, first-out method.
Inventory at June 30, 2003 and September 30, 2002, consisted of the following
(in thousands):

<TABLE>
<CAPTION>
                                                                             JUNE 30,           SEPTEMBER 30,
                                                                              2003                 2002
                                                                             ------             -------------
<S>                                                                          <C>                <C>
Finished goods on hand........................................               $3,377                 -
Inventory subject to return...................................                  199                 -
                                                                             ------               ------
                                                                             $3,576                 -
                                                                             ======               ======
</TABLE>

         Inventory subject to return represents the amount of Gelclair(TM)
shipped to wholesale customers which has not been recognized as revenue (see
note 2).

(8)      Comprehensive Income (Loss)

         Comprehensive loss for the three and nine months ended June 30, 2003
and 2002 was as follows (in thousands):

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED             NINE MONTHS ENDED
                                                            JUNE 30,                     JUNE 30,
                                                    -----------------------       -------------------------
                                                      2003           2002           2003            2002
                                                    --------       --------       ---------       ---------
<S>                                                 <C>            <C>            <C>             <C>
Net loss .....................................      $(75,118)      $(29,439)      $(132,387)      $(196,336)
Other comprehensive income (loss):
     Foreign currency translation adjustments            850          1,090           1,146             434
     Unrealized holding gains (losses) arising
       during period .........................            89          1,405            (239)         (1,465)
     Less: Reclassification adjustment for
       (gains) losses realized in net loss ...           (53)            19            (394)            199
                                                    --------       --------       ---------       ---------
                                                         886          2,514             513            (832)
                                                    --------       --------       ---------       ---------
Total comprehensive loss .....................      $(74,232)      $(26,925)      $(131,874)      $(197,168)
                                                    ========       ========       =========       =========
</TABLE>


                                      -12-
<PAGE>
         The components of accumulated other comprehensive income were as
follows (in thousands):

<TABLE>
<CAPTION>
                                                              JUNE 30,                SEPTEMBER 30,
                                                               2003                      2002
                                                              ------                 -------------
<S>                                                           <C>                    <C>
Cumulative foreign currency translation adjustment            $  826                  $  (320)
Unrealized gains on available-for-sale securities                692                    1,325
                                                              ------                  -------
Accumulated other comprehensive income ...........            $1,518                  $ 1,005
                                                              ======                  =======
</TABLE>


(9)      Net Loss per Common Share

         A reconciliation between the numerators and the denominators of the
basic and diluted net loss per share computation is as follows (in thousands
except per share data):

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED                 NINE MONTHS ENDED
                                                            JUNE 30,                            JUNE 30,
                                                  -----------------------------       ---------------------------
                                                      2003              2002             2003              2002
                                                  -----------       -----------       -----------       ---------
<S>                                               <C>               <C>               <C>               <C>
Net loss available for common
   stockholders ............................      $   (75,118)      $   (29,439)      $  (132,387)      $(196,336)
                                                  ===========       ===========       ===========       =========
Weighted average common shares .............           36,992            36,292            36,618          35,855
Effect of common share equivalents .........               --                --                --              --
                                                  -----------       -----------       -----------       ---------
Weighted average common and potential common
   shares outstanding ......................           36,992            36,292            36,618          35,855
                                                  ===========       ===========       ===========       =========
Basic loss per share .......................      $     (2.03)      $     (0.81)      $     (3.62)      $   (5.48)
                                                  ===========       ===========       ===========       =========
Diluted loss per share .....................      $     (2.03)      $     (0.81)      $     (3.62)      $   (5.48)
                                                  ===========       ===========       ===========       =========
</TABLE>

         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
period. The diluted net loss per share presented excludes the effect of common
share equivalents (stock options, convertible debt and warrants) and contingent
shares pursuant to the contingent value rights since such inclusion in the
computation would be anti-dilutive. Such common share equivalents (stock
options, warrants and convertible debt, assuming all shares upon conversion
would be dilutive) amounted to 4.3 million and 4.1 million for the three and
nine months ended June 30, 2003, respectively. Such contingent shares amounted
to 1.6 million for the three and nine months ended June 30, 2003. Such common
share equivalents (stock options and convertible debt, assuming all shares upon
conversion would be dilutive) amounted to 5.6 million and 4.3 million for the
three and nine months ended June 30, 2002, respectively.

(10)     Consolidation of Facility

         In the fourth quarter of fiscal 2001, the Company announced its
strategic decision to close down its Birmingham, England facility. The
operations at the Birmingham, England facility ceased on March 31, 2002 and the
Company completed closing down the facility in April 2003. In March 2003, the
Company entered into a surrender agreement whereby the landlord released the
Company of its obligations under the remaining facility leases in

                                      -13-
<PAGE>
consideration for a payment of approximately $662,000. This payment was made in
April 2003. As a result of the terms of the surrender agreements, the Company
recorded an adjustment to reduce the restructuring reserve by $180,000 in March
2003. The facility leases had an original expiration date of January 2006.

         As of June 30, 2003, the remaining restructuring reserve relating to
the consolidation of the Birmingham, England facility was $95,000 relating to
non-cancelable lease exit costs. The consolidation activity for the nine months
ended June 30, 2003 was as follows (in thousands):

<TABLE>
<CAPTION>
                                           Lease Exit Costs
                                           ----------------
<S>                                        <C>
Balance at September 30, 2002 ..........      $ 1,630
Cash paid ..............................       (1,397)
Change in estimates ....................         (180)
Foreign currency translation adjustments           42
                                              -------
Balance at June 30, 2003 ...............      $    95
                                              =======
</TABLE>

(11)     Sale of Diagnostics Business

         On November 30, 1999, the Company sold assets of its diagnostics
business to The Bayer Corporation including the assets of the Company's
wholly-owned diagnostics subsidiary, OSDI, Inc., based in Cambridge,
Massachusetts. The assets sold included certain contracts, equipment and
machinery, files and records, intangible assets, intellectual property,
inventory, prepaid expenses and other assets primarily related to the operations
of the diagnostics business. Under the terms of the sale, the Company received a
contingent payment of $1.0 million in December 2001, which is included in other
income for the nine months ended June 30, 2002.

(12)     Accounting for Goodwill and Other Intangible Assets

         Effective October 1, 2002, the Company fully adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and
intangible assets determined to have indefinite lives no longer be amortized but
instead be tested for impairment at least annually and whenever events or
circumstances occur that indicate impairment might have occurred. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of." Under SFAS No. 121, intangible and other long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable.

         As of September 30, 2002, the Company's intangible assets were $39.1
million, consisting of $36.5 million of goodwill, $2.1 million of acquired
workforce, and $458,000 for a license to compound libraries. In accordance with
SFAS No. 142, the goodwill has not been amortized as it was acquired in
connection with the acquisition of certain oncology assets from Gilead, which
occurred after July 1, 2001. Upon full adoption of SFAS No. 142, acquired

                                      -14-
<PAGE>
workforce no longer meets the definition of an identifiable intangible asset. As
a result, the net balance of $2.1 million as of September 30, 2002 was
reclassified to goodwill. The carrying amount of goodwill as of June 30, 2003,
inclusive of the acquired workforce, was $38.8 million, which includes a
$152,000 effect from foreign currency exchange rate fluctuations during the
nine-month period ended June 30, 2003.

         As a result of its acquisition from Serono in March 2003 of the
exclusive rights to market and promote the drug Novantrone(R) for the approved
oncology indications in the United States, the Company recorded an intangible
asset of $46.0 million, which is being amortized over the remaining 37-month
life of the underlying patent.

         In connection with the acquisition of Cell Pathways, the Company
assumed the exclusive rights to market, sell and distribute Gelclair(TM) in
North America which Cell Pathways had acquired from Sinclair in January 2002 for
a period of ten years. The Company recorded an identifiable intangible asset of
$28.8 million which is being amortized over eight and a half years, the
remaining term of the agreement.

