##### Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended
    December 31, 2005 or                                              
|          
|o          |  | 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
    Incorporation or Organization) |  | (I.R.S. Employer Identification
    No.)
|                                                                      
|41 Pinelawn Road, Melville,
    N.Y.                                   |  | 11747                                   
|(Address of Principal Executive
    Offices)                           |  | (Zip Code)                              

Registrants Telephone Number, including area code


(631) 962-2000


Securities Registered Pursuant to Section 12(b) of the
Act:


|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  | None                                     

Securities Registered Pursuant to Section 12(g) of the
Act:


Common Stock, par value $.01 per share, and


Series SRPA Junior Participating Preferred Stock
Purchase Rights


(Title of Class)


þ o


o þ


þ o


S-K 10-K 10-K. o


12b-2


þ o o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE


10-K.


EXPLANATORY NOTE


10-K/A 10-K 10-K), 10-K, 10-K/A. 10-K 10-K/A 10-K.










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##### 

OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

|                           |          |  |                                                                                                                      |      |  |     | 
|-------------------------- | -------- |  | -------------------------------------------------------------------------------------------------------------------- | ---- |  | --- | 
|                           |          |  |                                                                                                                      | Page | 
|                           |          |  |                                                                                                                      |      | 
|PART I                     |          |  | 1                                                                                                                    |     
|                           | ITEM 1.  |  | BUSINESS                                                                                                             |      |  | 1   | 
|                           | ITEM 1A. |  | RISK
    FACTORS                                                                                                     |      |  | 28  | 
|                           | ITEM 1B. |  | UNRESOLVED
    STAFF COMMENTS                                                                                        |      |  | 44  | 
|                           | ITEM 2.  |  | PROPERTIES                                                                                                           |      |  | 44  | 
|                           | ITEM 3.  |  | LEGAL
    PROCEEDINGS                                                                                                |      |  | 45  | 
|                           | ITEM 4.  |  | SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS                                                              |      |  | 45  | 
|PART II                    |          |  | 45                                                                                                                   |     
|                           | ITEM 5.  |  | MARKET FOR
    REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    ISSUER PURCHASES OF EQUITY SECURITIES |      |  | 45  | 
|                           | ITEM 6.  |  | SELECTED
    CONSOLIDATED FINANCIAL DATA                                                                             |      |  | 48  | 
|                           | ITEM 7.  |  | MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS                        |      |  | 50  | 
|                           | ITEM 7A. |  | QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                                                      |      |  | 70  | 
|                           | ITEM 8.  |  | CONSOLIDATED
    FINANCIAL STATEMENTS                                                                                |      |  | 72  | 
|                           | ITEM 9.  |  | CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE                         |      |  | 123 | 
|                           | ITEM 9A. |  | CONTROLS AND
    PROCEDURES                                                                                          |      |  | 123 | 
|                           | ITEM 9B. |  | OTHER
    INFORMATION                                                                                                |      |  | 126 | 
|PART III                   |          |  | 126                                                                                                                  |     
|                           | ITEM 10. |  | DIRECTORS AND
    EXECUTIVE OFFICERS OF THE REGISTRANT                                                               |      |  | 126 | 
|                           | ITEM 11. |  | EXECUTIVE
    COMPENSATION                                                                                           |      |  | 126 | 
|                           | ITEM 12. |  | SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                                   |      |  | 126 | 
|                           | ITEM 13. |  | CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS                                                                   |      |  | 126 | 
|                           | ITEM 14. |  | PRINCIPAL
    ACCOUNTANT FEES AND SERVICES                                                                           |      |  | 126 | 
|PART IV                    |          |  | 127                                                                                                                  |     
|                           | ITEM 15. |  | EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES                                                                       |      |  | 127 | 
|SIGNATURES                 |          |  | 128                                                                                                                  |     
|EX-23: CONSENT OF KPMG LLP
|EX-31.1: CERTIFICATION    
|EX-31.2: CERTIFICATION    
|EX-32.1: CERTIFICATION    
|EX-32.2: CERTIFICATION    



10-K,


® ® ® ® 10-K




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##### Table of Contents

PART I







ITEM 1.
    BUSINESSWe are a mid-cap biotechnology company committed to building a
scientifically strong and financially successful top tier
biopharmaceutical organization that discovers, develops and
commercializes innovative molecular targeted therapies
addressing major unmet medical needs in oncology, ophthalmology
and diabetes.

The launch in the United States in November 2004 of our flagship
anti-cancer product, Tarceva (erlotinib), a small molecule
inhibitor of the epidermal growth factor receptor, or HER1/EGFR,
represented a major milestone in the growth of our company.
Tarceva was initially approved for the treatment of advanced
non-small cell lung cancer, or NSCLC, patients who have failed
at least one prior chemotherapy regimen and, subsequently, in
November 2005, for the treatment of patients with locally
advanced and metastatic pancreatic cancer in combination with
the chemotherapy agent, gemcitabine. Tarceva was also approved
for sale in the European Union, or EU, for the treatment of
NSCLC in September 2005. Tarceva achieved global sales of
approximately $309 million during 2005, and its 2005
U.S. sales of approximately $275 million represented
one of the most successful oncology product launches ever in the
United States. We co-promote Tarceva in the United States with
Genentech, Inc. and receive royalties on sales from our
international partner, Roche.

