<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, 2004.

                                       OR

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

For the transition period from ____________________ to _____________________.

Commission file number 0-15190

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

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

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

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

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

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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

At July 31, 2004, the registrant had outstanding 43,348,149 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, 2004 (Unaudited) and September 30, 2003.....................................    1
            Consolidated Statements of Operations
            -Three Months Ended June 30, 2004 and 2003 (Unaudited)................................    2
            Consolidated Statements of Operations
            -Nine Months Ended June 30, 2004 and 2003 (Unaudited).................................    3
            Consolidated Statements of Cash Flows
            -Nine Months Ended June 30, 2004 and 2003 (Unaudited).................................    4
            Notes to Consolidated Financial Statements (Unaudited)................................    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.............................   32

  Item 4.  Controls and Procedures................................................................   33

PART II. OTHER INFORMATION........................................................................   35

  Item 1.  Legal Proceedings......................................................................   35

  Item 2.  Changes in Securities and Use of Proceeds..............................................   35

  Item 3.  Defaults Upon Senior Securities........................................................   35

  Item 4.  Submission of Matters to a Vote of Security Holders....................................   35

  Item 5.  Other Information......................................................................   35

  Item 6.  Exhibits and Reports on Form 8-K.......................................................   35

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

EXHIBIT INDEX.....................................................................................   39
</TABLE>

                                      -i-
<PAGE>

                         PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                         JUNE 30,        SEPTEMBER 30,
                                                                                           2004              2003
                                                                                        -----------      -------------
                                                                                        (UNAUDITED)
<S>                                                                                     <C>              <C>
                                     ASSETS
Current assets:
     Cash and cash equivalents ....................................................     $   124,885      $     202,519
     Investment securities ........................................................         174,695            174,057
     Restricted investment securities - short-term ................................          15,235             12,758
     Receivables, including amounts due from related parties of $1,013 and $74
         at June 30, 2004 and September 30, 2003, respectively ....................          10,682             10,121
     Inventory - net ..............................................................           1,356              3,616
     Interest receivable ..........................................................           1,162              1,533
     Prepaid expenses and other current assets ....................................           6,523              9,847
                                                                                        -----------      -------------
              Total current assets ................................................         334,538            414,451
                                                                                        -----------      -------------
Restricted investment securities - long-term ......................................           7,088             14,813
Property, equipment and leasehold improvements - net ..............................          40,185             44,977
Debt issuance costs - net .........................................................           8,146              9,488
Goodwill ..........................................................................          39,028             38,810
Other intangible assets - net .....................................................          52,177             66,145
Other assets ......................................................................           2,860              2,818
                                                                                        -----------      -------------
                                                                                        $   484,022      $     591,502
                                                                                        ===========      =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued expenses, including amounts due to related
         parties of $4,603 and $6,875 at June 30, 2004 and September 30, 2003,
         respectively .............................................................     $    31,855      $      29,013
     Unearned revenue - current, including amounts received in advance from related
         parties of $2,500 and $5,000 as of June 30, 2004 and September 30, 2003,
         respectively .............................................................           3,287              5,779

     Loans and capital leases payable - current ...................................              12                 61
                                                                                        -----------      -------------
              Total current liabilities ...........................................          35,154             34,853
                                                                                        -----------      -------------
Other liabilities:
     Deferred rent expense - long-term ............................................           2,103              2,179
     Unearned revenue - long-term,  amounts received in advance from related
          parties .................................................................              --              1,250
     Convertible senior subordinated notes and capital leases payable - long-term .         310,000            310,008
     Contingent value rights ......................................................          22,047             22,047
     Accrued post-retirement benefit cost .........................................           3,679              3,108
                                                                                        -----------      -------------
              Total liabilities ...................................................         372,983            373,445
                                                                                        -----------      -------------
Stockholders' equity:
     Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
         June 30, 2004 and September 30, 2003 .....................................              --                 --
     Common stock, $.01 par value; 200,000 shares authorized, 41,474 and 40,298
         shares issued at June 30, 2004 and September 30, 2003, respectively ......             415                403
     Additional paid-in capital ...................................................         778,328            747,737
     Deferred compensation ........................................................            (330)              (216)
     Accumulated deficit ..........................................................        (642,762)          (505,580)
     Accumulated other comprehensive income .......................................             839              1,164
                                                                                        -----------      -------------
                                                                                            136,490            243,508
Less: treasury stock, at cost; 1,443 shares at June 30, 2004 and
      September 30,2003............................................................         (25,451)           (25,451)
                                                                                        -----------      -------------
              Total stockholders' equity ..........................................         111,039            218,057
                                                                                        -----------      -------------
                                                                                        $   484,022      $     591,502
                                                                                        ===========      =============
</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,
                                                                 ----------------------
                                                                   2004          2003
                                                                 --------      --------
<S>                                                              <C>           <C>
Revenues:
   Sales commissions and product sales .....................     $  9,866      $  5,636
   License and other revenues, including $1,250 from related
        parties in 2004 and 2003 ...........................        1,300         1,519
   Collaborative program revenues ..........................           --           867
                                                                 --------      --------
                                                                   11,166         8,022
Expenses:
   Cost of product sales ...................................          108            55
   Research and development ................................       25,352        24,301
   Acquired in-process research and development
    (see note 5) ...........................................           --        31,290
   Selling, general and administrative .....................       22,655        23,336
   Amortization of intangibles .............................        4,574         3,922
                                                                 --------      --------
                                                                   52,689        82,904
                                                                 --------      --------
         Loss from operations ..............................      (41,523)      (74,882)

Other income (expense):
   Investment income - net .................................        1,271         1,567
   Interest expense ........................................       (6,576)       (1,605)
   Other expense - net .....................................         (517)         (198)
                                                                 --------      --------
Net loss ...................................................     $(47,345)     $(75,118)
                                                                 ========      ========

Weighted average shares of common stock outstanding ........       39,643        36,992
                                                                 ========      ========

Basic and diluted net loss per common share ................     $  (1.19)     $  (2.03)
                                                                 ========      ========
</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,
                                                                     ------------------------
                                                                       2004           2003
                                                                     ---------      ---------
<S>                                                                  <C>            <C>
Revenues:
   Sales commissions and product sales .........................     $  25,948      $   6,523
   License and other revenues, including $3,750
      from related parties in 2004 and 2003 ....................         3,825          4,478
   Collaborative program revenues, including $6,187 from related
      parties in  2003 .........................................            --          9,085
                                                                     ---------      ---------
                                                                        29,773         20,086
                                                                     ---------      ---------
Expenses:
   Cost of product sales .......................................         2,262             55
   Research and development ....................................        76,178         76,297
   Acquired in-process research and development (see note 5) ...            --         31,290
   Selling, general and administrative .........................        65,279         41,496
   Amortization of intangibles .................................        13,986          4,666
                                                                     ---------      ---------
                                                                       157,705        153,804
                                                                     ---------      ---------
         Loss from operations ..................................      (127,932)      (133,718)

Other income (expense):
   Investment income - net .....................................         4,185          6,469
   Interest expense ............................................       (12,216)        (4,817)
   Other expense - net .........................................        (1,219)          (321)
                                                                     ---------      ---------
Net loss .......................................................     $(137,182)     $(132,387)
                                                                     =========      =========

Weighted average shares of common stock outstanding ............        39,173         36,618
                                                                     =========      =========

Basic and diluted net loss per common share ....................     $   (3.50)     $   (3.62)
                                                                     =========      =========
</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,
                                                                                   ------------------------
                                                                                     2004           2003
                                                                                   ---------      ---------
<S>                                                                                <C>            <C>
Cash flow from operating activities:
   Net loss ..................................................................     $(137,182)     $(132,387)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Gain on sale of investments ............................................           (20)          (391)
      (Gain) loss  on sale and disposal of equipment .........................           (21)            26
      Depreciation and amortization ..........................................        24,352         13,564
      Provision for inventory obsolescence ...................................         1,954             --
      In-process research and development charge on acquisition ..............            --         31,290
      Non-cash compensation charges ..........................................         1,598            580
      Changes in assets and liabilities, net of effect of acquisition:
           Receivables .......................................................          (191)        (4,594)
           Inventory .........................................................           306           (604)
           Prepaid expenses and other current assets .........................         3,461         (1,640)
           Other assets ......................................................            40             53
           Accounts payable and accrued expenses .............................         1,482          7,273
           Unearned revenue ..................................................        (3,743)        (7,058)
           Accrued post-retirement benefit cost ..............................           570            522
                                                                                   ---------      ---------
Net cash used in operating activities ........................................      (107,394)       (93,366)
                                                                                   ---------      ---------

Cash flows from investing activities:
   Payment for acquisition, net of cash acquired .............................            --           (193)
   Payments for acquisition of marketing rights ..............................            --        (46,009)
   Purchases of investments (restricted and unrestricted) ....................      (251,015)      (344,543)
   Maturities and sales of investments (restricted and unrestricted) .........       253,917        389,086
   Net additions to property, equipment and leasehold improvements ...........        (2,404)        (2,571)
   Additions to compound library assets ......................................          (126)          (206)
   Investments in non-consolidated companies .................................          (215)          (130)
                                                                                   ---------      ---------
Net cash provided by (used in) investing activities ..........................           157         (4,566)
                                                                                   ---------      ---------

Cash flows from financing activities:
   Debt issuance costs .......................................................          (118)            --
   Proceeds from exercise of stock options and other .........................        29,891          4,017
   Payments on loans and capital leases payable ..............................           (58)          (495)
                                                                                   ---------      ---------
Net cash provided by financing activities ....................................        29,715          3,522
                                                                                   ---------      ---------

Net decrease in cash and cash equivalents ....................................       (77,522)       (94,410)
Effect of exchange rate changes on cash and cash equivalents .................          (112)            44
Cash and cash equivalents at beginning of year ...............................       202,519        152,578
                                                                                   ---------      ---------
Cash and cash equivalents at end of period ...................................     $ 124,885      $  58,212
                                                                                   =========      =========

Non-cash activities:
   Issuance of common stock to employees .....................................     $      65      $      91
                                                                                   =========      =========
   Issuance of common stock to directors .....................................     $     475      $     488
                                                                                   =========      =========
   Issuance of Prosidion stock to Tanabe .....................................     $   1,000           $ --
                                                                                   =========      =========

   Acceleration of director's options ........................................     $     177           $ --
                                                                                   =========      =========

   Issuance of common stock to consultants ...................................    $       --      $     286
                                                                                   =========      =========
   Issuance of common stock in connection with acquisition ...................    $       --      $  31,245
                                                                                   =========      =========
   Issuance of contingent value rights in connection with acquisition ........    $       --      $  22,047
                                                                                   =========      =========
   Issuance of warrants in connection with acquisition .......................    $       --      $     146
                                                                                   =========      =========

   Cash paid for interest ....................................................     $   5,664      $   3,221
                                                                                   =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      -4-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

      In this Quarterly Report on Form 10-Q, "OSI," "our company," "we," "us,"
and "our" refer to OSI Pharmaceuticals, Inc. and subsidiaries.