         As of June 30, 2003, the Company's identifiable intangible assets were
$70.6 million, consisting primarily of $41.7 million for the rights to market
and promote Novantrone(R) and $28.7 million for the rights to market, sell and
distribute Gelclair(TM). These identifiable intangible assets are subject to
amortization. The Company reassessed the useful life of the license to compound
libraries upon the adoption of SFAS No. 142 to make any necessary amortization
period adjustments. No adjustments resulted from this assessment. Amortization
expense for these intangible assets for the three and nine months ended June 30,
2003 was $3.9 million and $4.7 million, respectively. Amortization expense for
the three and nine months ended June 30, 2002 was $54,000 and $159,000,
respectively. Amortization expense is estimated to be $4.6 million for the
remainder of fiscal 2003, $18.5 million in fiscal 2004, $18.3 million in fiscal
2005, and $11.4 million in fiscal 2006.

         Under the non-amortization approach, goodwill and certain other
intangibles are not amortized into results of operations but instead are
reviewed for impairment, 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. The Company completed its impairment review
of goodwill during the first quarter of fiscal 2003 and determined that no
impairment charge was required upon adoption. A reconciliation of previously
reported net loss and net loss per share to the amounts adjusted for the
exclusion of acquired workforce amortization is as follows (in thousands except
per share data):

                                      -15-


<PAGE>

<TABLE>
<CAPTION>
                                           FOR THE THREE MONTHS ENDED          FOR THE NINE MONTHS ENDED
                                                    JUNE 30,                            JUNE 30,
                                         -----------------------------       -----------------------------
                                             2003              2002              2003              2002
                                         -----------       -----------       -----------       -----------
<S>                                      <C>               <C>               <C>               <C>
Net loss ..........................      $   (75,118)      $   (29,439)      $  (132,387)      $  (196,336)
Goodwill amortization .............               --                --                --                --
Acquired workforce amortization ...               --               261                --               773
                                         -----------       -----------       -----------       -----------
Adjusted net loss .................      $   (75,118)      $   (29,178)      $  (132,387)      $  (195,563)
                                         ===========       ===========       ===========       ===========
Reported basic and diluted net
   loss per share .................      $     (2.03)      $     (0.81)      $     (3.62)      $     (5.48)
Goodwill amortization per share ...      $        --       $        --       $        --       $        --
Acquired workforce amortization
   per share ......................      $        --       $      0.01       $        --       $      0.02
                                         -----------       -----------       -----------       -----------
Adjusted basic and diluted net loss
   per share ......................      $     (2.03)      $     (0.80)      $     (3.62)      $     (5.46)
                                         ===========       ===========       ===========       ===========
</TABLE>

(13)  Amendment to Stock Option Plan

      On December 11, 2002, the Board of Directors approved an amendment to the
2001 Incentive and Non-Qualified Stock Option Plan (the "Stock Option Plan").
The amendment to the Stock Option Plan only affected the automatic,
formula-based grants of non-qualified stock options to directors who are not
employees of the Company. Under the amended formula, each individual who becomes
a director on or after January 1, 2003 will receive an initial option to
purchase 50,000 shares of common stock upon his or her election to the Board.
Persons elected to the Board after June 13, 2001 but prior to January 1, 2003
were entitled to an initial grant of an option to purchase 30,000 shares of
common stock upon their initial election. All persons elected to the Board after
June 13, 2001 receive annual grants of options to purchase 7,500 shares upon
reelection to the Board. Persons elected to the Board prior to June 13, 2001
will continue to be eligible, upon reelection to the Board, for annual grants of
options to purchase shares of common stock in an amount which depends upon the
number of years of service as a director (20,000 shares reducing to 7,500
shares).

(14)  Amendment to the Stock Purchase Plan for the Non-Employee Directors

      On December 11, 2002, the Board of Directors approved an amendment to the
Company's Stock Purchase Plan for Non-Employee Directors which was adopted as of
March 25, 1996 (the "Stock Purchase Plan"). Pursuant to the amended Stock
Purchase Plan, fifty-percent of the annual retainer fee earned by each
non-employee director will be paid to the director in the form of a restricted
stock award. The restricted stock award will be made as of each annual
stockholder meeting at which directors are elected beginning with the Annual
Meeting of Stockholders which occurred on March 19, 2003. Annual restricted
stock awards will vest in monthly installments over the one-year term for which
the award is made. In the event a director's membership on the Board terminates
prior to the end of such one-year term, any unvested portion of the director's
restricted stock award will be forfeited. Shares of restricted stock awarded
annually may not be sold or transferred by the director until the first
anniversary of the date of grant of such award. Non-employee directors may elect
to receive the remaining fifty-percent of the director's annual retainer in the
form of shares of common stock under the Stock Purchase Plan as well.

                                      -16-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


THREE AND NINE MONTHS ENDED JUNE 30, 2003 AND 2002

OVERVIEW

      We are a leading biotechnology company focused on the discovery,
development and commercialization of high-quality oncology products that both
extend life and improve the quality-of-life for cancer patients worldwide. We
have established a balanced pipeline of oncology drug candidates that includes
both next-generation cytotoxic chemotherapy agents and novel mechanism-based,
gene-targeted therapies focused in the areas of signal transduction and
apoptosis. We currently have six proprietary candidates in clinical development
and two additional candidates in clinical development with Pfizer Inc. Over the
past two quarters we added to our oncology product portfolio the right to market
and promote Novantrone(R) for approved oncology indications in the United States
and Gelclair(TM) Concentrated Oral Gel in North America.

      Our most advanced drug candidate, Tarceva(TM) (erlotinib HCl), is a small
molecule inhibitor of the epidermal growth factor receptor, or HER1/EGFR. The
protein product of the HER1/EGFR gene is a receptor tyrosine kinase that is
over-expressed or mutated in many major solid tumors. We believe HER1/EGFR
inhibitors represent an exciting new class of relatively safe and well tolerated
anti-cancer agents that may have utility in treating a wide range of cancer
patients. Tarceva(TM) is an oral once-a-day small molecule drug designed to
specifically block the activity of the HER1/EGFR protein. Currently, we are
developing Tarceva(TM) in a global alliance with Genentech, Inc. and Roche. If
the drug receives regulatory approval, Genentech will lead the marketing effort
in the United States and Roche will market it in the rest of the world. We will
receive milestone payments from both Genentech and Roche, an equal profit share
from U.S. sales, and royalties on sales outside of the United States.
Tarceva(TM) has demonstrated encouraging indications of anti-tumor activity in
single-agent, open label Phase I and Phase II trials in non-small cell lung
cancer, broncioalveolar carcinoma ((BAC), a form of lung cancer), gliobastoma
multiforme (an aggressive form of brain cancer), head and neck cancer and
ovarian cancer. Tarceva(TM) is currently in Phase III clinical trials for
non-small cell lung cancer and pancreatic cancer. In January 2003, we announced
the completion of patient enrollment in the Phase III 2nd/3rd line non-small
cell lung and pancreatic cancer trials. The alliance has now completed target
enrollment in all four Phase III Tarceva(TM) trials, which involves a total of
approximately 3,500 patients. In April 2003, we announced that based on data
from a Phase I study in glioblastoma, we will continue with a comprehensive
Phase II program for this indication.