In 2005, we set out to define and execute a strategy that would
allow us to build upon our initial success with Tarceva and
establish a company capable of delivering long term, sustainable
growth and value creation to our stockholders. We believe that
in order to achieve this goal we need to:




    Operate in two to three areas of attractive commercial potential
    that allow us to broadly leverage our core strengths in the
    discovery and development of novel molecular targeted therapies;
    Continue to be a scientific innovator enabling us to deliver a
    novel and differentiated pipeline of products that represent
    major commercial opportunities by addressing significant unmet
    medical needs; and
    Establish sustainable revenue growth allowing significant
    reinvestment in research and development programs necessary for
    the creation of a strong portfolio while delivering the
    profitability and financial strength anticipated by many
    stockholders following Tarceva approval.The successful execution of this strategy also will allow us to
mitigate the risks associated with dependence on a single
product and a single disease area while continuing to build on
our historical strengths in oncology and broader target-based
drug discovery.

In 2005, we set out to execute upon this strategy by enhancing
our investment in Prosidion Limited, or Prosidion, our UK-based
subsidiary, and by seeking a secondary source of revenues and
revenue growth to complement Tarceva. In Spring 2005, we
acquired the minority interests of Prosidion, through which we
conduct our research and development efforts in diabetes and
obesity. The buyout of the minority stockholders resulted,
operationally, in committing us to diabetes as a second disease
area. We intend to commercialize our diabetes assets in
collaboration with major pharmaceutical company partners. We
believe that the widely recognized emergence of diabetes as a
growing healthcare issue in the western world has created a
significant enough commercial opportunity to allow innovators in
this field such as ourselves to derive appreciable economic
returns through a partnering strategy. We consider that our
emerging diabetes clinical pipeline (a pipeline that largely
derives from our historical target-based discovery efforts in
this area) has us well-positioned to provide prospective
partners with a pipeline of innovative and competitive drug
candidates designed to meet this growing and largely unmet
medical need.

In November 2005, we completed our acquisition of Eyetech
Pharmaceuticals, Inc., or Eyetech, in a transaction that we
valued at approximately $638 million, net of Eyetechs
cash at closing, thereby creating a third business team
operating in the commercially attractive arena of ophthalmology.
The

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Eyetech franchise is anchored by Macugen (pegaptanib sodium
injection), a novel, first-in-class therapeutic that selectively
binds to the vascular endothelial growth factor isomer 165, or
VEGF-165, the
pathogenic isoform of VEGF which is believed to be the principal
causative agent in the development of choroidal
neovascularization. This process results in neovascular
age-related macular degeneration, or wet AMD, a disease that is
the leading cause of blindness for Americans over the age of 50.
Macugen was launched in the United States in January 2005 and
achieved approximately $185 million in U.S. net sales
during 2005.

The Eyetech acquisition has been viewed as controversial based
upon two events: Phase III clinical trial data for a
competitive agent, Genentechs
Lucentistm
(ranibizumab), demonstrating impressive efficacy for this agent
that targets all isoforms of the VEGF molecule (which we refer
to as pan-VEGF inhibition) and the off-label use of a related
pan-VEGF inhibitor, Genentechs
Avastin®
(bevacizumab), approved for the treatment of colorectal cancer.
The competitive challenges facing Macugen led to a significant
reduction in Eyetechs stock price during 2005 and created
the opportunity for us to acquire the company. While some
commentators have continued to conclude that Macugen will have
only a limited role in the market following the presumed
approval and launch of Lucentis, we continue to believe that our
scientific assessment (which suggested to us that the efficacy
of Macugen in newly diagnosed patients is widely
under-appreciated in the retinal specialist community and that
the use of pan-VEGF targeted agents can lead to systemic and
local side-effects) is well-founded and will allow for a
continued and meaningful role for Macugen in the AMD marketplace
going forward. Indeed, recently announced data for Lucentis has
shown an increased incidence of thromboembolic events in
patients receiving Lucentis in a Phase III clinical trial.
In addition, recently published data demonstrate promising
activity for Macugen in a randomized Phase II clinical
trial in diabetic macular edema, or DME, a form of diabetic
retinopathy currently afflicting approximately 500,000 persons
in the United States, with approximately 75,000 new cases
reported each year. Diabetic retinopathy is the leading cause of
blindness among Americans under the age of 50. We believe that
Macugen can provide an important, and potentially growing,
source of long-term revenues that will help us sustain a
credible level of ongoing investment in research and development
while realizing much of the financial benefit (in terms of
profitability) from the anticipated continued growth of our
flagship product Tarceva.

Following our acquisition of Eyetech, we announced in November
2005 our integration plan, pursuant to which two Eyetech
facilities will be closed before the end of 2006, and one
facility has been consolidated, and approximately 129 former
Eyetech employees have been or will be terminated by the end of
2006. In total, we estimate our efforts will result in
approximately $29 million of annualized savings when
compared with the original expected level of annualized spending
by Eyetech as a separate company.

In December 2005, we strengthened the cash position on our
balance sheet by issuing $115 million aggregate principal
amount of 2% convertible senior subordinated notes due
2025, or the 2025 Notes. The sale of the 2025 Notes generated
net proceeds of approximately $111 million, a portion of
which was used to repurchase our common stock and enter into a
call spread transaction, and allowed us to exit 2005 with
approximately $179 million in cash, restricted cash and
short-term investments.