(1)   Basis of Presentation

      In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles, or GAAP, for interim financial information and
with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three and nine months ended June 30, 2004 and cash flows for the nine months
ended June 30, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2004. For further information,
refer to the consolidated financial statements and footnotes thereto included in
our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

(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 (see note 4). Sales commissions are recognized on net
oncology sales in the period the sales occur based on the estimated split
between oncology sales and multiple sclerosis sales, as determined on a
quarterly basis by a contracted external third party. The split between oncology
and multiple sclerosis sales is subject to further adjustment based on the
parties' final review in the subsequent quarter. Based on past experience, we do
not believe these adjustments, if any, are significant to the consolidated
financial statements.

      Product sales represent sales of Gelclair(R) Bioadherent Oral Gel, or
Gelclair(R), in accordance with an exclusive distribution agreement with Helsinn
Healthcare S.A., which allows us to market and distribute Gelclair(R) in North
America. Gelclair(R) was acquired as part of our acquisition of Cell Pathways,
Inc. (see note 5) and launched by us to the oncology market in the fourth
quarter of calendar 2003. In accordance with SFAS No. 48, "Revenue Recognition
When Right of Return Exists," given the limited sales history of Gelclair(R), we
at this time defer the recognition of revenue on product shipments of
Gelclair(R) to wholesale customers until such time as the product is sold from
the wholesale customer to the retail and non-retail outlets. For each reporting
period, we monitor estimated shipments from wholesale customers to pharmacies
and hospitals, and wholesale customer reorder history based on data from an
external third party. 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(R) to wholesale customers was $787,000 and $779,000 as of
June 30, 2004 and September 30, 2003, respectively, and is included in unearned
revenue-current on the accompanying consolidated balance sheets.

                                      -5-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

      We account 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. 104, "Revenue Recognition." We
received a total of $25.0 million in upfront fees from Genentech, Inc. and Roche
in January 2001 which is being recognized on a straight-line basis over the
expected term of our required research and development efforts under the terms
of a tripartite agreement with Genentech and Roche.

(3)   Stock Options

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

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

      The weighted average fair value per stock option granted was $36.01 and
$15.66 for the three months ended June 30, 2004 and 2003, respectively, and
$32.41 and $14.62 for the nine months ended June 30, 2004 and 2003,
respectively. The fair value of the options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED      NINE MONTHS ENDED
                                                                  JUNE 30,                JUNE 30,
                                                             ------------------      ------------------
                                                              2004        2003        2004        2003
                                                             ------      ------      ------      ------
<S>                                                          <C>         <C>         <C>         <C>
Risk-free interest rate ..................................     3.21%       1.71%       2.98%       1.75%
Dividend yield ...........................................        0%          0%          0%          0%
Volatility factors of expected market
  price of our common stock ..............................    80.00%      81.74%      78.98%      81.75%
Weighted-average expected life of option (years) .........        3           3           3           3
Weighted-average exercise price of stock option grants ...   $67.82      $29.59      $61.54      $27.62
</TABLE>

                                      -6-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

      For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. Our pro forma
information for the three and nine months ended June 30, 2004 and 2003 is as
follows (in thousands, except per share information):

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                        JUNE 30,                     JUNE 30,
                                                                 ----------------------      ------------------------
                                                                   2004          2003          2004           2003
                                                                 --------      --------      ---------      ---------
<S>                                                              <C>           <C>           <C>            <C>
Net loss ..................................................      $(47,345)     $(75,118)     $(137,182)     $(132,387)
   Add: stock-based compensation included in net loss .....           112           610            598            725
   Compensation cost determined under fair value method ...        (6,290)       (5,643)       (18,090)       (15,059)
                                                                 --------      --------      ---------      ---------
   Pro forma net loss .....................................      $(53,523)     $(80,151)     $(154,674)     $(146,721)
                                                                 ========      ========      =========      =========

Basic and diluted net loss per common share:
    Net loss - as reported ................................      $  (1.19)     $  (2.03)     $   (3.50)     $   (3.62)
                                                                 ========      ========      =========      =========
    Net loss - pro forma ..................................      $  (1.35)     $  (2.17)     $   (3.95)     $   (4.01)
                                                                 ========      ========      =========      =========
</TABLE>

(4)   Co-Promotion Agreement

      On March 11, 2003, we entered into a co-promotion agreement with an
affiliate of Serono S.A. to market and promote Novantrone(R) for approved
oncology indications in the United States through December 2017. The purchase
price and related professional fees, net of related amortization, are included
in other intangible assets in the accompanying consolidated balance sheets as of
June 30, 2004 and September 30, 2003, and are being amortized on a straight-line
basis through expiration of the Novantrone(R) patent in April 2006. Under the
terms of the agreement, we will also pay quarterly maintenance fees 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 are expensed as
incurred and included in selling, general and administrative expenses on the
accompanying consolidated statements of operations. We receive commissions on
net sales of the product in the United States for oncology indications. Sales
commissions totaled $9.5 million and $25.0 million for the three and nine months
ended June 30, 2004, respectively. Sales commissions totaled $5.5 million and
$6.4 million for the three and nine months ended June 30, 2003, respectively.

(5)   Acquisition

      On June 12, 2003, we completed our acquisition of Cell Pathways, pursuant
to the terms of an Agreement and Plan of Merger dated February 7, 2003. The
acquisition was accounted for under the purchase method of accounting. The
assets purchased and liabilities assumed by us included: (a) two drug candidates
in clinical development, Aptosyn(R) (exisulind) and OSI-461, and the related
technology platform and patent estate; (b) exclusive distribution rights to the

                                      -7-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

marketed product, Gelclair(R), 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.
Gelclair(R) is a bioadherent 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. We have an exclusive
distribution agreement with Helsinn that allows us to market and distribute
Gelclair(R) in North America (United States, Canada and Mexico) through January
2012. We previously had a marketing agreement with John O. Butler Company, under
which Butler marketed Gelclair(R) to the dental market. In April 2004, we agreed
with Butler to terminate this agreement and are currently seeking a new partner.

(6)   Restricted Assets

      In September 2003, in connection with the issuance of 3.25% convertible
senior subordinated notes due 2023, or the 2023 Notes, we pledged $14.2 million
of U.S. government securities, or Restricted Investment Securities, with
maturities at various dates through August 2006. In February 2002, in connection
with the issuance of 4% convertible senior subordinated notes due 2009, or the
2009 Notes, we pledged $22.9 million of Restricted Investment Securities with
maturities at various dates through November 2004. Upon maturity of the
Restricted Investment Securities, the proceeds will be used to pay the first six
scheduled interest payments on the respective convertible senior subordinated
notes when due. We consider our Restricted Investment Securities to be
held-to-maturity securities, as defined by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." These securities are reported at
their amortized cost, which includes the direct costs to acquire the securities
plus the amortization of any discount or premium, and accrued interest earned on
the securities. The balance of Restricted Investment Securities decreases as
scheduled interest payments are made. The aggregate fair value and amortized
cost of the Restricted Investment Securities at June 30, 2004 were $22.3
million, of which $15.2 million was classified as short-term and the balance of
$7.1 million was classified as long-term. In June 2004, we called the 2009 Notes
for redemption. In connection with the redemption call, in July 2004, we paid
the note holders the remaining portion of the guaranteed interest of $6.4
million (see note 17(a)).

      With respect to our facility leases in Horsham, Pennsylvania and Oxford,
England, we have outstanding letters of credit issued by a commercial bank. The
irrevocable letter of credit for our Horsham, Pennsylvania facility expires
annually on September 22nd with a final expiration date of September 22, 2008.
This letter of credit is for $400,000, of which the full amount was available at
June 30, 2004. The irrevocable letter of credit for our Oxford, England facility
expires annually on September 27th with a final expiration date of September 27,
2007. This letter of credit is for $2.5 million, of which the full amount was
available on June 30, 2004. The collateral for these letters of credit are
maintained in a restricted investment account. Included in cash and cash
equivalents and investments securities as of June 30, 2004 is $96,000 and $3.3
million, respectively, relating to restricted cash and investments to secure
these letters

                                      -8-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

of credit. Included in cash and cash equivalents and investment securities as of
September 30, 2003 is $35,000 and $3.4 million, respectively, relating to
restricted cash and investments to secure these letters of credit.

(7)   Inventory

      Inventory is comprised solely of Gelclair(R) and is stated at the lower of
cost or market, as determined using the first-in, first-out method. During the
three months ended March 31, 2004, we recorded a provision for inventory
obsolescence of $2.0 million for inventory we consider to be in excess of
forecasted future demand based on expiration dates. This provision is included
in inventory-net in the accompanying consolidated balance sheet as of June 30,
2004, as well as in cost of product sales in the accompanying consolidated
statement of operations for the nine months ended June 30, 2004.

      Inventory-net at June 30, 2004 and September 30, 2003, consisted of the
following (in thousands):

<TABLE>
<CAPTION>
                                         JUNE 30,      SEPTEMBER 30,
                                           2004            2003
                                         ---------     -------------
<S>                                      <C>           <C>
Finished goods on hand, net.........     $   1,107     $       3,358
Inventory subject to return ........           249               258
                                         ---------     -------------
                                         $   1,356     $       3,616
                                         =========     =============
</TABLE>

      Inventory subject to return represents the amount of Gelclair(R) shipped
to wholesale customers which has not been recognized as revenue based on
estimated wholesaler activity, as further discussed in note 2.