      Behind Tarceva(TM) we have an additional drug candidate in Phase III and
six drug candidates in earlier stages of clinical development. Aptosyn(R)
(exisulind), our second Phase III drug candidate, was acquired with the
acquisition of Cell Pathways, Inc. in June 2003 and is currently in a Phase III
trial in combination with Taxotere(R) for the treatment of advanced non-


                                      -17-
<PAGE>
small cell lung cancer. We consider Aptosyn(R) to be a higher risk prototype
drug candidate arising from the pro-apoptosis platform acquired from Cell
Pathways. The second acquired product candidate, OSI-461 (formerly CP461), is a
more potent second generation follow-on candidate in Phase I and Phase II
trials. Our earlier stage drug candidates include three next generation
cytotoxic chemotherapy agents (OSI-211, OSI-7904L and OSI-7836), which are being
developed by us, and two signal transduction inhibitors (CP547,632 and
CP-724,714) which are currently being developed by Pfizer. We will receive
royalty payments on the latter two if they are successfully commercialized. Our
next generation cytotoxic chemotherapy candidates are designed to improve upon
currently marketed products in the same drug class. OSI-211 is a liposomal
formulation of lurtotecan, a topoisomerase-I inhibitor, that is being developed
to compete with topotecan (Hycamtin(R)). OSI-7904L is a liposomal formulation of
a thymidylate synthase inhibitor, GW 1843, that is being developed as a
potential competitor to 5-Fluorouracil (5-FU) and capecitabine (Xeloda(R)).
OSI-7836 is a nucleoside analog being developed to compete with gemcitabine
(Gemzar(R)). OSI-211 is in Phase II clinical trials, and OSI-7904L and OSI-7836
are in Phase I clinical trials. We have committed to move OSI-7904L forward into
a Phase II program, with clinical trials in gastric cancer and combination Phase
Ib trials with cisplatin and oxalplatin. OSI-461 is a second-generation molecule
that is currently being evaluated in a dose ranging Phase I study and a series
of exploratory Phase II studies in chronic lymphocytic leukemia, renal cell
carcinoma and prostate cancer. Like Tarceva(TM), the two gene-targeted therapies
are receptor tyrosine kinase inhibitors. CP-547,632 is a small molecule
targeting the vascular endothelial growth factor receptor, or VEGFR, and
CP-724,714 is a small molecule targeting HER2/erbB2. Both agents are currently
in Phase I clinical trials.

      In order to support our clinical pipeline, we have established (through
acquisition and internal investment) a high quality oncology clinical
development and regulatory affairs capability and a pilot scale chemical
manufacturing and process chemistry group. Behind our clinical pipeline we have
an extensive, fully integrated small molecule drug discovery organization
designed to generate a pipeline of high quality oncology drug candidates to move
into clinical development. This research operation has been built upon our
historical strengths in high throughput screening, chemical libraries, medicinal
and combinatorial chemistry, and automated drug profiling technology platforms.
With oncology as our focus, we have made the strategic decision to divest all
non-oncology research programs by the end of 2003 and realign our internal
research effort toward an oncology strategy focused on the discovery of novel
anti-cancer drugs targeting defects in signal transduction and apoptosis that
are necessary for the growth of many human tumors. We have created a subsididary
for our diabetes and obesity programs. Our diabetes program includes a
partnership with the Vanderbilt University Diabetes Center, a funded alliance
with Tanabe Seiyaku Co. Ltd., and six proprietary gene-targeted discovery
programs in the lead seeking and lead optimization phases, primarily focused in
the glucose regulation and obesity fields. We have also transferred to this
entity our existing diabetes teams comprised of approximately 25 employees. We
are currently seeking a partner for the venture. If we are unable to obtain
external funding for this newly formed entity, we will consider other
alternatives to discontinue the diabetes program, including out-licensing our
diabetes assets and reducing our employee headcount. In July 2002, we agreed to
accelerate the conclusion of the phase-down period of our funded research
alliance


                                      -18-
<PAGE>
with Anaderm Research Corporation, a wholly-owned subsidiary of Pfizer focused
on the development of novel treatments for skin and hair conditions. As of March
31, 2003, we received the full $8.0 million phase-down fee for the complete
transfer to Anaderm of all of our research related to this collaboration. We
will also receive royalties on the sale of products for these treatments which
may arise from compounds that we have identified.

      On June 12, 2003, we completed our acquisition of Cell Pathways. Cell
Pathways was a development stage pharmaceutical company focused on the research
and development of products to treat and prevent cancer, and the future
commercialization of such products. Cell Pathways also marketed and sold
Gelclair(TM), the manufacturing rights of which were held by Sinclair
Pharmaceuticals Ltd. of the United Kingdom and subsequently licensed to Helsinn
Healthcare S.A. in July 2003. The assets purchased and liabilities assumed by us
included: (a) two drug candidates in clinical development: Aptosyn(R) and
OSI-461 and the related technology platform and patent estate; (b) exclusive
distribution rights to a marketed oncology device, Gelclair(TM); (c) rights to
Cell Pathways' leased facility in Horsham, Pennsylvania, as well as leasehold
improvements and certain equipment; (d) inventory; and (e) certain other assets
and liabilities. As consideration for the merger, each share of Cell Pathways
common stock was exchanged for (i) 0.0567 shares of OSI common stock and (ii) a
contingent value right to receive 0.04 shares of OSI common stock in the event a
new drug application is accepted for filing with the U.S. Food and Drug
Administration by June 12, 2008 for either of the two newly acquired clinical
candidates, Aptosyn(R) or OSI-461. Based on the exchange ratio of 0.0567, we
issued approximately 2.2 million shares of OSI common stock to Cell Pathways'
stockholders in connection with the merger.

      On March 11, 2003, we entered into an agreement to market and promote the
drug Novantrone(R) for approved oncology indications in the United States
pursuant to the terms of a Co-Promotion Agreement with Ares Tradings, S.A., an
affiliate of Serono S.A. In consideration for exclusive marketing and promotion
rights, we paid $45.0 million in cash. In consideration for certain transition
services required to be provided by Serono during a four-month transition period
starting on the effective date of the agreement, we also paid a fee of $10.0
million. Under the terms of the agreement, we pay quarterly maintenance fees to
Serono until the later of the expiration of the last valid patent claim or the
first generic date. We receive commissions on net sales of Novantrone(R) in the
United States for oncology indications. Novantrone(R) is approved by the FDA for
the treatment of acute nonlymphocytic leukemia, which includes myelogenous,
promyelocytic, monocytic and erythroid acute leukemias, and the relief of pain
associated with advanced hormone-refractory prostate cancer. The drug is also
approved for certain advanced forms of multiple sclerosis. Serono will continue
to be responsible for the marketing of the multiple sclerosis indication for
Novantrone(R) and will record all U.S. sales in all indications.

      To support Novantrone(R), we are building commercial operations which will
include a sales force and an associated marketing and sales management
infrastructure. These exclusive rights to a high quality marketed oncology
product allows us to seed a commercial organization and begin to build a revenue
base. We believe the tangible and intangible benefits of this transaction are
significant by opening up the possibility for future in-licensing and


                                      -19-
<PAGE>
co-promotion deals for other marketed products, increasing our ability to
directly market in the United States our future pipeline products and further
validating of our company as a quality development and commercialization partner
for oncology development candidates. In addition, it may allow us to further
explore our co-promotion rights for Tarceva(TM) in the United States with our
partner, Genentech.

CRITICAL ACCOUNTING POLICIES

      We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States. As such, we are
required to make certain estimates, judgments 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 revenue and
expenses during the periods presented. Actual results could differ significantly
from those estimates 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, as amended, for the year
ended September 30, 2002 includes a summary of the significant accounting
policies used in the preparation of the consolidated financial statements.

Revenue Recognition

      Sales commissions represent the commissions earned on Novantrone(R) sales
for oncology uses pursuant to the Co-Promotion Agreement with Serono. Under the
terms of the agreement, we have the exclusive rights to market and promote the
drug for approved oncology indications in the United States. The drug is also
approved for advanced forms of multiple sclerosis. Serono will continue to be
responsible for the marketing of the multiple sclerosis indication of
Novantrone(R) and will record all U.S. sales for all indications, including
oncology indications. Sales commissions from Novantrone(R) are recognized based
on estimated net oncology sales in the period the sales occur. Sales commissions
are subject to further adjustment based on final information regarding the split
between oncology and multiple sclerosis sales of Novantrone(R), as determined by
an independent third party.