We believe we now have established the strategic and operating
framework from which to build a scientifically strong and
financially successful biopharmaceutical company. Oncology,
ophthalmology and diabetes represent three of the most
attractive areas of commercial growth in the
biotechnology/pharmaceutical industries and in Tarceva and
Macugen we have two scientifically innovative products that are
both in the early stages of their product life cycles and which,
together with our partners (Genentech and Roche for Tarceva and
Pfizer Inc. for Macugen), we believe can be grown into
appreciable sources of ongoing revenue. Our emerging pipeline of
products in oncology and back of the eye disease, along with our
diabetes franchise (with three novel and differentiated agents
in clinical development) represents an additional source of
future value which, with our assembled research and development
infrastructure and established team of scientists and
clinicians, we believe we are well equipped to pursue. Our two
high quality commercial organizations in the specialty areas of
oncology and back of the eye disease give us the ability to add
significant value to our partners efforts to

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commercialize Tarceva and Macugen in the United States and the
future opportunity to commercialize our oncology and
ophthalmology pipeline products in the U.S. market on our
own. In addition, our patent portfolio around dipeptidyl
peptidase IV, or DPIV, the target for our leading diabetes drug
candidate, PSN9301, could generate a valuable near term flow of
royalty revenues from
first-in-class
competitor products, one of which is currently under review at
the U.S. Food and Drug Administration, or FDA, and is
scheduled to come to market in the next nine to 12 months
if approved, and one of which is scheduled for filing with the
FDA in the first quarter of 2006.

As we move forward our focus will be on executing the core
elements of a business plan designed to draw out the significant
potential that we believe to be inherent in the strategic
framework that we have established. We are committed to
achieving this in a disciplined manner and to balance all of our
investments in the longer term against the need to deliver
revenue growth and profitability for our stockholders in the
nearer term.

Our Marketed Products



TarcevaTarceva is an oral, once-a-day, small molecule therapeutic
designed to inhibit the receptor tyrosine kinase activity of the
protein product of the HER1/EGFR gene. HER1/ EGFR is a key
component of the HER signaling pathway, which plays a role in
the regulation of growth in many normal cells. EGFR inhibitors
were designed to arrest the growth of tumors (cytostasis);
however, under certain circumstances EGFR inhibition can lead to
apoptosis (programmed cell death) which in turn would result in
tumor shrinkage. The HER1/ EGFR gene is over-expressed, mutated
or amplified in approximately 40% to 60% of all cancers and
contributes to the abnormal growth signaling in these cancer
cells. There is a strong scientific rationale and a substantial
potential market for EGFR inhibitors. While we believe that
Tarceva is likely to have utility in many oncology disease
settings, the initial focus of our development program has been
on NSCLC and pancreatic cancer.

Tarceva is currently approved for sale in the United States for
the treatment of NSCLC patients following the failure of at
least one prior chemotherapy regimen and, in combination with
gemcitabine, for the treatment of advanced pancreatic cancer
patients. It is approved for sale in the EU, Canada and
Switzerland, among others, for NSCLC.

The American Cancer Society estimates that approximately 151,800
American cancer patients will be diagnosed with NSCLC in 2006.
Based on data from the Tandem Oncology Monitor, a national audit
by Synovate, Inc. of cancer patients receiving therapy, in 2005,
approximately 67,000 subsequent courses of therapy were provided
to NSCLC Stage IIIB/IV patients following a course of
front-line chemotherapy. The American Cancer Society estimates
that approximately 32,000 cancer patients in the United States
will die from pancreatic cancer in 2006, which makes it the
fourth leading cause of cancer death in the United States. In
Europe, based on information collected by the International
Agency for Research on Cancer in Lyon, France, the most common
incident form of cancer in 2004 was lung cancer, with
approximately 381,500 cases. Lung cancer was also the most
common cause of cancer death in Europe, with approximately
341,800 deaths.

We have an ongoing collaboration with our partners, Genentech
and Roche, for the continued development and commercialization
of Tarceva. We co-promote Tarceva in the United States with
Genentech and receive a 50% share of net profits after the
deduction of costs of goods and certain sales and marketing
expenses. We are also responsible for manufacturing and supply
of Tarceva in the United States and receive reimbursement of
manufacturing costs from Genentech. Roche is responsible for
sales outside of the United States and, we receive a 21% royalty
on net sales. Tarceva research and development expenses that are
part of the alliances global development program are
shared equally among the three parties.

Commercial/ Regulatory Milestones. On November 18,
2004, we received full approval from the FDA for monotherapy
Tarceva use in the treatment of NSCLC patients after the failure
of at least one

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prior chemotherapy regimen, and we launched Tarceva on
November 22, 2004. Tarceva was the most successful oncology
drug launch in the United States in terms of number of patients
treated during the first 12 months of launch, and had the
fourth most successful oncology drug launch in terms of sales in
the United States. Total U.S. net sales for Tarceva for
2005 were approximately $275 million and worldwide net
sales (reflecting a late 2005 launch in the EU) were
approximately $309 million.

Tarceva was approved for NSCLC by the Swiss health authority,
Swissmedic, in March 2005, by Health Canada in July 2005 and by
the European Commission for the EU in September 2005. On
November 2, 2005, the FDA approved Tarceva in combination
with gemcitabine for the treatment of advanced pancreatic cancer
in patients who have not received previous chemotherapy. As of
January 31, 2006, Tarceva has received approval in a total
of 24 countries. We anticipate that Chugai Pharmaceutical Co.,
Ltd., a subsidiary of Roche, our international collaborator for
Tarceva, will file a submission for approval of Tarceva in Japan
during the second quarter of 2006 and that, if successful,
Tarceva will be launched in Japan in 2007.