                                      -9-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(8)   Comprehensive Income (Loss)

      Comprehensive loss for the three and nine months ended June 30, 2004 and
2003 was as follows (in thousands):

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                                JUNE 30,                     JUNE 30,
                                                                         ----------------------      ------------------------
                                                                           2004          2003          2004           2003
                                                                         --------      --------      ---------      ---------
<S>                                                                      <C>           <C>           <C>            <C>
Net loss ...........................................................     $(47,345)     $(75,118)     $(137,182)     $(132,387)
Other comprehensive income (loss):
   Foreign currency translation adjustments ........................         (449)          850          1,349          1,146
   Unrealized gains (losses) on derivative instruments arising
   during period ...................................................           (9)            -             93              -
   Unrealized holding gains (losses) arising during period .........       (1,834)           89         (1,727)          (239)
   Less:  Reclassification adjustment for losses (gains) realized ..          (18)          (53)           (40)          (394)
                                                                         --------      --------      ---------      ---------
                                                                           (2,310)          886           (325)           513
                                                                         --------      --------      ---------      ---------

Total comprehensive loss ...........................................     $(49,655)     $(74,232)     $(137,507)     $(131,874)
                                                                         ========      ========      =========      =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                  JUNE 30,      SEPTEMBER 30,
                                                                    2004            2003
                                                                  --------      -------------
<S>                                                               <C>           <C>
Cumulative foreign currency translation adjustment ..........     $  2,179      $         830
Unrealized gains on derivative instruments ..................           58                  -
Unrealized gains (losses) on available-for-sale securities ..       (1,398)               334
                                                                  --------      -------------
Accumulated other comprehensive income ......................     $    839      $       1,164
                                                                  ========      =============
</TABLE>

(9)   Net Loss per Common Share

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

      Such common share equivalents (convertible senior subordinated notes,
stock options and warrants) and contingent shares for the three and nine months
ended June 30, 2004 and 2003 amounted to (in thousands):

<TABLE>
<CAPTION>
                                THREE MONTHS ENDED       NINE MONTHS ENDED
                                      JUNE 30,                JUNE 30,
                                -------------------     -------------------
                                 2004        2003        2004        2003
                                -------     -------     -------     -------
<S>                             <C>         <C>         <C>         <C>
Common share equivalents ..       8,585       4,272       7,851       4,124
                                =======     =======     =======     =======
Contingent shares .........       1,585       1,585       1,585       1,585
                                =======     =======     =======     =======
</TABLE>

                                      -10-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

         If the three and nine months ended June 30, 2004 and 2003 had resulted
in net income and had the common share equivalents for our 2009 Notes (3,200,000
shares) and our 2023 notes (2,998,800 shares) been dilutive, interest expense
related to the notes would have been added back to net income to calculate
diluted earnings per share. The related interest expense of these notes for the
three and nine months ended June 30, 2004 totaled $6.6 million and $12.2
million, respectively, and $1.6 million and $4.8 million for the three and nine
months ended June 30, 2003, respectively.

(10)     Goodwill and Other Intangible Assets

         The carrying amount of goodwill as of June 30, 2004 of $39.0 million
includes a $218,000 effect from foreign currency exchange rate fluctuations
during the nine-month period ended June 30, 2004. We completed our annual
impairment review of goodwill during the first quarter of fiscal 2004 and
determined that no impairment charge was required.

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

<TABLE>
<CAPTION>
                                                  JUNE 30, 2004                            SEPTEMBER 30, 2003
                                     --------------------------------------     --------------------------------------
                                                                      NET                                        NET
                                     CARRYING     ACCUMULATED        BOOK       CARRYING     ACCUMULATED        BOOK
                                      AMOUNT      AMORTIZATION       VALUE       AMOUNT      AMORTIZATION       VALUE
                                     --------     ------------      -------     --------     ------------      -------
<S>                                  <C>          <C>               <C>         <C>          <C>               <C>
Novantrone(R) ..................     $ 46,009     $    (19,274)     $26,735     $ 46,009     $     (8,084)     $37,925
Gelclair(R) ....................       28,957           (3,515)      25,442       28,957             (984)      27,973
License to compound libraries ..            -                -            -          740             (493)         247
                                     --------     ------------      -------     --------     ------------      -------
Total ..........................     $ 74,966     $    (22,789)     $52,177     $ 75,706     $     (9,561)     $66,145
                                     ========     ============      =======     ========     ============      =======
</TABLE>

      Amortization expense for these intangible assets for the three and nine
months ended June 30, 2004 was $4.6 million and $14.0 million, respectively, and
$3.9 million and $4.7 million for the three and nine months ended June 30, 2003,
respectively. Amortization expense is estimated to be $4.6 million for the
remainder of fiscal 2004, $18.3 million in fiscal 2005, $11.5 million in fiscal
2006, $3.4 million in fiscal 2007, and $3.4 million in fiscal 2008.

(11)  Horsham Facility Costs

      During the second quarter of fiscal 2004, we committed to and approved an
exit plan for our Horsham, Pennsylvania facility which we acquired in connection
with the acquisition of Cell Pathways in June 2003. In accordance with SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities," we have
recognized the rent obligations for the remainder of the lease (through June
2008), offset by the sublease rental income. This resulted in a charge of $1.8
million which has been included in selling, general and administrative expenses
in the accompanying consolidated statement of operations for the nine months
ended

                                      -11-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

June 30, 2004. In May 2004, we entered into a sublease agreement for the Horsham
facility. We charge the rental payments and the sublease rental income against
the accrued liability, which had a remaining balance of $1.8 million as of June
30, 2004.

(12)  Derivative Financial Instruments

      Beginning in March 2004, we entered into forward exchange contracts to
reduce foreign currency fluctuation risks relating to intercompany transactions
for the funding of our research activities in the United Kingdom. We account for
these derivative financial instruments in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS No. 137 and SFAS No. 138. When entered into, we designate and
document these derivative instruments as a cash flow hedge of a specific
underlying exposure, as well as the risk management objectives and strategies
for undertaking the hedge transactions. Changes in the fair value of a
derivative that is designated and documented as a cash flow hedge and is highly
effective, are recorded in other comprehensive income until the underlying
transaction affects earnings, and then are later reclassified to earnings. We
formally assess, both at the inception and at each financial quarter thereafter,
the effectiveness of the derivative instrument hedging the underlying forecasted
cash flow transaction. Any ineffectiveness related to the derivative financial
instruments' changes in fair value will be recognized in the period in which the
ineffectiveness was calculated. As of June 30, 2004, the notional and fair value
of the foreign exchange contracts for British pounds was $4.5 million and $4.6
million, respectively. The contracts will mature over the next five months. At
June 30, 2004, net gains on derivative instruments expected to be reclassified
from accumulated other comprehensive income to earnings during the next five
months due to the settlement of the forward contracts and execution of the
intercompany transactions were $58,000.

(13)  Employee Post-Retirement Plan

      On November 10, 1992, we adopted a plan which provides post-retirement
medical and life insurance benefits to eligible employees, board members and
qualified dependents. Eligibility is determined based on age and service
requirements. These benefits are subject to deductibles, co-payments and other
limitations.

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

      In May 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." FSP No. FAS 106-1 provides
guidance on the accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization

                                      -12-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


Act of 2003, or the Act, for employers that sponsor post-retirement health care
plans that provide prescription drug benefits. It requires those employers to
provide certain disclosures regarding the effect of the Federal subsidy provided
by the Act. The accumulated post-retirement benefits obligation or net
post-retirement benefits cost in the consolidated financial statements or
accompanying notes do not reflect the effects of the Act on our post-retirement
benefit plan. We are in the process of determining the impact of the Act on the
accumulated post-retirement benefits obligation and net post-retirement benefits
cost to be recorded when FSP No. FAS 106-1 is effective, which currently is
scheduled for the fourth quarter of fiscal 2004.

      Net post-retirement benefit costs for the three and nine months ended June
30, 2004 and 2003 includes the following components (in thousands):

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED       NINE MONTHS ENDED
                                                                              JUNE 30,                 JUNE 30,
                                                                         -------------------     -------------------
                                                                          2004        2003        2004        2003
                                                                         -------     -------     -------     -------
<S>                                                                      <C>         <C>         <C>         <C>
Service costs for benefits earned during the period ................         143         108         429         323
Interest costs on accumulated post-retirement benefits obligation ..          66          59         198         176
Amortization of initial benefits attributed to past services .......           1           1           3           4
Amortization of loss ...............................................          10           7          30          22
                                                                         -------     -------     -------     -------
Net post-retirement benefit cost ...................................     $   220     $   175     $   660     $   525
                                                                         =======     =======     =======     =======
</TABLE>

(14)  Amended and Restated Stock Incentive Plan

      On March 17, 2004, at the 2004 Annual Meeting of Stockholders, our
stockholders approved the Amended and Restated Stock Incentive Plan, or the
Plan, which was adopted by the Board of Directors on January 23, 2004. The Plan
amends and restates our 2001 Incentive and Non-Qualified Stock Option Plan to
permit, in addition to the grant of options, the grant of restricted stock
awards, stock appreciation rights and stock bonus awards upon such terms and
conditions as the compensation committee appointed by the Board of Directors
shall determine.

(15)  License Agreement

      Effective as of October 1, 1999, we entered into a Collaborative Research
and License Agreement with Tanabe Seiyaku Co. Ltd. focused on discovering and
developing novel pharmaceutical products to treat diabetes. In April 2003, we
assigned our rights and obligations under the collaborative agreement to our
majority-owned, UK-based subsidiary, Prosidion Limited, which is focused on the
discovery and development of diabetes and obesity therapeutics. The contract
period under this agreement expired on October 1, 2003 and was not renewed.
Tanabe had the responsibility for further development and marketing of any lead
compound in exchange for milestone and royalty payments to us. In March 2004,
Prosidion entered into a termination agreement with Tanabe, whereby Prosidion
obtained the rights to certain patents developed under the collaboration,
subject to Tanabe's rights to develop and commercialize, in certain Asian
territories, certain compounds covered by such patents. In consideration of the
termination, Prosidion paid Tanabe $1.0 million in cash and issued $1.0

                                      -13-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


million of Prosidion stock. This expense of $2.0 million is included in research
and development expenses on the accompanying statement of operations for the
nine months ended June 30, 2004. Prosidion is also required to make certain
payments to Tanabe upon the achievement of certain milestones.