      Product sales represent revenues earned on sales of Gelclair(TM) which was
acquired in our acquisition of Cell Pathways which became effective on June 12,
2003. In accordance with SFAS No. 48, "Revenue Recognition When Right of Return
Exists", given the limited sales history of Gelclair(TM), we at this time defer
the recognition of revenue on product shipments of Gelclair(TM) to wholesale
customers until such time as the product is prescribed to the end user. For each
reporting period, we monitor shipments from wholesale customers to pharmacies
and hospitals, wholesale customer reorder history and prescriptions filled by
pharmacies based on prescription data from external, independent sources. When
this data


                                      -20-
<PAGE>
shows a flow of product through the supply chain to the end user, which
indicates that returns are less likely to occur, product revenue is recognized.

      We recognize all nonrefundable upfront license fees, including upfront
technology access fees, as revenue over the term of the related research
collaboration period 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, or SAB No. 101. Our most
significant application of this policy, to date, is the $25.0 million in upfront
fees received from Genentech and Roche in January 2001, which was originally
being recognized evenly over the expected three-year term of our required
research and development efforts under the terms of the agreement. The expected
term is subject to change based upon the parties' continuous monitoring of
current research data and their projections for the remaining development
period. A change in this expected term impacts the period over which the
remaining deferred revenue would be recognized. In the fourth quarter of fiscal
2002, the expected term was changed to four years to reflect the revised
estimated timing of our research and development commitment for Tarceva(TM)
under the alliance. The revision was a result of the review of the current
research data available, current developments in the HER1/EGFR targeted therapy
market and the involved parties' revised projections for the clinical
development plan. As a result of this revision, we recorded revenues of $1.3
million and $3.8 million for the three and nine months ended June 30, 2003,
respectively, compared to $2.1 million and $6.3 million had the upfront fees
continued to be recognized over a three-year period.

      Collaborative program revenues represent funding arrangements for research
and development in the field of biotechnology and are recognized when earned in
accordance with the terms of the contracts and the related development
activities undertaken.

Accruals for Clinical Research Organizations 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. Actual results
could differ significantly from those estimates under different assumptions.

Accounting for Goodwill and Other Intangible Assets

      Effective October 1, 2002, we fully adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 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 impairment review of goodwill during the first quarter
of fiscal


                                      -21-
<PAGE>
2003 and determined that no impairment charge was required upon adoption. In
addition, no indications of impairment were identified during the third quarter
of fiscal 2003.

      Our identifiable intangible assets are subject to amortization. We
reassessed the useful life of our intangible asset (license for compound
libraries) upon adoption of SFAS No. 142 to make any necessary amortization
period adjustments. SFAS No.142 requires that goodwill and intangible assets
with indefinite useful lives are tested for impairment at least annually. SFAS
No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Asset to be Disposed Of". Under SFAS No. 121, intangible and other
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. As
a result of our acquisition from Serono in March 2003 of the exclusive rights to
market and promote the drug Novantrone(R) for the approved oncology indications
in the United States, we recorded an identifiable intangible asset with an
estimated useful life through the expiration of the Novantrone(R) patent in
April 2006. In connection with our acquisition of Cell Pathways, we assumed the
exclusive rights to market, sell and distribute Gelclair(TM) in North America
which Cell Pathways had acquired from Sinclair in January 2002 for a period of
10 years. As a result, we recorded an identifiable intangible asset which is
being amortized over eight and a half years, the remaining term of the
agreement.

Accounting for the Impairment of Long-Lived Assets

      On October 1, 2002, we adopted the provisions of 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. Intangibles with determinable lives
and other long-lived assets are reviewed for impairment whenever 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. In the future, events could cause us to conclude
that impairment indicators exist and that certain 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. The adoption of
SFAS No. 144 did not have an impact on our consolidated financial statements as
of and for the nine-month period ended June 30, 2003.

REVENUES

         Total revenues for the three and nine months ended June 30, 2003 were
$8.0 million and $20.1 million, respectively, compared to revenues of $4.5
million and $17.2 million for the three and nine months ended June 30, 2002,
respectively. We began recognizing Gelclair(TM) product sales on June 12, 2003,
subsequent to the closing of our acquisition of Cell Pathways. Total product
sales for the period June 12, 2003 to June 30, 2003 were $145,000. We expect


                                      -22-
<PAGE>
to launch our sales effort for this product in the fall of 2003. We estimate
that our total fiscal 2004 product sales of Gelclair(TM) will be between $3.0
million to $4.0 million. We began recording Novantrone(R) sales commissions on
March 11, 2003, subsequent to the execution of the Co-Promotion Agreement with
Serono. Total estimated sales commissions for the three and nine months ended
June 30, 2003 were $5.5 million and $6.4 million, respectively. Sales
commissions are subject to further adjustment based on final information on the
split between oncology and multiple sclerosis sales of Novantrone(R), as
determined by an independent third party. We initiated our sales activity for
Novatrone(R) during the third quarter. We estimate that our total fiscal 2004
sales commissions on Novantrone(R) oncology sales will be between $20 million
and $30 million.

      License and other revenues decreased $1.0 million or 40% and $3.6 million
or 44% for the three and nine months ended June 30, 2003, respectively, compared
to the three and nine months ended June 30, 2002. These decreases were primarily
due to the decrease in the amount of revenue recognized relating to the $25.0
million upfront fees received from Genentech and Roche (see note 2 to the
accompanying unaudited consolidated financial statements). In accordance with
the provisions of SAB No. 101, we were recognizing the $25.0 million received
from Genentech and Roche evenly over the expected three-year development phase
of our agreement. In the fourth quarter of fiscal 2002, we changed the expected
term of the agreement to four years to reflect the revised estimated timing of
our research and development commitment for Tarceva(TM) under the alliance. The
revision was a result of the review of the current research data available,
current developments in the HER1/EGFR targeted therapy market and the involved
parties' revised projections for the clinical development plan. In accordance
with Accounting Principles Board Opinion No. 20, "Accounting Changes," the
remaining unearned revenue will be recognized prospectively over the revised
term. As a result, we recorded revenues of $1.3 million and $3.8 million during
the three and nine months ended June 30, 2003, respectively, compared to
revenues of $2.1 million and $6.3 million in the comparable periods of fiscal
2002. The decreases were also due to a decrease in revenues of $100,000 and
$799,000 for the three and nine month periods, respectively, related to certain
administrative services provided to British Biotech plc and Gilead Sciences,
Inc. during the transition periods following the acquisitions of certain assets
of each company.

      Total collaborative program revenues decreased $1.1 million or 56% and
$46,000 or 0.5% for the three and nine months ended June 30, 2003, respectively,
compared to the three and nine months ended June 30, 2002. The decrease for the
three months was primarily due to the phase-down of our collaboration with
Anaderm. In July 2002, we entered into an agreement with Pfizer to accelerate
the phase-down period of the collaboration with Anaderm so that it would
terminate no later than April 23, 2003. In consideration for the work to be
performed by us during the accelerated phase-down period, we received $4.5
million in September 2002 and $3.5 million in March 2003 upon the successful
completion of the transition period. The $4.5 million was recognized as revenue
ratably over the term of the transition period and the $3.5 million was
recognized during the three months ended March 31, 2003 upon the successful
completion of the transition. The decrease for the three months was also due to
a decrease in activity related to our collaboration with Tanabe Seiyaku Co.,
Ltd.,


                                      -23-
<PAGE>
which expires in September 2003 and is not expected to be renewed. As a result
of our strategic decision to divest all non-oncology research programs, as well
as the completion of the Anaderm collaboration in the second quarter of fiscal
2003, we expect collaborative revenues to continue to decrease.