Growth Drivers for 2006. We believe that a number of
factors should contribute to continued growth of Tarceva sales
revenues in 2006. These include:



(i) We estimate that the two price increases taken by our
    partner Genentech in 2005 will contribute an approximate 15%
    annualized increase in U.S. net sales of Tarceva for the
    full year of 2006 assuming the same unit sales levels of Tarceva
    as in 2005;(ii) Tarceva was launched for pancreatic cancer in November
    of 2005. We expect continued uptake in the pancreatic market
    through 2006;(iii) The European launch of Tarceva for NSCLC is currently
    underway. Existing treatment options and patterns differ in
    Europe from those in the United States. Tarceva is the first
    oral EGFR inhibitor available for use in Europe and, due to
    differences in reimbursement and views on the use of
    chemotherapy as a treatment option, Tarceva is well positioned
    to emerge as the second-line treatment of choice. In the United
    States, the second-line use of Tarceva competes with
    chemotherapy agents such as
    Alimta®
    (pemetrexed); and(iv) We believe that changes to the Medicare program in the
    United States will improve the reimbursement environment for
    Tarceva and will help increase sales. Beginning January 1,
    2006, Medicare patients were eligible to receive reimbursement
    for Tarceva under the Medicare Part D Program. At the end
    of 2005, approximately one in five patients treated with Tarceva
    received Tarceva
    free-of-charge under
    Genentechs drug access program. We believe that many of
    these types of patients will now be eligible for reimbursement
    for Tarceva through Medicare Part D if they elect to
    enroll. We would expect our Tarceva revenues to increase in the
    event such enrollment occurs, as many patients would acquire
    Tarceva as part of the Medicare Part D benefits rather than
    receiving Tarceva free under the Genentech program.Lifecycle Plan. Our longer-term strategy for maximizing
the Tarceva brand is focused on progressing Tarceva use to the
front-line and adjuvant settings in NSCLC, expanding Tarceva use
to other cancers, and exploring the use of Tarceva in
combination with other targeted therapies, including Avastin.
Phase II data has shown good activity for Tarceva in the
front-line setting. Anti-tumor activity has also been
demonstrated in Phase II trials for ovarian, head and neck,
brain, liver, breast and colon cancers.

Together with our collaborators for Tarceva, Genentech and
Roche, we have implemented a broad-based global development
strategy for Tarceva comprised of simultaneous clinical programs
currently designed to potentially expand the number of approved
indications for Tarceva, evaluate its use in new and/or novel
combinations and provide additional clinical data pertinent to
our understanding of the drug. The studies will be sponsored by
us, Genentech, Roche or third parties through
investigator-sponsored studies. Our priority studies are
summarized below.

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SATURN AND TITAN Studies. In conjunction with the
approval of Tarceva in the United States, we have agreed with
the FDA to conduct the SATURN and TITAN studies as part of our
post-marketing clinical studies commitments. The SATURN study is
a double-blind randomized Phase III study to evaluate the
efficacy of Tarceva or placebo following four cycles of
chemotherapy in patients with advanced, recurrent or metastatic
NSCLC who have not experienced disease progression or
unacceptable toxicity during the four cycles of front-line
chemotherapy. The TITAN study is a randomized Phase III
study to evaluate the efficacy of Tarceva compared to either of
two chemotherapy agents, Alimta or
Taxotere®
(Docetaxel), following four cycles of front-line chemotherapy in
advanced, recurrent metastatic NSCLC patients who have
experienced disease progression or unacceptable toxicity.

The SATURN and TITAN studies are expected to enroll
approximately 1,500 patients as part of a merged protocol
in which patients will receive four cycles of
platinum-containing chemotherapy. Those patients who do not
progress on chemotherapy will be enrolled in SATURN and
randomized to Tarceva or placebo. This study, if positive, could
provide a new label for Tarceva as a front-line maintenance
therapy. Patients with progressive disease as best response to
platinum-containing chemotherapy will be enrolled in TITAN and
will be randomized to Tarceva or chemotherapy (Alimta or
Taxotere at the discretion of the investigator). This study will
provide head-to-head
comparative data for Tarceva versus chemotherapy in the sub-set
of patients who rapidly progress on front-line chemotherapy. In
both SATURN and TITAN, tissue collection for analyses of
molecular markers will be mandatory and the information gained
will be used to design the next series of studies with Tarceva
in NSCLC. The clinical protocols for these studies were filed
with the FDA in 2005, and the studies are currently enrolling.

RADIANT Study (Adjuvant Tarceva after surgery and
chemotherapy in patients with Stage IB-IIIA NSCLC). Due to
its demonstrated efficacy, favorable safety profile and
convenience, Tarceva is well suited for testing in the adjuvant
treatment of patients with fully resected stage IB
through IIIA NSCLC. Over the last two years, it has been
confirmed that patients with resectable NSCLC benefit from
platinum-containing adjuvant chemotherapy. This treatment
paradigm is rapidly becoming the standard of care in the United
States. In the RADIANT study, patients with fully resected NSCLC
who do or do not receive platinum-containing adjuvant
chemotherapy will be randomized to Tarceva or placebo for up to
two years. This study has the potential to change the standard
of care for patients with early stage NSCLC and to increase the
number of patients that are cured of this disease.

Phase II Study in Enriched Population. The use of
molecular markers to select patients with NSCLC for treatment
with Tarceva continues to be a controversial topic and one that
may in part determine the long-term success of the product
especially in the earlier line settings. Results from our
registrational study for NSCLC, the BR.21 study, suggest that
patients with tumors that are EGFR positive by either
fluorescent in situ hybridization, or FISH, and/or
immunohistochemistry, or IHC, derive a larger survival benefit
from Tarceva than those with EGFR negative tumors. However, the
two front-line Phase III studies of Tarceva plus standard
chemotherapy in metastatic NSCLC failed to demonstrate a benefit
from Tarceva in patients with tumors that were EGFR positive by
IHC. We are conducting a
140-patient
Phase II study in which we are prospectively selecting
patients with untreated NSCLC based on EGFR positivity using IHC
and/or FISH. Patients with tumors that are EGFR-negative by both
IHC and FISH will be excluded from the study. After enrollment,
patients will be randomized to either single agent Tarceva or
Tarceva intercalated with chemotherapy. The treatment regimen
for the patients in the Tarceva plus chemotherapy arm will
differ from the concurrent regimen utilized in the two
front-line Phase III Tarceva studies. We hypothesize that
the administration of Tarceva in combination with chemotherapy
in a unique schedule to patients with EGFR-positive tumors may
have the potential for an increased effect on survival when
compared with historical controls. The study is currently
enrolling.