(16)  Product Development, Marketing and Manufacturing Contracts

      In January 2001, we entered into an alliance with Genentech and Roche for
the global co-development and commercialization of Tarceva(TM). With respect to
the alliance, we entered into a tripartite agreement and separate agreements
with both Genentech and Roche. Under the OSI/Genentech collaboration agreement,
we agreed to collaborate in the product development of Tarceva(TM) with the goal
of obtaining regulatory approval for commercial marketing and sale in the United
States of products resulting from the collaboration and, subsequently,
supporting the commercialization of these products. In June 2004, we amended the
OSI/Genentech collaboration agreement to further clarify and define the roles
and responsibilities of the parties. As stated in the original agreement,
Genentech has primary responsibility for the design and implementation of all
product launch activities and the promotion, marketing and sales of all products
resulting from the collaboration in the United States, its territories and
Puerto Rico, and we will own and be responsible for filing the new drug
application, or NDA, for Tarceva(TM) and obtaining approval by the U.S. Food and
Drug Administration, or FDA. Pursuant to the amendment, we will also assist with
the promotion of Tarceva(TM) by providing at least 25% of the combined
OSI/Genentech sales force. We will share equally in the operating profits and
losses of Tarceva(TM) and other products resulting from the collaboration in the
United States, its territories and Puerto Rico.

      In June 2004, pursuant to the OSI/Genentech collaboration agreement, as
amended, we also entered into a manufacturing and supply agreement with
Genentech. Under the terms of the agreement, we will be responsible for the
clinical and, upon approval, commercial supplies of Tarceva(TM) in the United
States, its territories and Puerto Rico. We will also be responsible for the
inventory management and manufacturing planning to ensure adequate supply in
order to meet the forecasted demand. We have established a supply chain of
third-party providers to manufacture Tarceva(TM) in anticipation of the product
launch. We and Genentech have established a team, with representatives from both
parties, to determine minimum safety stock and inventory levels, and to review
and discuss inventory management strategy and supply process, forecasts and
delivery schedules. If we fail to comply with certain manufacturing obligations,
as defined in the agreement, and are unable to cure such failure within a set
period of time, Genentech has the right, but not the obligation, to assume some
or all of the supply responsibilities.

                                      -14-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(17)  Subsequent Events

      (a)   4.00% Convertible Senior Subordinated Notes

      On February 1, 2002, we issued $200.0 million aggregate principal amount
of the 2009 Notes in a private placement for net proceeds to us of $192.9
million. The 2009 Notes were convertible into shares of our common stock at a
conversion price of $50 per share, subject to normal and customary adjustments
such as stock dividends. The 2009 Notes were redeemable by us, in whole or in
part, at any time before February 1, 2005 if the closing price of our common
stock exceeded 150% of the conversion price then in effect for a specified
period of time. The related debt issuance costs of $7.1 million were deferred
and recorded as other non-current assets and were being amortized on a
straight-line basis over the seven-year term of the 2009 Notes. In August and
September 2002, we retired a total of $40.0 million in principal amount of the
2009 Notes for an aggregate purchase price of $26.2 million, including accrued
interest of $133,000. In June 2004, we called for the full redemption of the
outstanding $160.0 million of the 2009 Notes. All of the holders of the 2009
Notes converted their notes into shares of our common stock prior to the
redemption date of July 19, 2004. As a result of these conversions, on July 19,
2004, we issued 3.2 million shares of our common stock and paid the remaining
portion of the guaranteed interest of $6.4 million. Under the terms of the 2009
Notes, the note holders were guaranteed the payment of interest for the first
three years through February 1, 2005. The note holders became fully entitled to
this guaranteed interest on June 18, 2004, the date we called for redemption of
the 2009 Notes, and accordingly we accrued an additional interest charge of $3.7
million in the quarter ended June 30, 2004. Upon conversion of the 2009 Notes,
the remaining balance of the debt issuance costs of $3.7 million was
reclassified to additional paid in capital in July 2004. Since the 2009 Notes
were converted to common stock, the 2009 Notes have been reflected as a
non-current liability on the accompanying consolidated balance sheet as of June
30, 2004.

      (b)   Asset Acquisition

      On June 17, 2004, our subsidiary, Prosidion, which is focused on the
discovery and development of diabetes and obesity therapeutics, entered into an
asset purchase agreement with Probiodrug AG. Probiodrug is a development company
engaged in the research and development of drug candidates for various targets
and various indications, including metabolic diseases. The acquisition was
completed on July 26, 2004. The assets acquired included a platform of
dipeptidyl peptidase IV (DP-IV) technology, which includes PSN9301 (formerly
P93/01), a clinical candidate that is in Phase II clinical trials for the
treatment of Type 2 diabetes and issued method-of-use claims that have been
non-exclusively licensed to other companies for future milestones and royalties
payments. Upon the closing of the acquisition, we paid $35.0 million in cash. We
will also be required to pay additional contingent milestone payments upon the

                                      -15-
<PAGE>

                   OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

successful development of PSN9301. We expect to record an acquired in-process
research and development charge of approximately $35.0 million in the fourth
quarter related to this asset acquisition.

      (c)   Consolidation of Our Oncology Operations

      On August 5, 2004, we announced to our employees a proposal to consolidate
our U.K. based oncology research and development activities into our New York
locations by November 30, 2004. This decision was based on the need to
prioritize the expansion of our commercial operation infrastructure and increase
our level of investment in both translational research and our diabetes and
obesity subsidiary, Prosidion. This consolidation will primarily affect our
Oxford facility where the consolidation may result in the layoff of
approximately 90 employees. Following the consolidation, the only operations
remaining at the Oxford facility will be those related to our international
clinical trials group and our diabetes and obesity subsidiary, Prosidion.

                                      -16-
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

THREE AND NINE MONTHS ENDED JUNE 30, 2004 AND 2003

OVERVIEW

      We are a leading biotechnology company primarily 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. Our
flagship product, Tarceva(TM) (erlotinib-HCI), is an oral, once-a-day, small
molecule inhibitor of the epidermal growth factor receptor (HER1/EGFR).
Tarceva(TM) is the first EGFR inhibitor, and the first non-chemotherapy agent,
to demonstrate a survival benefit in advanced non-small cell lung cancer, or
NSCLC. We recently completed the filing of a rolling submission new drug
application, or NDA, with the U.S. Food and Drug Administration, or FDA, for
Tarceva(TM) for the treatment of NSCLC patients who have failed prior
chemotherapy. Tarceva(TM) has a Fast Track designation for this indication and
has also recently been granted Pilot 1 status by the FDA. The Pilot 1 program is
designed to expedite the Fast Track process. Beyond Tarceva(TM), we have a
balanced pipeline of oncology drug candidates that includes signal transduction
inhibitors, apoptosis inducers and a next-generation cytotoxic chemotherapy
agent. We have established a core commercial organization, which includes
approximately 30 sales representatives, which we intend to expand to
approximately 50 sales representatives in advance of the launch of Tarceva(TM).
We anticipate a launch of Tarceva(TM) in the United States in the first quarter
of calendar 2005. We market and promote Novantrone(R) (mitoxantrone concentrate
for injection) for approved oncology indications in the United States, and we
market and distribute Gelclair(R) in North America, a bioadherent oral gel for
the relief of pain associated with oral mucositis, a frequent side-effect of
chemotherapy. We have also established Prosidion Limited, an independently
operated diabetes and obesity subsidiary based in the United Kingdom.
Prosidion's lead clinical candidate, PSN9301 (formerly P93/01), an inhibitor of
dipeptidyl peptidase IV (DP-IV), is in Phase II clinical trials for the
treatment of Type 2 diabetes. PSN9301 was acquired by Prosidion from Probiodrug
AG in a transaction which closed on July 26, 2004.

      Our objective going forward is to build upon Tarceva(TM)'s significant
market potential and to capitalize on the experienced management team and the
comprehensive set of capabilities from discovery to commercialization that we
have established over the last several years in order to create a premier
biotechnology organization and drive value creation for our stockholders. To
accomplish this, we intend to:

            -     maximize Tarceva(TM)'s value with a timely registration in the
                  United States, the European Union and Japan, and an effective
                  product growth strategy;

            -     establish our position as a premier oncology franchise by
                  advancing our pipeline, reinforcing our commercial presence,
                  validating our research capabilities and actively pursuing
                  in-licensing and acquisition opportunities; and

                                      -17-
<PAGE>

            -     diversify our business through continued investment in
                  Prosidion to grow a second business unit focused on diabetes
                  and obesity in order to help drive long-term growth.

QUARTERLY UPDATE

Tarceva(TM)

      On April 26, 2004, we announced that Tarceva(TM) met its primary endpoint
of improving overall survival and its key secondary endpoints of
progression-free survival, time-to-symptom deterioration and objective tumor
response rate in a 731-patient randomized, double-blinded placebo controlled
Phase III trial, or the BR.21 study. The trial compared Tarceva(TM) to placebo
in the treatment of patients with advanced NSCLC following the failure of first
or second-line chemotherapy. The data demonstrates a 42% improvement in median
survival and a 45% improvement in the one-year survival rate relative to
placebo. The results revealed a survival benefit in essentially all subsets of
patients examined, including males, smokers and patients with squamous cell
carcinoma histology (subsets that, consistent with previous studies with EGFR
inhibitors, had a relatively low rate of tumor response in our study), as well
as females, non-smokers and patients with adenocarcinoma (subsets with higher
rates of tumor response). We believe that these results are particularly
noteworthy in that they demonstrate a meaningful, broad-based clinical benefit
in a very advanced population of lung cancer patients.

      In addition to the survival benefit, Tarceva(TM) also demonstrated
statistically significant and clinically meaningful improvement in patients'
quality-of-life as measured by the time-to-symptom deterioration of key lung
cancer symptoms. Statistically significant improvements were observed for cough
(adjusted p-value = 0.04), pain (adjusted p-value = 0.04) and dyspnea, or
shortness of breath, (adjusted p-value = 0.03). P-value is a statistical measure
of significance. A p-value of less than 0.05 indicates a statistically
significant difference. The safety profile observed was relatively benign
compared to cytotoxic chemotherapy and was consistent with that seen in prior
Tarceva(TM) studies with the most common side-effects consisting of rash (75%)
and diarrhea (54%). In this large placebo controlled study, severe pulmonary
events, including potential cases of interstitial lung disease, were infrequent
and generally equally distributed between the Tarceva(TM) and placebo arms. We
believe that the combination of survival with a relatively benign side-effect
profile positions Tarceva(TM) as a potentially important treatment option for
oncologists treating advanced NSCLC patients, if approved by the FDA.