EXPENSES

      Total operating expenses of $82.9 million increased $47.8 million or 136%
for the three months ended June 30, 2003 compared to the three months ended June
30, 2002. Excluding the acquired in-process R&D charge of $31.3 million recorded
in the three months ended June 30, 2003, operating expenses increased $16.5
million or 47% for the three months ended June 30, 2003. Operating expenses of
$153.8 million decreased $68.0 million or 31% for the nine months ended June 30,
2003 compared to the nine months ended June 30, 2002. Excluding the in-process
R&D charges of $31.3 million and $130.2 million recorded in the nine months
ended June 30, 2003 and 2002, respectively, operating expenses increased $30.9
million or 34% for the nine months ended June 30, 2003 compared to the nine
months ended June 30, 2002. These in-process research and development charges
relate to the acquisition of Cell Pathways in June 2003 and the acquisition of
certain assets from Gilead in December 2001. We do not deem these charges to be
indicative of the day-to-day operations of our company. Operating expenses
primarily included (i) research and development expenses, which included
expenses related to the development of our lead clinical candidate, Tarceva(TM),
and proprietary and collaborative-based research; (ii) in-process R&D charges
related to the acquisition of Cell Pathways in June 2003 and the acquisition of
oncology assets acquired from Gilead in December 2001; (iii) selling, general
and administrative expenses; and (iv) amortization of intangibles.

      Cost of products sold related to sales of Gelclair(TM) for the period June
12, 2003 to June 30, 2003 were $55,000 or 38% of product sales. There were no
costs of products sold prior to June 12, 2003 since we acquired the rights to
Gelclair(TM) on June 12, 2003 in connection with the Cell Pathways acquisition.

      The largest component of our total expenses is our ongoing investments in
research and development and particularly the clinical development of our
product pipeline. We currently have eight drug candidates in clinical
development including our most advanced candidate, Tarceva(TM), which is
currently in Phase III trials for non-small cell lung cancer and pancreatic
cancer and in Phase II trials for glioblastoma. Aptosyn(R), an early-generation
molecule acquired in connection with our acquisition of Cell Pathways, is
currently in Phase III trials for non-small cell lung cancer. The other six drug
candidates are in earlier stages of clinical development. OSI-461, which also
was acquired in connection with our acquisition of Cell Pathways, is a
second-generation molecule that is being evaluated in chronic lymphocytic
leukemia, renal carcinoma and prostate cancer. Three candidates (OSI-211,
OSI-7904L and OSI-7836) are next generation cytotoxic chemotherapy agents which
are being developed by us. The other two candidates (CP-547,632 and CP-724,714)
are gene-targeted therapies currently being developed by Pfizer and require no
further research and development investment by us. We consider the active
management and development of our clinical pipeline


                                      -24-
<PAGE>
to be crucial to the long-term success of the company. Due to the inherent risks
associated with the drug discovery development, regulatory and approval process,
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 both the advancement of products to the market and the anticipated
attrition rate of drug candidates that fail in clinical trials or are terminated
for business reasons. The table below summarizes the typical duration of each
phase of clinical development and the typical cumulative probabilities of
success for approval of drug candidates entering clinical development. The
numbers are based upon industry survey data for small molecule drugs:

<TABLE>
<CAPTION>
                                                     Estimated Cumulative
Development Phase     Estimated Completion Time     Probability of Success
-----------------     -------------------------     ----------------------
<S>                   <C>                           <C>
     Phase I                  1-2 Years                          20%
    Phase II                  1-2 Years                          30%
    Phase III                 2-3 Years                          65%
  Registration              6-15 months                          85%
</TABLE>

      The actual probability of success for each drug candidate and clinical
program will be impacted by a variety of factors, including the quality of the
molecule, the validity of the target and disease indication, early clinical
data, investment in the program, competition and commercial viability. 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, as well as the future cash inflows from these programs. However, in
fiscal 2003 we anticipate investing a total of approximately $35 million in
pre-clinical research and approximately $75 million in clinical development. We
consider this level of investment suitable to sustain one to two Phase III
programs and two to four earlier clinical stage programs at any time and we
manage our overall research and development investments toward this level of
activity.

      Research and development expenses decreased $1.5 million or 6% for the
three months ended June 30, 2003 compared to the three months ended June 30,
2002. Research and development expenses increased $6.7 million or 10% for the
nine months ended June 30, 2003 compared to the nine months ended June 30, 2002.
The decrease for the three months was primarily related to a shift from
non-oncology programs to oncology programs as well as the timing of expenses
related to our clinical development programs. The decrease for the three months
ended June 30, 2003 was offset by increased investments in other proprietary
cancer programs, including the oncology candidates recently acquired from Cell
Pathways. Costs associated with the clinical development of Tarceva(TM) under
our Tripartite Agreement with Genentech and Roche remained flat for the three
months ended June 30, 2003 compared to the three months ended June 30, 2002. The
increase for the nine months ended June 30, 2003 was due to an increase in costs
associated with the clinical development of Tarceva(TM) and certain proprietary
cancer programs, including oncology candidates recently acquired from Cell
Pathways. This increase was offset by decreased investments in collaborative
programs and our proprietary diabetes program. Included in research and
development expenses for the nine months ended June 30, 2003 is a severance
charge of $694,000. This charge related to a


                                      -25-
<PAGE>
reduction in our headcount in October 2002 as we refocused our business on
oncology and away from services that we had historically provided to our former
collaborative partners.

      Our most advanced development program is for Tarceva(TM). In January 2001,
we entered into the alliance with Genentech and Roche for the global development
and commercialization of Tarceva(TM). The significant perceived market potential
for Tarceva(TM) has resulted in the alliance partnership committing to an
unusually large and comprehensive global development plan for the candidate. The
global development plan comprises four major phase III clinical trials in lung
and pancreatic cancers and a large number of earlier stage trials in a variety
of disease settings, including glioblastoma. In addition, numerous collaborative
and investigator sponsored studies are ongoing in a number of other disease
settings including bronchioloalveolar cell-carcinoma and gynecological
malignancies. The alliance partners have committed to invest a combined $300
million in the global development plan to be shared equally by the three
parties. Additional research and development investments can be made by the
parties outside of the global development plan with the consent of the other
parties. We estimate that we will invest an additional $10-$15 million in
Tarceva(TM) research and development outside of the global development plan
prior to the drug's targeted launch in the third quarter of calendar 2004. As of
June 30, 2003, we have invested in excess of $67 million, representing our share
of the costs incurred to date in the tripartite global development plan and
additional investments outside the plan. Our share of the research and
development expenses for Tarceva(TM) incurred for the three and nine months
ended June 30, 2003 were $7.8 million and $28.4 million, respectively. We
anticipate investing a majority of the remaining $43-48 million we have
provisionally budgeted for this program over the next two years. Should
Tarceva(TM) be successfully registered and launched we would anticipate a lower
level but continued research and development investment in the product to
support its commercial growth. For our second Phase III clinical candidate,
Aptosyn(R), we expect the cost to complete the Phase III trials to be between
$3.0 and $4.0 million.

      In connection with the acquisition of Cell Pathways, which was completed
in June 2003, we recorded an in-process R&D charge of $31.3 million during the
three months ended June 30, 2003, representing the estimated fair value of the
acquired in-process technology that had not yet reached technological
feasibility and had no alternative future use (see note 5(a) to the accompanying
unaudited consolidated financial statements). The in-process R&D charge was
assigned to the two development projects and related technology platform and
patent estate, Aptosyn(R) ($3.7 million) and OSI-461 ($27.6 million) based on
their value on the date of the acquisition. In determining the value of the
in-process R&D, the assumed commercialization dates for these products ranged
from 2005 to 2006. Significant assumptions and estimates used in the valuation
of in-process R&D included: the stage of development for each of the two
projects; future revenues; growth rates for each product; 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 25% to
reflect present value.