Ovarian and Colorectal Cancer Studies. Additional
collaborative Phase III trials are under way in both
ovarian cancer and colorectal cancer. The ovarian cancer study
is an 830-patient
Phase III trial being conducted by the European
Organization for Research into the Treatment of Cancer and
follows a similar maintenance protocol to the one described
above for NSCLC in which Tarceva is used as a monotherapy
following initial chemotherapy. The colorectal cancer study is a
640-patient study being

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conducted through our collaboration partner, Roche, and also
employs Tarceva in a maintenance setting. In this study Tarceva
is being tested in a fourarm study that also explores the
use of Avastin in combination with the established front-line
chemotherapy regimens FOLFOX and XELOX that are widely employed
in the treatment of colorectal cancer.

Smoker Maximum Tolerated Dose Study. Pharmacokinetic
analyses from our BR.21 study suggest that patients that are
current smokers have lower drug exposure. In addition, as judged
by the lower incidence of rash and diarrhea, these patients
appear to have a less marked biological effect from Tarceva.
Retrospective analyses for the BR.21 study showed that the
treatment effect of Tarceva on survival was less pronounced in
this population. The data suggest that under-dosing of current
smokers with NSCLC could be partially responsible for the
sub-optimal treatment effect observed in these patients in the
registrational study. We are conducting a
62-patient Phase I
dose escalation study with Tarceva in smokers with NSCLC in an
attempt to establish the maximum-tolerated dose of Tarceva in
this population. This study is currently enrolling. We have
already conducted a Phase I clinical study in healthy
volunteers which demonstrated that the plasma levels of Tarceva
achieved in active smokers were approximately half those
observed in non-smokers.

Investigator Sponsored Studies. In addition to the
studies listed above, there are currently over 150
investigator-sponsored studies and National Cancer Institute/
Cancer Therapy Evaluation Program Studies ongoing or planned in
the Tarceva program. These studies are exploring monotherapy and
combination uses of Tarceva, including with novel agents, in
various tumor types and with a variety of treatment modalities,
such as radiation and surgery. The studies also include
examining the use of Tarceva earlier in the treatment paradigm
in both the adjuvant and chemoprevention settings. In general,
those studies are carried out at minimal cost to us or our
partners beyond the supply of Tarceva.

Translational Research. Translational research is an area
of investigation designed to bridge our research knowledge base
into the clinic and the marketplace, and one of the key goals
for our translational research group has been to generate data
that could enhance the quality of the clinical strategies for
compounds within our development portfolio. The current emphasis
of our translational research programs is on Tarceva, and a
series of collaborations and studies are ongoing. Our
translational research group has pioneered research on Tarceva
cellular action relative to a process known as epithelial
mesenchymal transition, or EMT (see Our Proprietary
Clinical and Pre-Clinical Oncology Programs  Oncology
Research), and is planning studies of effective markers of
EMT and EGFR signaling in retrospective and prospective clinical
trials. These studies may lead to an enhancement of the
likelihood of success of Tarceva in additional indications by
selecting those patients most likely to respond to therapy.

Sales and Marketing. In order to maximize the Tarceva
brand and to ensure the optimal competitive positioning of
Tarceva, we entered into a co-development and commercialization
alliance with Genentech and Roche in January 2001. Under the
alliance, Genentech leads the marketing efforts in the United
States and Roche markets the drug in the rest of the world. We
assist with the promotion of Tarceva by providing at least 25%
of the combined U.S. sales force, covering 43 territories.
Our oncology sales specialists perform sales calls to certain
high-volume physician call targets and associated medical staff
in addition to attending OSI promotional exhibit booths at
medical meetings and tradeshows. We believe that our sales team
is a key contributor to the Tarceva sales effort, based upon the
significantly higher sales volume for Tarceva in the territories
where Tarceva is being co-promoted by us and Genentech. As of
February 28, 2006, our oncology commercial organization
consisted of 89 employees, 58 of which were in sales and
marketing and the remainder of which were in medical affairs,
corporate development and strategic management and operations.

The OSI/ Genentech/ Roche Alliance. We manage the ongoing
development program for Tarceva with Genentech and Roche through
a global development committee under a Tripartite Agreement
among the parties. OSI and Genentech are parties to a
collaboration agreement which was amended in 2004 to provide us
with the right to co-promote Tarceva. The OSI/ Genentech
collaboration agreement

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continues until the date on which neither we nor Genentech are
entitled to receive a share of the operating profits or losses
on any products resulting from the collaboration, that is, until
the date that we and Genentech mutually agree to terminate the
collaboration or until either party exercises its early
termination rights as described as follows. The OSI/ Genentech
collaboration agreement is subject to early termination in the
event of certain customary defaults, such as material breach of
the agreement and bankruptcy. Since January 8, 2003,
Genentech has had the right to terminate the OSI/ Genentech
collaboration agreement with six months prior written
notice. The provisions of the amendment allowing us to
co-promote are also subject to termination by Genentech upon a
material breach of the amendment by us, which remains uncured,
or upon a pattern of nonmaterial breaches which remain uncured.
In 2004, we signed a Manufacturing and Supply Agreement with
Genentech that clarified our role in supplying Tarceva for the
U.S. market.