      Tarceva(TM) was granted a Fast Track designation by the FDA in September
2002 for the second/third-line NSCLC indication and in January 2004, we
initiated a rolling submission of our NDA under provisions available with Fast
Track status. Tarceva(TM) was recently granted Pilot 1 status, which requires
the FDA to initiate a six-month review of each unit of the submission either as
it is received, or upon granting of Pilot 1 status, whichever is later. On
August 2, 2004, we along with our partner, Genentech, announced that we
completed the submission of the NDA with the FDA for Tarceva(TM) as a
monotherapy for the treatment of patients with advanced NSCLC for whom
chemotherapy has failed. The FDA has up to sixty days to accept the filing. Upon
acceptance of the submission by the FDA, we will receive a

                                      -18-
<PAGE>

milestone payment from Genentech. Assuming a successful priority review
designation and a successful review by the FDA lasting the full six months from
completion of the filing, we, together with our partner, Genentech, anticipate
launching Tarceva(TM) in the United States in the first quarter of calendar
2005, with a full approval allowing us to market the product to patients that
have failed prior chemotherapy. We anticipate that our partner, Roche, will file
for registration in the European Union using the positive results of our Phase
III study in the third quarter of calendar 2004 and, assuming a successful
review, will gain approval for the drug in the second half of calendar 2005. The
acceptance of such filing by the European regulatory authorities will trigger a
milestone payment to us from Roche.

      In connection with the further development and commercialization of
Tarceva(TM), we recently entered into agreements with Genentech with respect to
promotion, marketing and manufacturing responsibilities for Tarceva(TM) in the
U.S. market. Genentech will have the lead responsibility for the marketing and
promotion of Tarceva(TM) in the United States. However, we will co-promote the
product in the field by providing at least 25% of the combined U.S. sales force.
We also have responsibility for manufacturing and supply in the United States.
We believe that the supply chain of third-party providers that we have
established will, position us with sufficient inventory to be ready to launch
the product in advance of FDA approval.

      The successful execution of a strategy to expand FDA-approved Tarceva(TM)
indications post-launch is a clear priority. We intend to broaden the use of
Tarceva(TM) to earlier stage lung cancer patients, both in the first-line and
adjuvant settings. The first part of this strategy has been initiated with an
ongoing randomized Phase II trial evaluating monotherapy Tarceva(TM) against
chemotherapy in patients who have received no prior chemotherapy and have poor
performance status. We also intend to explore the use of Tarceva(TM) in
combination with other targeted therapies, particularly the anti-angiogenic
antibody, Avastin(R). Data from Phase II studies has revealed potentially
promising activity for the combination of Tarceva(TM) and Avastin(R) in renal
cell carcinoma and in advanced NSCLC patients with adenocarcinoma. Additionally,
we intend to expand the use of Tarceva(TM) to other disease settings in
oncology. To date, tumor responses have been documented in Phase II studies for
monotheraphy Tarceva(TM) in bronchioalveolar cell carcinoma, glioblastoma
multiforme, head and neck cancer, hepatocellular carcinoma, breast cancer and
ovarian cancer. Approximately 100 clinical trials of Tarceva(TM), including both
registration oriented and publication only studies, are either ongoing or
planned.

Aptosyn(R)

      On June 11, 2004, we announced that, as we had expected, the Phase III
study of Apotsyn(R) (exislund) in combination with Taxotere(R) (docetaxal), did
not meet its primary endpoint of improving overall survival in patients with
advanced NSCLC. The trial also did not meet its secondary endpoints of
improvement in one-year survival, progression-free survival and response rate.
Survival in the Aptosyn(R) plus Taxotere(R) arm of the study was essentially
indistinguishable from the Taxotere(R) plus placebo arm. Median and one-year
survival rates in the Apotsyn(R) plus Taxotere(R) were 6.9 months and 30.7%,
respectively, compared with 6.9 months and 29.5%, respectively, in the
Taxotere(R) plus placebo arm. Although the further development of Apotsyn(R) is
unlikely, we believe that the more potent follow-on molecule, OSI-461, warrants
continued development. We acquired both Aptosyn(R) and OSI-461 in June 2003 as
part of the Cell Pathways acquisition.

                                      -19-
<PAGE>

Redemption of 4% Convertible Notes

      On June 18, 2004, we exercised the redemption option for our 4% senior
convertible subordinated notes due 2009 that we issued in February 2002 and
called for the full redemption of the outstanding $160.0 million of the notes.
As expected, all of the noteholders converted their notes into shares of our
common stock prior to the redemption date of July 19, 2004. As a result of these
conversions, on July 19, 2004, we reduced our long-term debt by $160.0 million
and issued 3.2 million shares of our common stock. We also paid the remaining
portion of the guaranteed interest of $6.4 million to the noteholders.

Consolidation of Our Oncology Operations

      On August 5, 2004, we announced to our employees a proposal to consolidate
our U.K. based oncology research and development activities into our New York
locations by November 30, 2004. This decision was based on the need to
prioritize the expansion of our commercial operation infrastructure and increase
our level of investment in both translational research and our diabetes and
obesity subsidiary, Prosidion.

      This consolidation will primarily affect our Oxford facility where the
consolidation may result in the layoff of approximately 90 employees. Following
the consolidation, the only operations remaining at the Oxford facility will be
those related to our international clinical trials group and our diabetes and
obesity subsidiary, Prosidion. We currently estimate annual savings of $10
million to $15 million in operating expenses as a result of this consolidation.

Prosidion's Asset Acquisition

      We consider expansion into a second disease area to be an important part
of our strategy for long-term value creation. To this end, on July 26, 2004 our
majority-owned UK diabetes subsidiary, Prosidion, acquired from Probiodrug AG, a
German company, its Phase II Type 2 diabetes clinical candidate, PSN9301
(formerly P93/01), and its associated intellectual property estate. PSN9301 is
an oral, small molecule inhibitor of dipeptidyl peptidase IV (DP-IV), which is
recognized as an important target in diabetes. In addition to composition of
matter claims for PSN9301, the acquired intellectual property estate includes
issued U.S. methods-of-use claims that have been non-exclusively licensed to
Novartis, Inc. and Merck & Co., Inc., among others, for milestones and
royalties. Prosidion also anticipates initiating clinical trials for two
diabetes candidates, PSN105 (a glucokinase activator) and PSN357 (a glycogen
phosphorylase inhibitor), in the first half of calendar 2005.

CRITICAL ACCOUNTING POLICIES

      We prepare our consolidated financial statements in accordance with U.S.
generally accepted accounting principles. As such, we are required to make
certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities as of the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the periods presented. Actual results could differ significantly from our
estimates and the

                                      -20-
<PAGE>

estimated amounts could differ significantly under different assumptions and
conditions. We believe that the following discussion addresses our most critical
accounting policies, which are those that are most important to the portrayal of
our financial condition and results of operations and which require our most
difficult and subjective judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. Note 1 to
the consolidated financial statements included in our Annual Report on Form 10-K
for the fiscal year ended September 30, 2003, includes a summary of the
significant accounting policies used in the preparation of the consolidated
financial statements.

Revenue Recognition

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

      Given the limited sales history of Gelclair(R), we at this time defer the
recognition of revenue on product shipments of Gelclair(R) to wholesale
customers until such time as the product is sold from the wholesale customer to
the retail and non-retail outlets. For each reporting period, we monitor
shipments from wholesale customers to pharmacies and hospitals' and wholesale
customers' reorder history based on data from an external third party.

      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. 104, "Revenue
Recognition." 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. Subsequent changes to the expected term could
increase or decrease the period over which the unearned revenue is recognized.

Inventory

      Our inventory is stated at the lower of cost or market value, and our
inventory costs are determined by the first-in, first-out method. We analyze our
inventory levels quarterly and write down inventory that has become obsolete,
inventory that has a cost basis in excess of its expected net realizable value,
and inventory in excess of expected requirements. Expired inventory is disposed
of and the related costs are written off. Provisions for excess or expired
inventory are primarily based on our estimates of forecasted sales levels. If
actual market conditions are less favorable than those projected by us,
additional inventory write-downs may be required.

Accruals for Clinical Research Organization and Clinical Site Costs

      We make estimates of costs incurred to date but not yet invoiced in
relation to external clinical research organizations, or CROs, and clinical site
costs. We analyze the progress of

                                      -21-
<PAGE>

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.

Goodwill and Other Long-Lived Assets

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

      Our identifiable intangible assets are subject to amortization. SFAS No.
142 requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 requires, among other things, that long-lived
assets be measured at the lower of carrying amount or fair value, less cost to
sell, whether reported in continuing operations or in discontinued operations.
We review our intangibles with determinable lives and other long-lived assets
for impairment 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. Our two most significant intangible assets are our rights to
Novantrone(R) and Gelclair(R), and therefore, we continually monitor sales
activity and market and regulatory conditions for these products for the
existence of any impairment indicators. 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.

REVENUES

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED JUNE 30,           NINE MONTHS ENDED JUNE 30,
                                           -------------------------------      --------------------------------
                                            2004        2003      $ CHANGE       2004        2003       $ CHANGE
                                           -------     ------     --------      -------     -------     --------
<S>                                        <C>         <C>        <C>           <C>         <C>         <C>
Sales commissions and product sales ..     $ 9,866     $5,636     $  4,230      $25,948     $ 6,523     $ 19,425
License and other revenues ...........       1,300      1,519         (219)       3,825       4,478         (653)
Collaborative program revenues .......           -        867         (867)           -       9,085       (9,085)
                                           -------     ------     --------      -------     -------     --------
                                           $11,166     $8,022     $  3,144      $29,773     $20,086     $  9,687
                                           -------     ------     --------      -------     -------     --------
</TABLE>

      The prior year revenues included collaborative revenue, whereas the
current year revenues consist mainly of sales commissions and product sales.
This shift reflects our transition

                                      -22-
<PAGE>

from a business centered on funded collaborative programs to one of generating
our own product revenues ahead of a projected launch of Tarceva(TM).