      In connection with the acquisition of certain assets from Gilead in
December 2001, we recorded an in-process R&D charge of $130.2 million during the
three months ended


                                      -26-
<PAGE>
December 31, 2001, representing the estimated fair value of the acquired
in-process technology that had not yet reached technological feasibility and had
no alternative future use (see note 5(b) to the accompanying unaudited
consolidated financial statements). The acquired in-process R&D was allocated to
the following three oncology candidates: OSI-211, OSI-7904L and OSI-7836. The
value of the acquired in-process R&D charges were determined by estimating the
projected net cash flows related to products under development based upon the
future revenues to be earned upon commercialization of such products.

      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 each compound's stage of development at the time of assessment and the
historical probability of successful advancement for compounds at that stage.
These modeled cash flows were discounted back to their 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 projects. The in-process R&D
was valued based on the income approach that focuses on the income-producing
capability of the assets. 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. For each project, we need to successfully complete a series of clinical
trials and to receive FDA or other regulatory approvals prior to
commercialization. There can be no assurances that any of these candidates will
ever reach feasibility or develop into products that can be marketed profitably,
nor can there be any assurances that we will be able to develop and
commercialize these products prior to the development of comparable products by
our competitors. If it is determined that it is not cost beneficial to pursue
the further development of any of these candidates, we may discontinue such
further development of certain or all of these candidates.

      Selling, general and administrative expenses increased $14.4 million or
160% and $20.4 million or 97% for the three and nine months ended June 30, 2003,
respectively, compared to the three and nine months ended June 30, 2002. The
increases were due to (i) increased commercialization and marketing costs
relating to Tarceva(TM) which are shared with Genentech in accordance with the
terms of our collaboration with Genentech, (ii) additional management and
administrative personnel to support our clinical trial programs, research and
development efforts, (iii) additional management and personnel relating to the
establishment of commercial operations to support Gelclair(TM) and
Novantrone(R), and (iv) expenses for maintenance fees and transition support
services provided by Serono relating to Novantrone(R) sales in oncology
indications. The increase for the nine months ended June 30, 2003 was slightly
offset by a decrease in relocation expenses relating to the consolidation of our
Birmingham, England facility with our Oxford, England facility. Included in
selling, general and administrative expenses for the nine months ended June 30,
2003 is a severance charge of $249,000 relating to a reduction in our headcount
in October 2002. In connection with the exclusive rights to market and promote
Novantrone(R) for approved oncology indications in the United States, we secured
a short-term transitional arrangement with a contract sales organization
comprising a core of sales representatives as we build our commercial
operations. We expect selling, general and administrative costs to increase as
we build commercial


                                      -27-
<PAGE>
operations which will include a sales force and an associated marketing and
sales management infrastructure. The initial sales and marketing infrastructure
will be comprised of approximately 60 sales and marketing personnel, of which
approximately 30 will be detail sales representatives in the field. The balance
of personnel will be management and support positions.

      Amortization of intangibles increased $3.6 million and $3.7 million for
the three and nine months ended June 30, 2003, respectively, compared to the
three and nine months ended June 30, 2002. The increase primarily related to
$3.7 million and $4.4 million for the three and nine months ended June 30, 2003,
respectively, in amortization expense for the exclusive rights to market and
promote the drug Novantrone(R) for approved oncology indications in the United
States. Also included in amortization for the three and nine months ended June
30, 2003, is $140,000 in amortization expense for the exclusive rights to
market, sell and distribute Gelclair(TM) in North America. Offsetting these
increases were a $249,000 and $737,000 decrease in amortization expense for the
three months and nine months ended June 30, 2002, respectively, attributable to
the full adoption of SFAS No. 142 on October 1, 2002, whereby we ceased
amortizing the assembled workforce acquired from British Biotech and
reclassified the balance of $2.1 million to goodwill.

OTHER INCOME AND EXPENSE

      Net investment income decreased $1.9 million or 55% and $5.0 million or
44% for the three and nine months ended June 30, 2003, respectively, compared to
the three and nine months ended June 30, 2002. The decrease was primarily
attributable to a decrease in the average rate of return on our investments and
to less funds available for investment during the respective periods. Interest
expense decreased $406,000 or 20% for the three months ended June 30, 2003
compared to the three months ended June 30, 2002. Interest expense increased
$1.5 million or 43% for the nine months ended June 30, 2003 compared to the nine
months ended June 30, 2002. The increase was primarily due to the interest
expense incurred on the convertible senior subordinated notes issued in February
2002, a portion of which were retired in August and September 2002. The
convertible senior subordinated notes bear interest at 4% per annum, are payable
semi-annually, and mature on February 1, 2009. For the three months ended June
30, 2003 and 2002, other expense-net was $198,000 and $317,000, respectively.
Included in the three months ended June 30, 2003 and 2002 was the amortization
of debt issuance costs of $203,000 and $249,000, respectively. For the nine
months ended June 30, 2003 other expense-net was $321,000 compared to other
income-net of $155,000 for the nine months ended June 30, 2002. Included in the
nine months ended June 30, 2003 was amortization of debt issuance costs of
$609,000 offset by realized gains from the sale of investments of $391,000.
Included in the nine months ended June 30, 2002 was the $1.0 million contingent
payment received from The Bayer Corporation in December 2001, in connection with
the sale of the diagnostic business in November 1999, offset by realized losses
from the sale of investments of $186,000 and amortization of debt issuance costs
of $405,000.

                                      -28-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

      At June 30, 2003, working capital, representing primarily cash, cash
equivalents, and restricted and unrestricted short-term investments, aggregated
$303.2 million compared to $444.6 million at September 30, 2002. This decrease
of $141.4 million is primarily due to the payment for the exclusive rights to
market and promote Novantrone(R) and related fees totaling $46.0 million, the
transition services fees and maintenance fees paid to Serono as well as net
operating cash burn for the period.

      On February 1, 2002, we issued $200.0 million aggregate principal amount
of convertible senior subordinated notes in a private placement for net proceeds
to us of approximately $193.0 million. The notes bear interest at 4% per annum,
are payable semi-annually, and mature on February 1, 2009. We pledged $22.9
million of U.S. government securities which will be sufficient to provide for
the payment in full of the first six scheduled interest payments on the notes
when due. In August and September 2002, we retired a total of $40.0 million in
principal amount of the notes for an aggregate purchase price of $26.2 million,
including accrued interest. Should conditions warrant, we may from time-to-time
continue to enter the market to repurchase additional notes.

      We expect to incur continued losses over the next several years as we
continue our investment in Tarceva(TM) and other product candidates in our
pipeline and build our commercial operations. The major expenses associated with
the broad-based Phase III development program for Tarceva(TM) are expected to
occur in fiscal 2003. We estimate that following the assimilation of both the
acquisition of the Novantrone(R) rights and the Cell Pathways acquisition, our
fiscal 2004 cash burn will be approximately $100-$110 million depending on the
timing of certain expenses and excluding any sales revenues from Tarceva(TM).
We currently estimate that our fiscal 2003 year ending cash position will be in
excess of $250 million, assuming all acquisition and consolidation related
costs occur in fiscal 2003. We have established a goal of achieving
profitability and positive cash flow within 18 to 24 months of a successful
market launch of Tarceva(TM). Although we believe that we have sufficient cash
for operations for the next few years, if the market launch of Tarceva(TM) is
delayed or if Tarceva(TM) does not receive FDA approval or if the approval
process is delayed or takes longer than expected, such events could have a
negative impact on our liquidity position, assuming our current cash burn. In
addition, as we continue to pursue strategic in-licensing and acquisition
opportunities that would bring additional products and clinical development
candidates to our cancer pipeline, we will be required to use our available
cash and/or equity securities.