We are also parties to an agreement with Roche whereby we have
provided Roche with the right to sell Tarceva worldwide except
for the United States, its territories, possessions and Puerto
Rico, in exchange for a royalty. The OSI/ Roche agreement
continues until the date on which we are no longer entitled to
receive a royalty on products resulting from the development of
Tarceva, that is, until the date of expiration or revocation or
complete rejection of the last to expire patent covering Tarceva
or, in countries where there is no valid patent covering
Tarceva, on the tenth anniversary of the first commercial sale
of Tarceva in that country. The OSI/ Roche agreement is subject
to early termination in the event of certain customary defaults,
such as material breach of the agreement and bankruptcy. In
addition, since July 31, 2003, Roche has had the right to
terminate the agreement on a country-by-country basis with six
months prior written notice. We also currently have the
right to terminate the agreement on a country-by-country basis
if Roche has not launched or marketed a product in such country
under certain circumstances.

Manufacturing and Supply. We currently manage the supply
of Tarceva through third-party manufacturers. Under our
collaboration agreement with Genentech, we are responsible for
the manufacture and supply of erlotinib, the active
pharmaceutical ingredient, or API, and Tarceva tablets for
pre-clinical and clinical trials and for the supply of
commercial quantities of Tarceva tablets for sales within the
United States. Under our collaboration agreement with Roche,
Roche has elected to take responsibility for the supply of
Tarceva tablets for sales outside of the United States.

Erlotinib is manufactured in a three-step process with high
yield. Sumitomo Chemical Co., Ltd. and Dipharma S.p.A are our
manufacturers of the API used for commercial supplies. Both of
these manufacturers have also manufactured API for Tarceva
clinical trials. Schwarz Pharma AG is our manufacturer of
Tarceva tablets and placebo product for clinical and commercial
supplies. We have entered into long term supply agreements with
our API and tablet manufacturers. We are evaluating the
capability of another manufacturer to serve as an alternative
(i.e., back-up) provider of Tarceva tablets. Clinical supplies
of Tarceva tablets are currently stored, labeled, packaged and
distributed by Cardinal Health Clinical Services, and Cardinal
Health Packaging Services also labels and provides secondary
packaging services for commercial supplies of Tarceva tablets
before their subsequent distribution to Genentech or a storage
facility designated by Genentech. All manufacturers of the API
and Tarceva tablets are required to comply with current good
manufacturing practices. We have produced sufficient quantities
of Tarceva tablets to conduct our ongoing clinical trials, and
we have a supply chain organization in place, with inventory on
hand, to support the commercial sales of Tarceva.



MacugenMacugen is our innovative,
first-in-class product
for the treatment of wet AMD and the cornerstone of our
ophthalmology business. Macugen is co-promoted in the United
States by our specialty ophthalmology sales force as part of a
co-development and marketing arrangement with Pfizer. Macugen
was launched in the United States in January 2005 for use in the
treatment of all types of wet AMD. Macugen is a novel
therapeutic (a pegylated aptamer) that selectively binds to the
VEGF Isoform-165, the pathogenic isoform causing choroidal
neovascularization associated with wet AMD. Macugen is
administered inside the eye once every six weeks via an
intravitreous injection, and addresses the

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abnormal blood vessel growth and blood vessel leakage that is
believed to be the underlying cause of the disease. It is the
first and only FDA-approved therapy for the treatment of all
subtypes of wet AMD. Total U.S. net sales for Macugen were
approximately $185 million for the year ended
December 31, 2005. We share with Pfizer on a 50/50 basis
the gross profits of Macugen sales in the United States. We and
Pfizer are responsible for our own sales costs and we share
equally with Pfizer manufacturing, regulatory and marketing
costs. Development costs are shared, with Pfizer paying 75% of
the external costs of any agreed development program and 50% of
the costs of any post-marketing program. Pfizer is responsible
for all commercialization of Macugen outside of the United
States. Macugen was approved in the EU in February 2006 and has
now been approved in 33 countries and territories around the
world. With respect to Macugen sales in the EU, we receive the
greater of 20% of product operating profit or (i) for
aggregate net sales of Macugen below $1 billion, a 15%
royalty and (ii) for aggregate net sales of Macugen greater
than $1 billion, a 20% royalty on such incremental net
sales. In all other countries (other than the United States,
where we do not receive royalties), we receive a 10% royalty on
net sales of Macugen.

In addition to wet AMD, we are currently jointly developing
Macugen with Pfizer for use in DME, a condition that afflicts a
significant subset of diabetic retinopathy patients, and in
central retinal vein occlusion, or CRVO, another serious disease
of the retina that leads to significantly impaired vision. We
are currently conducting a
900-patient
Phase III clinical trial in DME and expect to report
results of an ongoing Phase II clinical trial for CRVO
during 2006. Wet AMD and DME are two of the leading causes of
severe vision loss and blindness in the adult population. As of
December 31, 2005, we estimate that there are more than
1.6 million people in the United States age 50 and
older who have wet AMD. Approximately 500,000 new cases of wet
AMD arise each year worldwide, approximately 200,000 of which
occur in the United States. Although wet AMD represents
approximately 10% of all AMD cases, it is responsible for up to
90% of the severe vision loss associated with AMD, with a
majority of wet AMD patients experiencing severe vision loss in
the affected eye within as little as a few months to two years
after diagnosis of the disease. Because wet AMD generally
affects adults over 50 years of age, we expect the
incidence of wet AMD to continue to increase as the elderly
population and overall life expectancy increases. Diabetic
retinopathy is the leading cause of blindness in people less
than 50 years of age in developed countries. DME is a
manifestation of diabetic retinopathy and the leading cause of
vision loss in patients with diabetic retinopathy. As of
December 31, 2005, there were approximately 500,000 people
suffering from DME in the United States, with approximately
75,000 new cases reported each year. We expect the incidence of
DME in the United States to increase as the number of people
with diabetes increases. We also believe that the prevalence and
incidence of AMD and DME in the EU are similar to those in the
United States. Because the existing treatments for DME have
significant limitations, there is a significant unmet medical
need for a new therapy for this disease. As of December 31,
2005, there were an estimated 130,000 patients with CRVO in
the United States. Like wet AMD and DME, we believe that CRVO
remains a major unmet clinical need and a significant commercial
opportunity.