Sales Commissions and Product Sales

      We began recording Novantrone(R) sales commissions upon the execution of
our Co-Promotion Agreement with an affiliate of Serono, S.A. in March 2003.
Sales commissions for the three months ended June 30, 2004 of $9.5 million were
$4.0 million higher than the three months ended June 30, 2003 and $3.9 million
higher than the three months ended March 31, 2004. The lower sales commissions
during the three months ended March 31, 2004 most likely reflected some
inventory workdown at the wholesalers during that quarter as a result of an
increase in wholesaler stocking levels during the quarter ended December 31,
2003 in anticipation of a price increase. We believe the increase over the three
months ended June 30, 2003 was primarily the direct result of our commercial
efforts related to Novantrone(R) for approved oncology indications. The increase
for the nine-month period was primarily due to sales commissions commencing in
March 2003, resulting in only three and a half months of sales commissions in
fiscal 2003, compared to a full nine months in fiscal 2004. In July 2004, Serono
implemented a 3% price increase on all Novantrone(R) line items. The last price
increase on Novantrone(R) was over a year and a half ago. This increase will not
be reflected in Medicare reimbursement level for 2004. We do not believe this
will have a material impact on Novantrone(R) oncology sales. We also began
recognizing Gelclair(R) product sales during the third quarter of fiscal 2003,
upon the closing of our acquisition of Cell Pathways. Product sales for the
three and nine months ended June 30, 2004 were $335,000 and $911,000,
respectively. We currently estimate that Gelclair(R) sales will be between $1.2
million to $1.5 million for fiscal 2004. Although Gelclair(R) product sales have
been less than originally forecasted, we believe that our product sales of
Gelclair(R) will increase in the oncology market as we continue our sales and
marketing efforts which we launched in the fourth quarter of calendar 2003. We
previously had a marketing agreement with John O. Butler Company, under which
Butler marketed Gelclair(R) to the dental market. In April 2004, we agreed with
Butler to terminate this agreement and are currently seeking a new partner. We
will be introducing a new package size for Gelclair(TM) (i.e., number of units
per package) and believe that a significant component of our forecasted
Gelclair(TM) sales will be derived from this new package size. We currently
estimate that our total fiscal 2004 sales commissions and product sales will be
between $32 million and $35 million.

License and Other/ Collaborative Revenue

      License and other revenues consist principally of the recognition of
upfront fees from Genentech and Roche over the expected term of the
collaboration. There were no collaborative program revenues in fiscal 2004 due
to the completion of our remaining collaborations with Anaderm Research
Corporation in March 2003 and Tanabe Seiyaku Co., Ltd. in October 2003.

                                      -23-
<PAGE>

EXPENSES

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED JUNE 30,              NINE MONTHS ENDED JUNE 30,
                                           -----------------------------------      ----------------------------------
                                            2004         2003        $  CHANGE        2004         2003       $ CHANGE
                                           -------     --------      ---------      --------     --------     --------
<S>                                        <C>         <C>           <C>            <C>          <C>          <C>
Cost of product sales ................     $   108     $     55      $      53      $  2,262     $     55     $  2,207
Research and development .............      25,352       24,301          1,051        76,178       76,297         (119)

Acquired in-process R&D ..............           -       31,290        (31,290)            -       31,290      (31,290)
Selling, general and administrative ..      22,655       23,336           (681)       65,279       41,496       23,783
Amortization of intangibles ..........       4,574        3,922            652        13,986        4,666        9,320
                                           -------     --------      ---------      --------     --------     --------
                                           $52,689     $ 82,904      $ (30,215)     $157,705     $153,804     $  3,901
                                           -------     --------      ---------      --------     --------     --------
</TABLE>

      The overall decrease in expenses for the three months ended June 30, 2004
compared to the three months ended June 30, 2003 is primarily the result of the
acquired in-process research and development in connection with the acquisition
of Cell Pathways in June 2003. For the nine-month period, this acquired
in-process R&D charge was offset by an increase in selling, general and
administrative expenses as well as an increase in amortization expense in fiscal
2004.

Cost of Product Sales

      Cost of product sales relate to sales of Gelclair(R). Included in cost of
product sales for the nine months ended June 30, 2004 is a provision of $2.0
million which we recorded in the second quarter for obsolete inventory that we
consider to be in excess of forecasted future demand based on the expiration
date of the product on hand. The excess inventory relates to the substantial
inventory obtained from Cell Pathways and the current low demand for the product
as a result of a previously unsuccessful and under-funded product launch in
2002, prior to our acquisition of the product. Excluding this provision for
obsolete inventory, cost of product sales during the three and nine months ended
June 30, 2004 was approximately one-third of product sales.

Research and Development

      We currently have multiple drug candidates in clinical development,
including our flagship product Tarceva(TM), which successfully completed Phase
III trials for NSCLC and continues in a Phase III study for pancreatic cancer,
additional NSCLC studies and other Phase II trials. Tarceva(TM) is also the
subject of an extensive collaborative clinical program encompassing over 100
additional clinical trials. We consider the active management and development of
our clinical pipeline crucial to the long-term 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.

      Because we manage our pipeline in a dynamic manner, it is difficult to
give accurate guidance on the anticipated proportion of our research and
development investments assigned to any one program prior to the Phase III stage
of development, or to the future cash inflows from these programs. For the three
months and nine months ended June 30, 2004, we invested a total

                                      -24-
<PAGE>

of $13.1 million and $37.5 million, respectively, in research and $12.2 million
and $38.7 million, respectively, in pre-clinical and clinical development. We
estimate our fiscal 2004 research and development costs will be between $100
million and $110 million, excluding charges associated with the consolidation of
the UK operations. We consider this level of investment suitable to sustain one
major Phase III program 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.

      The increase in the research and development expense for the three months
was primarily due to costs associated with the clinical development of our
pipeline, including OSI-7904L, OSI-930, and Aptosyn(R), as well as additional
investments in our other cancer programs. Research and development expenses also
included the research and development costs of our majority-owned UK diabetes
and obesity subsidiary, Prosidion. Prosidion's research and development expenses
for the three months ended June 30, 2004 totaled $2.8 million. This increase was
offset by a decrease in the development expenses of Tarceva(TM) due to the
completion of the Phase III trial in NSCLC. Research and development expenses
remained flat for the nine months ended June 30, 2004 compared to the nine
months ended June 30, 2003. Tarceva(TM) development related expenses decreased
$10.1 million for the nine months ended June 30, 2004 compared to June 30, 2003.
Offsetting this decrease was our continued investment in our other clinical and
research-based oncology programs, including those programs acquired from Cell
Pathways in June 2003, as well as our increased investment in Prosidion.
Prosidion's research and development expenses for the nine months ended June 30,
2004 totaled $8.4 million. In March 2004, Prosidion entered into a termination
agreement with Tanabe, whereby Prosidion obtained the rights to certain patents
developed under the collaboration. Tanabe retained the rights to develop and
commercialize, in certain Asian territories, compounds covered by such patents.
In consideration of the termination, Prosidion paid Tanabe $1.0 million in cash
and issued to Tanabe $1.0 million in Prosidion stock. These required upfront
payments of $2.0 million to Tanabe were included in research and development
expenses on the accompanying statement of operations for the nine months ended
June 30, 2004. Prosidion is also required to make certain payments to Tanabe
upon the achievement of certain milestones.

      The significant perceived market potential for Tarceva(TM) resulted in the
OSI/Genentech/Roche alliance committing to a large and comprehensive global
development plan for the candidate. The global development plan consists of
major Phase III clinical trials in lung and pancreatic cancers and a large
number of earlier stage trials in a variety of disease settings. The alliance
partners have committed to invest a combined $300 million in the global
development plan to be shared equally by the three parties. We have made
additional research and development investments outside of the global
development plan with the consent of the other parties. As of June 30, 2004, we
have invested in excess of $93 million in the development of Tarceva(TM) since
the return of the full rights to the product from Pfizer, Inc. in June 2000,
representing our share of the costs incurred to date in the tripartite global
development plan and additional investments outside the plan. Our research and
development expenses for Tarceva(TM) incurred for the three and nine months
ended June 30, 2004 were $5.1 million and $18.3 million, respectively, as
compared to $7.8 million and $28.4 million for the three and nine months ended
June 30, 2003, respectively. We anticipate investing a majority of the remaining
commitment under the global development plan over the next year and we
anticipate continued research and development investment in Tarceva(TM) to
support its commercial growth.

                                      -25-
<PAGE>

Acquired In-Process Research and Development

      In connection with the acquisition of Cell Pathways 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 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. We recently announced that, as we had expected, the
Phase III study of Aptosyn(R) (exislund) in combination with Taxotere(R)
(docetaxal), did not meet its primary endpoints of improving overall survival in
patients with advanced NSCLC, nor did the trial meet its secondary endpoints.
Based on historical data for Aptosyn(R) in familial adenomatous polyposis and
early prostate cancer, we believe that the more potent follow-on molecule,
OSI-461, warrants continued development.

      On July 26, 2004, Prosidion, our majority owned UK subsidiary acquired
certain assets from Probiodrug AG. In connection with the acquisition we expect
to record an acquired in-process research and development charge of
approximately $35.0 million in the fourth quarter of fiscal 2004.

Selling, General and Administrative

      Selling, general and administrative expenses remained relatively flat for
the three months ended June 30, 2004 compared to the three months ended June 30,
2003. Included in the 2003 quarter were fees for transition services provided by
Serono relating to our acquisition of the rights to market and promote
Novantrone(R) for approved oncology indications in the United States. Excluding
these transition services, the increases for the three and nine months ended
June 30, 2004 were primarily due to an increase in commercialization and
marketing costs relating to Tarceva(TM) which are shared with Genentech in
accordance with the terms of our collaboration with Genentech and additional
management and personnel relating to the establishment of commercial operations
to support Gelclair(R) and Novantrone(R). Also contributing to the increase for
the nine months ended June 30, 2004 was (i) transition support services provided
by Celgene Corporation during the first quarter of fiscal 2004 as a result of
our full recovery of rights to market and distribute Gelclair(R) from Celgene,
(ii) an additional two quarters of maintenance fees expense relating to
Novantrone(R) sales in oncology indications for the current nine-month period
compared to the prior year nine-month period and (iii) disposal costs relating
to the consolidation of our Horsham, Pennsylvania facility acquired in the Cell
Pathways acquisition, which we recorded in the second quarter of fiscal 2004.