      To achieve profitability, we, alone or with others, must successfully
develop and commercialize our technologies and products, conduct pre-clinical
studies and clinical trials, secure required regulatory approvals and obtain
adequate assistance to successfully manufacture, introduce and market such
technologies and products. The ability and time required to reach profitability
is uncertain. We believe that our existing cash resources provide a strong
financial base from which to fund our operations and capital requirements for at
least the next few years.

                                      -29-
<PAGE>
COMMITMENTS AND CONTINGENCIES

      Our major outstanding contractual obligations relate to our convertible
senior subordinated notes and our facility leases. The following table
summarizes our significant contractual obligations at June 30, 2003 and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods (in thousands):

<TABLE>
<CAPTION>
                                                                                         2008 &
                                  2003       2004       2005       2006       2007     THEREAFTER    TOTAL
                                --------   --------   --------   --------   --------   ----------   --------
<S>                             <C>        <C>        <C>        <C>        <C>        <C>          <C>
Contractual Obligations:
   Senior convertible debt(a)   $  3,200   $  6,400   $  6,400   $  6,400   $  6,400   $  169,600   $198,400
   Operating leases .........      2,017      7,860      7,932      6,659      5,385       58,237     88,090
   Capital commitments ......      3,455        499         --         --         --           --      3,954
   Loans and capital
       leases payable(b) ....         71         42         12         --         --           --        125
                                --------   --------   --------   --------   --------   ----------   --------
   Total contractual
     obligations ............   $  8,743   $ 14,801   $ 14,344   $ 13,059   $ 11,785   $  227,837   $290,569
                                ========   ========   ========   ========   ========   ==========   ========
</TABLE>

----------
      (a)   Includes interest payments at a rate of 4% per annum.

      (b)   Includes interest payments.

Other significant commitments and contingencies include the following:

      -     We are committed to share equally with Genentech and Roche a
            combined $300 million in certain global development costs for
            Tarceva(TM). As of June 30, 2003 we have spent approximately two
            thirds of our commitment under the agreement. We are also committed
            to share certain commercialization cost relating to Tarceva(TM) with
            Genentech.

      -     In connection with the acquisition of certain of Gilead's oncology
            assets in December 2001, we are obligated to pay up to an additional
            $30.0 million in either cash or a combination of cash and common
            stock upon achievement of certain milestones related to the
            development of OSI-211, the most advanced of Gilead's oncology
            product candidates acquired by us.

      -     In connection with the acquisition of Cell Pathways in June 2003, 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 .04 share of OSI
            common stock in the event of a filing of a new drug application for
            either of the two clinical candidates acquired from Cell Pathways,
            OSI-461 or Aptosyn(R).

      -     In connection with the exclusive distribution agreement to promote
            and distribute Gelclair(TM) in North America, we are committed to
            additional inventory purchases of $3.0 million and $5.0 million in
            2003 and 2004 respectively, and annual marketing expenditures of
            $750,000, $500,000 and $250,000 for 2003 through 2006, 2007 through
            2008 and 2009 through 2011 respectively. In addition we are
            obligated to spend $1.3 million annually for

                                      -30-
<PAGE>
            direct sales force efforts. We could be responsible for milestone
            payments totaling $3.0 million related to achievement of certain
            sales, patent and clinical trial milestones.

      -     In connection with our agreement with Celgene, we are required to
            make payments to Celgene upon the return of certain sales and
            marketing data and upon the first anniversary of the effective date
            provided that the transition services, as defined in the agreement,
            have been provided to us. The agreement also provides for a
            milestone payment to Celgene upon the achievement of a specified
            amount of net sales of Gelclair(TM).

      -     In connection with our agreement with Serono to market and promote
            Novantrone(R) in approved oncology indications, we are required to
            pay quarterly maintenance fees to Serono until the later of the
            expiration of the last valid patent claim or the first generic date,
            as defined in the agreement, or unless the agreement is earlier
            terminated.

      -     Under agreements with external CROs, over the next 12 months we will
            continue to incur expenses relating to the progress of Tarceva(TM)
            clinical trials. These disbursements can be based upon the
            achievement of certain milestones, patient enrollment, services
            rendered or as expenses are incurred by the CROs.

      -     We have a retirement plan which provides postretirement 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
            $3.0 million at June 30, 2003.

      -     Under certain collaboration agreements with pharmaceutical companies
            and educational institutions, we are required to pay royalties
            and/or milestones upon the successful development and
            commercialization of products.

      -     Under certain license agreements, we are required to pay license
            fees for the use of technologies and products in our research and
            development activities.

      -     We have outstanding letters of credit issued by a commercial bank.
            One is an irrevocable letter of credit related to our Oxford,
            England facility and expires annually with a final expiration date
            of September 27, 2007. The amount under this letter of credit is
            $2.2 million of which the full amount was available on June 30,
            2003. 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 annually with a
            final expiration date of September 22, 2008. The amount under this
            letter of credit is $400,000 of which the full amount was available
            on June 30, 2003.

      -     In May 2003, we entered into a contract with a third-party contract
            sales organization for the outsourcing of sales representatives and
            other sales force


                                      -31-
<PAGE>
            infrastructure. The commitment is approximately $3.3 million over a
            one-year period.

RECENT ACCOUNTING PRONOUNCEMENTS

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", effective for exit or disposal
activities that are initiated after December 31, 2002. Under SFAS No. 146, a
liability for a cost associated with an exit or disposal activity must only be
recognized when the liability is incurred. Under the previous guidance of EITF
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity including Certain Costs Incurred in a Restructuring",
we recognized a liability for an exit or disposal activity cost at the date of
our commitment. We have not entered into any significant exit or disposal
activities since the effectiveness of this statement. As such, SFAS No. 146 has
not had an impact on our consolidated financial statements.

      In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." Issue 00-21 provides guidance
on how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of Issue
00-21 will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003, that are not within the scope of higher level
accounting literature. The adoption of Issue 00-21 is not expected to have a
material impact on our financial statements

      In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to include
disclosure of certain obligations, and if applicable, at the inception of the
guarantee, recognize a liability for the fair value of other certain obligations
undertaken in issuing a guarantee. The recognition requirement is effective for
guarantees issued or modified after December 31, 2002 and did not have a
material impact on our consolidated financial statements.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by SFAS No. 123 "Accounting for Stock-Based Compensation".
Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosure in both the annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. The transitional requirements of SFAS No.
148 are effective for all financial statements for fiscal years ending after
December 15, 2002. We adopted the disclosure portion of this statement beginning
in the fiscal quarter ended March 31, 2003. The application of the disclosure
portion of this standard will have no impact on our consolidated financial
position or results of operations. The FASB recently decided that it will
require stock-based employee


                                      -32-
<PAGE>
compensation to be recorded as a charge to earnings beginning as early as 2004.
We will continue to monitor its progress on the issuance of this standard.

      In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." FIN 46 clarifies the application of Accounting
Research Bulletin No. 51 to require consolidation of an entity if it is
controlled through interests other than voting interests. FIN 46 applies
immediately to any variable interest entities created after January 31, 2003 and
to variable interest entities in which an interest is obtained after that date.
The guidelines of this interpretation will become applicable for us in the
fourth quarter of fiscal year 2003 for variable interest entities created before
February 1, 2003. The interpretation requires variable interest entities to be
consolidated if the equity investment at risk is not sufficient to permit an
entity to finance its activities without support from other parties or the
equity investors lack certain specified characteristics. The adoption of FIN 46
for variable interest entities created after January 31, 2003 did not have a
material impact on our consolidated financial condition, results of operations
or cash flows. We are continuing to review the provisions of FIN 46 to determine
its impact, if any, on future reporting periods with respect to interests in
variable interest entities created prior to February 1, 2003, and do not
currently anticipate any material accounting or disclosure requirements under
the provisions of the interpretation.