Currently, the only other approved treatment for wet AMD is
photodynamic therapy, or PDT, in combination with Novartis
AGs
Visudyne®,
which is approved for the predominantly classic form of wet AMD.
However, Genentech has filed a biologics license application, or
BLA, in the United States for its anti-VEGF agent Lucentis, an
antibody fragment of Genentechs anti-cancer agent Avastin,
which is approved in the United States for the systemic,
intravenous treatment of colorectal cancer. Unlike Macugen,
Lucentis and Avastin are pan-VEGF inhibitors designed to inhibit
all isoforms of the VEGF molecule. Avastin has been
re-formulated for intravitreous injection by independent
compounding pharmacies and used extensively in an off-label
manner by retinal specialists in the United States, prompted by
the announcement of Phase III trial results for Lucentis
and the fact that Avastin is the full-length antibody from which
the Lucentis product candidate is derived. Despite the lack of
comparative studies, it has been suggested that the pan-VEGF
agents may have better efficacy than Macugen. The off-label use
of Avastin has occurred despite the lack of formal clinical
trials demonstrating the safety and efficacy of intravitreous
Avastin, an agent which contains a black-box warning in its FDA
approved label highlighting the risk of gastrointestinal
perforations, wound healing complications, and hemor-

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rhage, as well as warnings and precautions regarding adverse
events including proteinuria, hypertension, congestive heart
failure, and thromboembolic events. We believe that while
pan-VEGF targeting may provide enhanced efficacy over Macugen,
the perception of this potential advantage may be over-stated,
and is based on comparisons of Phase III trials of
different design and patient eligibility. In addition, the
Phase III clinical trial results reported to date have
demonstrated an imbalance in thromboembolic events for Lucentis.
Macugen demonstrated no imbalance in thromboembolic events in
any clinical study to date and has an established safety profile
through two-plus years of follow-up. For these reasons, we
believe there will be an important ongoing role for Macugen in
the chronic management of wet AMD even after the anticipated
launch of Lucentis.

A number of recent developments have begun to support our belief
that the efficacy of Macugen is under-appreciated and that
Macugens established safety profile may prove to be an
important advantage. In an October 2005 publication in the
journal Retina, data from a retrospective analysis of a
sub-set of patients from our two registrational Phase III
trials, or the VISION trials, for Macugen were presented. The
data demonstrated that in patients afflicted with
early-stage wet AMD, which is characterized by
either (i) small lesions with better vision, without prior
treatment and lacking scarring or atrophy, or (ii) occult
lesions without lipid and with better vision in the fellow eye
treatment with Macugen, leads to better overall outcomes than
was shown in the overall VISION trial population. Up to 20% of
these patients gained three or more lines of vision (using the
standardized early treatment of diabetic retinopathy study, or
ETDRS, visual acuity chart) compared to 0% in the control group
and 6% of the Macugen-treated patients in the VISION trial
population. More recently, a retrospective analysis from The
Associated Retinal Consultants, P.C. in Royal Oaks,
Michigan, regarding the efficacy of Macugen in previously
untreated wet AMD patients treated for an average of six months
was presented at the Royal Hawaiian Eye conference in January
2006 and showed that 90% of these patients maintained their
vision and 22% experienced three or more lines of vision gain.
These results were appreciably better than those reported in the
VISION studies. As a result, we are currently enrolling patients
in a Phase II collaborative study with UCLA designed to
attempt to reproduce the encouraging results of these
retrospective studies in a prospective clinical trial in newly
diagnosed early-stage wet AMD patients. We expect that the UCLA
study data will be available for presentation and publication
during 2007.

Positioning Macugen in the Rapidly Evolving Wet AMD
Market. There are three key components of the strategy we
are developing, together with our partner Pfizer, for
stabilizing, maintaining and ultimately growing Macugens
share in the wet AMD market, especially in the face of current
competition from off-label intravitreous Avastin and future
competition from Lucentis:




    To demonstrate through publications in peer-reviewed journals,
    case studies, and through clinical trials, Macugens
    under-appreciated efficacy in treating patients with early-stage
    wet AMD. Much of the clinical experience with Macugen was
    limited to patients with advanced wet AMD, who often had failed
    one or more previous therapies;
    To capitalize on Macugens established safety profile which
    we believe is particularly advantageous for patients with higher
    cardiovascular risk, and newly diagnosed patients who present
    with good baseline visual acuity; and
    To establish and demonstrate through clinical trials a new
    treatment paradigm that positions Macugen as safe and effective
    in the chronic management of wet AMD  both in
    sequential regimens, such as following induction therapy with a
    pan-VEGF agent such as Avastin or Lucentis, or PDT or steroids,
    or as first-line therapy in early-stage wet AMD to which other
    pan-VEGF agents may be added adjunctively if the disease
    progresses.The systemic safety profile of Macugen, established in data from
the first year of the VISION trials, has now been demonstrated
in over two years of treatment with no evidence of association
with hypertension or serious hemorrhagic or thromboembolic
events as compared to the control group. Furthermore, a
preliminary analysis of a third year of
follow-up from the
VISION trials suggests that the safety of Macugen is maintained
throughout three years of treatment. Biology and scientific data