      Our sales and marketing infrastructure is currently comprised of
approximately 60 sales, marketing, medical affairs, commercial planning and
support personnel, including an approximately 30-person sales force. We intend
to expand to approximately 50 sales representatives in advance of the launch of
Tarceva(TM), which we anticipate in the first quarter of calendar year 2005. As
a result, we expect selling, general and administrative costs to increase as we
expand our commercial operations and are currently estimating that our fiscal
2004 selling, general and administrative costs will be between $85 million and
$95 million.

                                      -26-
<PAGE>


Amortization of Intangibles

      The increase of $9.3 million for the nine month period is primarily
related to amortization expense related to our rights to Novantrone(R) acquired
in March 2003 and to Gelclair(R) acquired in June 2003.

OTHER INCOME (EXPENSE)

<TABLE>
<CAPTION>
                                 THREE MONTHS ENDED JUNE 30,              NINE MONTHS ENDED JUNE 30,
                              ---------------------------------      ------------------------------------
                               2004         2003        $ CHANGE       2004          2003        $ Change
                              -------      -------      --------     --------      --------      --------
<S>                           <C>          <C>          <C>          <C>           <C>           <C>
Investment income- net ..     $ 1,271      $ 1,567      $  (296)     $  4,185      $  6,469      $ (2,284)
Interest expense ........      (6,576)      (1,605)      (4,971)      (12,216)       (4,817)       (7,399)
Other expense- net ......        (517)        (198)        (319)       (1,219)         (321)         (898)
                              -------      -------      -------      --------      --------      --------
                              $(5,822)     $  (236)     $(5,586)     $ (9,250)     $  1,331      $(10,581)
                              -------      -------      -------      --------      --------      --------
</TABLE>

      The decreases in investment income were primarily due to a decrease in the
average rate of return on our investments and to less funds available for
investment during the respective periods. The increase in interest expense
resulted from the guaranteed interest for the period July 2004 through January
2005 relating to our exercise of the redemption option for our 4% senior
convertible notes due 2009, as well as from the interest on the $150.0 million
of 3.25% convertible senior subordinated notes that we issued in September 2003.
Under the terms of the 2009 Notes, the note holders were guaranteed the payment
of interest for the first three years through February 1, 2005. The note holders
became fully entitled to this guaranteed interest on June 18, 2004, the date we
called for redemption of the 2009 Notes, and accordingly we accrued an
additional interest charge of $3.7 million in the quarter ended June 30, 2004.
The increase in the other expense-net was primarily due to the amortization of
debt issuance costs related to the convertible senior subordinated notes issued
in September 2003. The debt issuance costs are being amortized over a period of
five years, which represents the earliest date that we may redeem the notes.

LIQUIDITY AND CAPITAL RESOURCES

      At June 30, 2004, working capital, representing primarily cash, cash
equivalents, and restricted and unrestricted short-term investments, aggregated
$299.4 million compared to $379.6 million at September 30, 2003. This decrease
of $80.2 million is primarily due to net operating cash burn for the nine-month
period offset by proceeds from the exercise of options.

      We expect to incur continued losses over the next few years as we continue
our investment in Tarceva(TM) and other product candidates in our pipeline as
well as our research programs and our commercial operations. We estimate that
our fiscal 2004 cash burn will be between $160 million and $165 million
depending upon the timing of certain milestone payments that we will receive
upon the successful filing and approval of the NDA submission for Tarceva(TM) in
the United States and the European Union and excluding cost associated with

                                      -27-
<PAGE>

the consolidation of our UK facility. The ability and time required to reach
profitability is uncertain. We have established a goal of achieving
profitability and positive cash flow within 24 to 36 months of a successful
market launch of Tarceva(TM). We estimate the approval of Tarceva(TM) by the FDA
in early first quarter of calendar 2005, assuming a successful review with the
FDA for the NDA taking the full six months. 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.
We believe that our current cash resources provide a solid financial base from
which to fund our existing operations although we are continuously evaluating
our capital requirements to support the next phase of our growth.

      In the past, we have funded our research, development, commercial and
administrative support efforts through public and private sales of our
securities, including debt and equity securities. In September 2003, we issued a
total of $150.0 million aggregate principal amount of convertible senior
subordinated notes due September 8, 2023, or the 2023 Notes, in a private
placement for net proceeds of $144.8 million. The 2023 Notes bear interest at
3.25% per annum, payable semi-annually, and mature on September 8, 2023. The
notes are convertible into shares of our common stock at a conversion price of
$50.02 per share, subject to normal and customary adjustments such as stock
dividends or other dilutive transactions. The related debt issuance costs of
$5.3 million were deferred and recorded as other non-current assets and are
being amortized on a straight-line basis over a five-year term, which represents
the earliest date that we may redeem the 2023 Notes. In connection with the
issuance of the 2023 Notes, we used $19.0 million of the net proceeds for the
purchase of 503,800 shares of our common stock. With respect to the notes, we
pledged $14.2 million of U.S. government securities with maturities at various
dates through August 2006. Upon maturity, the proceeds of these restricted
investment securities will be sufficient to pay the first six scheduled interest
payments on the notes when due. The aggregate fair value and amortized cost of
the restricted investment securities at June 30, 2004 was $11.9 million.

      If all or any portion of the 2023 Notes have not been converted into
common stock prior to their maturity dates, we will be required to pay, in cash,
the outstanding principal amounts of the notes plus any accrued and unpaid
interest. This could have a significant impact on our liquidity depending on our
cash position at time of maturity. If we do not have sufficient cash to repay
the debt, we may need to borrow additional funds or sell additional equity in
order to meet out debt obligations.

      On February 1, 2002, we issued $200.0 million aggregate principal amount
of convertible senior subordinated notes due February 1, 2009, or the 2009
Notes, in a private placement for net proceeds to us of approximately $192.9
million. The 2009 Notes were convertible into shares of our common stock at a
conversion price of $50 per share, subject to normal and customary adjustments
such as stock dividends. The 2009 Notes were redeemable, in whole or in part, at
any time before February 1, 2005 if the closing price of our common stock
exceeded 150% of the conversion price then in effect for a specified period of
time, or the Provisional Redemption. The related debt issuance costs of $7.1
million were deferred and recorded as other non-current assets

                                      -28-
<PAGE>

and were being amortized on a straight-line basis over the seven-year term of
the 2009 Notes. In August and September 2002, we retired a total of $40.0
million in principal amount of the 2009 Notes for an aggregate purchase price of
$26.2 million, including accrued interest of $133,000. In June 2004, we
exercised our Provisional Redemption right and called for the full redemption of
the outstanding $160.0 million of the 2009 Notes. All of the holders of the 2009
Notes converted their notes into shares of our common stock prior to the
redemption date of July 19, 2004. As a result of these conversions, on July 19,
2004, we issued 3.2 million shares of our common stock and paid the remaining
portion of the guaranteed interest of $6.4 million. Upon conversion, the $3.7
million remaining balance of the debt issuance costs was reclassified to
additional paid in capital.

COMMITMENTS AND CONTINGENCIES

      Our major outstanding contractual obligations relate to our senior
subordinated convertible notes and our facility leases. The following table
summarizes our significant contractual obligations at June 30, 2004 and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods (in thousands):

<TABLE>
<CAPTION>
                                                                                               2009 &
                                   2004        2005        2006        2007       2008        THEREAFTER    TOTAL
                                  -------     -------     -------     ------     -------      ----------   --------
<S>                               <C>         <C>         <C>         <C>        <C>          <C>          <C>
Contractual Obligations:
  Senior convertible debt (a)     $ 8,838     $ 4,875     $ 4,875     $4,875     $ 4,875       $223,125     251,463

   Operating leases                 2,022       7,948       6,419      5,060       6,171         54,720      82,340


   Capital commitments                199          --          --         --          --             --         199
                                  -------     -------     -------     ------     -------       --------    --------
Total contractual obligations     $11,059     $12,823     $11,294     $9,935     $11,046       $277,845    $334,002
                                  =======     =======     =======     ======     =======       ========    ========
</TABLE>

-----------------------

      (a)   Includes interest payments at a rate of 3.25% per annum relating to
            our 2023 Notes. Includes the guaranteed interest payment of $6.4
            million on our 2009 Notes, which were converted into shares of our
            common stock in July 2004. Had these notes not been called for
            redemption and converted, our commitment as of June 30, 2004 would
            have been $160.0 million in principal and $32.0 million in interest.

      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, 2004, we have spent almost 90% of
                  our commitment under the agreement.

            -     In connection with our agreement to market and promote
                  Novantrone(R) in approved oncology indications, we are
                  required to pay quarterly maintenance fees 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.

            -     In connection with the exclusive distribution agreement to
                  market and distribute Gelclair(R)in North America, we were
                  committed to additional inventory purchase orders of $3.0
                  million and $5.0 million in calendar 2003 and 2004,
                  respectively. Our purchase order commitment for calendar 2003
                  will be recorded during 2004 upon shipment of the inventory.
                  We are also committed to annual marketing

                                      -29-
<PAGE>

                  expenditures of $750,000, $500,000 and $250,000 for 2004
                  through 2006, 2007 through 2008 and 2009 through 2011,
                  respectively. In addition, we are obligated to spend $1.3
                  million annually for 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.

            -     Under agreements with external CROs we will continue to incur
                  expenses relating to the progress of Tarceva(TM) and other
                  candidate 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 outstanding letters of credit issued by a commercial
                  bank totaling $2.9 million of which the full amounts were
                  available on June 30, 2004. One is an irrevocable letter of
                  credit related to our Oxford, England facility which expires
                  and is renewed annually with a final expiration date of
                  September 27, 2007. Another is an irrevocable letter of credit
                  related to our Horsham, Pennsylvania facility, whose lease we
                  assumed through the acquisition of Cell Pathways. The letter
                  expires and is renewed annually with a final expiration date
                  of September 22, 2008.

            -     We have a retirement plan which provides post-retirement
                  medical and life insurance benefits to eligible employees,
                  board members and qualified dependents. Eligibility is
                  determined based on age and years of service. We have accrued
                  postretirement benefit costs of $3.7 million at June 30, 2004.

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

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

            -     Under certain license and other agreements, we are required to
                  pay license fees for the use of technologies and products in
                  our research and development activities or milestone payments
                  upon the achievement of certain predetermined conditions.