      In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003 and is not expected to have an impact on us upon
adoption.

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or as an asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have an impact on our consolidated
financial statements.

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


                                      -33-
<PAGE>
and subject areas. These forward looking statements are also subject generally
to the other risks and uncertainties that are described in our annual report on
Form 10-K, as amended, for the fiscal year ended September 30, 2002.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Our cash flow and earnings are subject to fluctuations due to changes in
interest rates in our investment portfolio of debt securities, to the fair value
of equity instruments held and to foreign currency exchange rates. We maintain
an investment portfolio of various issuers, types and maturities. These
securities are generally classified as available-for-sale 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 the convertible senior
subordinated notes, we pledged $22.9 million of U.S. government securities
(restricted investment securities) with maturities at various dates through
November 2004. Upon maturity, the proceeds of the restricted investment
securities will be sufficient to pay the first six scheduled interest payments
on the convertible senior subordinated notes when due. We consider our
restricted investment securities to be "held-to-maturity," 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. 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. It is uncertain whether other-than-temporary
losses will be material to our results of operations in the future. We do not
currently hedge these exposures. We at times minimize risk by hedging the
foreign currency exchange rates exposure through forward contracts as more fully
described in note 12(d) to the consolidated financial statements contained in
our annual report on Form 10-K, as amended, for the fiscal year ended September
30, 2002. We did not have any forward foreign exchange contracts as of or during
the three and nine months ended June 30, 2003.

      At June 30, 2003, 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 containing financial instruments which
are principally comprised of government and government agency obligations and
corporate obligations and are subject to interest rate risk and will decline in
value if interest rates increase. A hypothetical 10% change in interest rates
during the three and nine months ended June 30, 2003 would have resulted in a
$157,000 and $647,000 change in our net loss, respectively. We have not used or
held derivative financial instruments in our investment portfolio.

      Our long-term debt totaled $160.0 million at June 30, 2003 and was
primarily comprised of the convertible senior subordinated notes. The
convertible senior subordinated notes bear interest at a fixed rate of 4%.
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 convertible
senior subordinated notes to common stock beneficial to the convertible senior

                                      -34-
<PAGE>
subordinated notes holders. Conversion of the convertible senior subordinated
notes would have a dilutive effect on any future earnings and book value per
common share.

ITEM 4. CONTROLS AND PROCEDURES

      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)), 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, subject to the limitations
noted below, our disclosure controls and procedures are effective to provide
reasonable assurance that material information relating to the Company and its
consolidated subsidiaries is made known to management, including the CEO and
CFO, on a timely basis and particularly 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 errors and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not 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 the 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
errors or mistakes. 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, control 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. While we believe that our disclosure controls and procedures
have been effective, in light of the foregoing we intend to continue to examine
and refine our disclosure controls and procedures and to monitor ongoing
developments in this area.

                                      -35-
<PAGE>
      Changes in Internal Controls. There were no changes in our internal
control over financial reporting (as defined in Rule 13(a)-15(f)) 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.

                                      -36-
<PAGE>
                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

      Not applicable.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

      Not Applicable.

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 AND REPORTS ON FORM 8-K

      (A)   EXHIBITS

            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* Distribution Agreement, dated January 22, 2002, by and between
                  Sinclair Pharmaceuticals Ltd. and Cell Pathways, Inc. (assumed
                  by OSI Pharmaceuticals, Inc. upon the acquisition of Cell
                  Pathways, Inc. on June 12, 2003).

            10.2  Amendment No. 1 to Distribution Agreement, dated March 15,
                  2002, by and between Sinclair Pharmaceuticals Ltd. and Cell
                  Pathways, Inc. (assumed by OSI Pharmaceuticals, Inc. upon the
                  acquisition of Cell Pathways, Inc. on June 12, 2003).

                                      -37-
<PAGE>
            10.3* Amendment No. 2 to Distribution Agreement, dated October 15,
                  2002, by and between Sinclair Pharmaceuticals Ltd. and Cell
                  Pathways, Inc. (assumed by OSI Pharmaceuticals, Inc. upon the
                  acquisition of Cell Pathways, Inc. on June 12, 2003).

            10.4  Amendment No. 3 to Distribution Agreement, dated June 9, 2003,
                  by and between Sinclair Pharmaceuticals Ltd. and Cell
                  Pathways, Inc. (assumed by OSI Pharmaceuticals, Inc. upon the
                  acquisition of Cell Pathways, Inc. on June 12, 2003).

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

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

            32.1  Certification of Chief Executive Officer pursuant to 18
                  U.S.C. Section 1350.

            32.2  Certification of Chief Financial Officer pursuant to 18
                  U.S.C. Section 1350.

----------

*     Portions of this exhibit have been redacted and are subject to a
      confidential treatment request filed with the Secretary of the Securities
      and Exchange Commission pursuant to Rule 24b-2 under the Securities
      Exchange Act of 1934, as amended.

      (B)   REPORTS ON FORM 8-K

      We filed a second amendment on May 6, 2003 to a current report which was
filed on March 12, 2003 and amended on March 17, 2003, with the Securities and
Exchange Commission via EDGAR, with respect to our co-promotion agreement with
Serona for Novantrone(R). The earliest event covered by this report occurred on
March 12, 2003.

      We filed a current report on May 14, 2003 with the Securities and Exchange
Commission via EDGAR, with respect to our earnings release. The earliest event
covered by this report occurred on May 14, 2003.

      We filed a current report on June 27, 2003 with the Securities and
Exchange Commission via EDGAR, with respect to the completion of the merger
agreement under which we acquired Cell Pathways by way of a stock-for-stock
merger. The earliest event covered by this report occurred on June 12, 2003.



                                      -38-
<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 13, 2003                /s/ Colin Goddard, Ph.D.
                                      ------------------------------------------
                                      Colin Goddard, Ph.D.
                                      Chief Executive Officer


Date:  August 13, 2003                /s/ Robert L. Van Nostrand
                                      ------------------------------------------
                                      Robert L. Van Nostrand
                                      Vice President and Chief Financial Officer
                                      (Principal Financial Officer)



                                      -39-
<PAGE>
                                INDEX TO EXHIBITS

Exhibit
-------

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*     Distribution Agreement, dated January 22, 2002, by and between
          Sinclair Pharmaceuticals Ltd. and Cell Pathways, Inc. (assumed by OSI
          Pharmaceuticals, Inc. upon the acquisition of Cell Pathways, Inc. on
          June 12, 2003).

10.2      Amendment No. 1 to Distribution Agreement, dated March 15, 2002, by
          and between Sinclair Pharmaceuticals Ltd. and Cell Pathways, Inc.
          (assumed by OSI Pharmaceuticals, Inc. upon the acquisition of Cell
          Pathways, Inc. on June 12, 2003).

10.3*     Amendment No. 2 to Distribution Agreement, dated October 15, 2002, by
          and between Sinclair Pharmaceuticals Ltd. and Cell Pathways, Inc.
          (assumed by OSI Pharmaceuticals, Inc. upon the acquisition of Cell
          Pathways, Inc. on June 12, 2003).

10.4      Amendment No. 3 to Distribution Agreement, dated June 9, 2003, by and
          between Sinclair Pharmaceuticals Ltd. and Cell Pathways, Inc. (assumed
          by OSI Pharmaceuticals, Inc. upon the acquisition of Cell Pathways,
          Inc. on June 12, 2003).

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

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

32.1      Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
          1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002.

32.2      Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
          1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002.


----------
*         Portions of this exhibit have been redacted and are subject to a
          confidential treatment request filed with the Secretary of the
          Securities and Exchange Commission pursuant to Rule 24b-2 under the
          Securities Exchange Act of 1934, as amended.

                                      -40-