RECENT ACCOUNTING PRONOUNCEMENTS

      In December 2003, President Bush signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. The Act introduced both a
Medicare prescription

                                      -30-
<PAGE>

drug benefit and a federal subsidy to sponsors of retiree health care plans that
provide a benefit at least "actuarially equivalent" to the Medicare benefit.
These provisions of the new law will affect accounting measurements. In May
2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Improvement and Modernization Act of
2003." FSP No. FAS 106-1 provides guidance on the accounting for the effects of
the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or
the Act, for employers that sponsor post-retirement health care plans that
provide prescription drug benefits. It requires those employers to provide
certain disclosures regarding the effect of the Federal subsidy provided by the
Act. The accumulated post-retirement benefits obligation or net post-retirement
benefits cost in the consolidated financial statements or accompanying notes do
not reflect the effects of the Act on our post-retirement benefit plan. We are
in the process of determining the impact of the Act on the accumulated
post-retirement benefits obligation and net post-retirement benefits cost to be
recorded when FSP No. FAS 106-1 is effective, which currently is scheduled for
the fourth quarter of fiscal 2004.

RECENTLY ISSUED EXPOSURE DRAFT

      On March 31, 2004, the FASB issued a proposed Statement, "Share-Based
Payment," that addresses the accounting for share-based awards to employees,
including employee-stock-purchase-plans, or ESPPs. The FASB formally proposed to
require companies to recognize the fair value of stock options and other
stock-based compensation to employees. The proposed statement would eliminate
the ability to account for share-based compensation transactions using APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and generally would
require instead, that such transactions be accounted for using a
fair-value-based method. The proposed requirements in the exposure draft would
be effective for public companies as of the beginning of the first fiscal year
beginning after December 15, 2004. We currently account for our stock-based
compensation plans in accordance with APB Opinion No. 25. Therefore, the
eventual adoption of this proposed statement, if issued in final form by the
FASB, will have a material effect on our consolidated financial statements.

      On June 23, 2004, the FASB issued a proposed Statement, "Fair Value
Measurements," that provides guidance on how to measure fair value of financial
and non-financial assets and liabilities. The proposed requirements in the
exposure draft would be effective for public companies as of the beginning of
the first fiscal year beginning after June 15, 2005. We have not determined
what, if any, impact this statement would have 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 and subject areas. These forward looking statements are
also subject generally to the other risks

                                      -31-
<PAGE>

and uncertainties that are described in our Annual Report on Form 10-K for the
fiscal year ended September 30, 2003.

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 as defined by SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and,
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a component of accumulated other comprehensive
income (loss) included in stockholders' equity. With respect to the convertible
senior subordinated notes issued in September 2003 and February 2002, we pledged
U.S. government securities, or restricted investment securities, with maturities
at various dates through August 2006 and November 2004, respectively. 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. These securities
are reported at their amortized cost, which includes the direct costs to acquire
the securities, plus the amortization of any discount or premium, and accrued
interest earned on the securities. We have not used or held derivative financial
instruments in our investment portfolio.

      At June 30, 2004, we maintained a portion of our cash and cash equivalents
in financial instruments with original maturities of three months or less. We
also maintained an investment portfolio principally comprised of government and
government agency obligations and corporate obligations that are subject to
interest rate risk and will decline in value if interest rates increase.

      A hypothetical 10% change in interest rates during the periods would have
resulted in a $127,000 and $419,000 change in our net losses for the three and
nine-month periods ended June 30, 2004, respectively.

      In March 2004, we began to enter into forward exchange contracts to reduce
foreign currency fluctuation risks relating to intercompany transactions for the
funding of our research activities in the United Kingdom. We account for these
derivative financial instruments in accordance with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which was amended by SFAS
No. 137 and SFAS No. 138. Changes in the fair value of a derivative that is
designated and documented as a cash flow hedge and is highly effective, are
recorded in other comprehensive income until the underlying transaction affects
earnings, and then are later reclassified to earnings. We formally assess, both
at the inception and at each financial quarter thereafter, the effectiveness of
the derivative instrument hedging the underlying forecasted cash flow
transaction. Any ineffectiveness related to the derivative financial
instruments' change in fair value will be recognized in the period in which the
ineffectiveness was calculated. As of June 30, 2004, the notional and fair value
of the foreign exchange contracts for British pounds was $4.5 million and $4.6
million, respectively. The contracts will mature over the next five months. At
June 30, 2004, net gains on derivative instruments

                                      -32-
<PAGE>

expected to be reclassified from accumulated other comprehensive income to
earnings during the next five months due to the settlement of the forward
contracts and execution of the intercompany transactions was $58,000.

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

      Our long-term debt totaled $310.0 million at June 30, 2004 and was
comprised of our 2023 Notes and our 2009 Notes which bear interest at a fixed
rate of 3.25% and 4%, respectively. In June 2004, we exercised our provisional
redemption right and called for the full redemption of the outstanding $160.0
million of the notes we issued in February 2002. All of the holders of these
notes converted their notes into shares of our common stock prior to the
redemption date of July 19, 2004. As a result of these conversions, in July
2004, we issued 3.2 million shares of our common stock and paid the remaining
portion of the guaranteed interest of $6.4 million. Upon conversion on July 19,
2004, the $3.7 million remaining balance of the debt issuance costs was
reclassified to additional paid in capital.

      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
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)) under the Securities Exchange Act of 1934, or the Exchange
Act, and report on the effectiveness of the design and operation of our
disclosure controls and procedures. Accordingly, under the supervision and with
the participation of our management, including our CEO and CFO, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q.

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

                                      -33-
<PAGE>

      Limitations on the Effectiveness of Controls. Our management, including
the CEO and CFO, does not expect that our disclosure controls and procedures or
our internal control over financial reporting will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, 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
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, 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.

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

                                      -34-
<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

            2.1*  Asset Purchase Agreement, dated as of June 17, 2004, by and
                  between Probiodrug AG, Halle, and Prosidion Limited, filed as
                  an exhibit to OSI's current report on Form 8-K filed on July
                  6, 2004, and incorporated herein by reference.(1)

            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* Manufacturing and Supply Agreement, dated as of June 4, 2004,
                  by and between OSI Pharmaceuticals, Inc., and Genentech, Inc.,
                  filed as an exhibit to OSI's current report on Form 8-K filed
                  on June 28, 2004, and incorporated herein by reference.

            10.2* Amendment No.1 to Development and Marketing Collaboration

                                      -35-
<PAGE>

                  Agreement, dated as of June 4, 2004, by and between OSI
                  Pharmaceuticals, Inc., and Genentech, Inc., filed as an
                  exhibit to OSI's current report on Form 8-K filed on June 28,
                  2004, and incorporated herein by reference.

            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.

            --------------------------

            (1)   The schedules and certain exhibits to the Asset Purchase
            Agreement have been omitted pursuant to Item 601(b)(2) of Regulation
            S-K promulgated by the Securities and Exchange Commission. The
            omitted schedules and exhibits from this filing will be provided
            upon request.

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

      (b)   REPORTS ON FORM 8-K

            We filed a current report on April 26, 2004 with the Securities and
      Exchange Commission via EDGAR, with respect to the results of a certain
      Phase III trial of Tarceva (TM) in non-small cell lung cancer. The
      earliest event covered by this report occurred on April 26, 2004.

            We filed a current report on May 13, 2004 with the Securities and
      Exchange Commission via EDGAR, furnishing our financial results for the
      quarter ended March 31, 2004. The earliest event covered by this report
      occurred on May 11, 2004.

            We filed a current report on June 7, 2004 with the Securities and
      Exchange Commission via EDGAR, with respect to the results of a certain
      Phase III trial of Tarveca (TM) in non-small cell lung cancer and a
      certain Phase I/II trial of the combination of Avastin (TM) and Tarceva
      (TM). The earliest event covered by this report occurred on June 5, 2004.

            We filed a current report on June 9, 2004 with the Securities and
      Exchange Commission via EDGAR, with respect to the summary of data for
      Phase III studies of Tarceva(TM). The earliest event covered by this
      report occurred on June 8, 2004.

                                      -36-
<PAGE>

            We filed a current report on June 28, 2004 with the Securities and
      Exchange Commission via EDGAR, with respect to a Manufacturing and Supply
      Agreement that we entered into with Genentech, Inc. and an amendment to
      our Development and Marketing Collaboration Agreement with Genentech. The
      earliest event covered by this report occurred on June 4, 2004.

            We filed a current report on July 6, 2004 with the Securities and
      Exchange Commission via EDGAR, with respect to an asset purchase agreement
      by our UK subsidiary, Prosidion Limited, from Probiodrug AG. The earliest
      event covered by this report occurred on June 17, 2004.

                                      -37-
<PAGE>

                                   SIGNATURES

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

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

Date: August 16, 2004                 /s/ Colin Goddard, Ph.D.
                                      ------------------------------------------
                                      Colin Goddard, Ph.D.
                                      Chief Executive Officer

Date: August 16, 2004                 /s/ Robert L. Van Nostrand
                                      ------------------------------------------
                                      Robert L. Van Nostrand
                                      Vice President and Chief Financial Officer
                                      (Principal Financial Officer)

                                      -38-
<PAGE>

                                INDEX TO EXHIBITS

Exhibit

2.1*     Asset Purchase Agreement, dated as of June 17, 2004, by and between
         Probiodrug AG, Halle, and Prosidion Limited, filed as an exhibit to
         OSI's current report on Form 8-K filed on July 6, 2004, and
         incorporated herein by reference.(1)

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*    Manufacturing and Supply Agreement, dated as of June 4, 2004, by and
         between OSI Pharmaceuticals, Inc., and Genentech, Inc., filed as an
         exhibit to OSI's current report on Form 8-K filed on June 28, 2004, and
         incorporated herein by reference.

10.2*    Amendment No.1 to Development and Marketing Collaboration Agreement,
         dated as of June 4, 2004, by and between OSI Pharmaceuticals, Inc., and
         Genentech, Inc., filed as an exhibit to OSI's current report on Form
         8-K filed on June 28, 2004, and incorporated herein by reference.

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.

------------------

         (1)      The schedules and certain exhibits to the Asset Purchase
                  Agreement have been omitted pursuant to Item 601(b)(2) of
                  Regulation S-K promulgated by the Securities and Exchange
                  Commission. The omitted schedules and exhibits from this
                  filing will be provided upon request.

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

                                      -39-