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suggest possible safety issues with the use of pan-VEGF agents.
In addition, clinical trial data suggests the potential for
neurotoxicity, vascular abnormalities and thromboembolic events.
Given that wet AMD afflicts the older population (most patients
are age 50 and older), who are at a greater risk for
thromboembolic events, we believe that Macugen has the potential
to become the preferred anti-VEGF agent for maintenance use
following induction treatment with a pan-VEGF agent.

Clinical Data and Lifecycle Plan. In December 2004 we
announced that the FDA had approved Macugen for the treatment of
wet AMD based on data from our VISION trials. We have completed
approximately three and a half years of our Phase II/ III
pivotal clinical trials for the use of Macugen in the treatment
of wet AMD. These Phase II/ III clinical trials are ongoing
to generate long-term safety data for up to five years.

We are also presently conducting a number of additional clinical
trials of Macugen, including (i) a Phase IV clinical
trial for the efficacy of Macugen in combination with Visudyne,
an intravenously administered light activated drug, in the
treatment of wet AMD, (ii) a Phase IV clinical trial
to explore the safety and efficacy of the FDA approved
0.3 mg dose of Macugen versus two different lower doses of
Macugen in patients with wet AMD, (iii) a Phase II/
III clinical trial for the use of Macugen in the treatment of
DME and (iv) Phase II clinical trial of Macugen in the
treatment of CRVO which completed enrollment in August 2005.

Wet AMD Post-Approval Commitment Study. In conjunction
with the approval of Macugen in the United States, we have
agreed with the FDA to conduct a Phase IV post-approval
safety and efficacy study. This Phase IV clinical trial
will explore the safety and efficacy of the approved dose of
Macugen (0.3 mg) versus two additional lower doses of
Macugen in patients with subfoveal wet AMD. This global study
will run for two years with the primary endpoint being the
proportion of subjects losing less than three lines on the ETDRS
eye chart at the end of 54 weeks. This Phase IV study
is expected to enroll approximately 262 patients, with the
first patient expected to be enrolled in March 2006. The study
will provide us with additional data on lower doses of Macugen
as well as safety data on retinal and corneal toxicity.

Macugen plus PDT Combination Study for Wet AMD. This
Phase IV combination trial is a
360-patient study that
compares Macugen and PDT with Visudyne versus Macugen alone, to
determine if patients with the predominantly classic form of wet
AMD benefit from combination therapy. The study, which began in
the second quarter of 2005, is being conducted in both U.S. and
international sites and will compare the proportion of patients
who maintain vision after both one and two years of treatment.
Maintenance of vision is defined as a loss of less than three
lines on the ETDRS eye chart. All patients will receive Macugen
every six weeks, and half the patients will receive PDT with
Visudyne as needed, while the other half will receive a control
sham PDT infusion. The study is currently ongoing.

DME Clinical Study. In February 2005, we completed a
Phase II clinical trial for the use of Macugen in the
treatment of DME. The 172 patients enrolled in this study
were required to have DME involving the center of the macula. In
this randomized, double-masked placebo controlled trial,
patients received 0.3 mg, 1.0 mg and 3.0 mg doses
of Macugen via intravitreous injection or sham control
injections every six weeks for at least 12 weeks and then
up to an additional 18 weeks at the discretion of the
investigators. Focal laser photocoagulation was allowed in the
investigators discretion after week 12. The results of the
study, which were published in the November 2005 edition of the
journal Ophthalmology, demonstrated that the therapy was
well tolerated, and there were no serious adverse events
determined by the clinical trial investigators as related to the
drug or its administration. 59% of the patients had one or more
lines of vision gain and 18% of patients had three or more lines
of vision gain (using the ETDRS chart). Based on this data we
have initiated a Phase III trial in this indication and are
currently exploring a compendia listing for the reimbursement of
Macugen use for the treatment of DME in the United States. The
Phase III DME study is a
900-patient trial being
conducted in the United States, Europe, Australia, South Africa,
and South America. Patients will be given intravitreous
injections of 0.3 mg, 0.03 mg or 0.003 mg
Macugen, every six weeks for three years versus sham injections

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in subjects with DME involving the center of the macula. If this
study is positive, it could result in the approval of a new
indication for Macugen.

CRVO Clinical Study. A Phase II clinical trial
designed to test the efficacy, safety, and pharmacokinetics of
Macugen in CRVO patients was started in 2004. CRVO is
characterized by high VEGF levels, abnormal blood vessel growth
and blood vessel leakage. CRVO occurs when the circulation of a
retinal vein becomes obstructed, causing blood vessel bleeding
and leakage in the retina and/or iris. The CRVO study is a
90-patient study
conducted in the United States, Europe, Australia and Israel.
Patients will be given intravitreous injections of 1.0 mg
or 3.0 mg Macugen every six weeks for 30 weeks versus
sham injection. Recruitment for this trial was completed in
September 2005 and results are expected the second quarter of
2006. If this trial is positive, a Phase III study may be
initiated in the fourth quarter of 2006.

Macugen Maintenance Study. We, together with Pfizer, have
agreed to begin a study for the use of Macugen as a maintenance
therapy to sustain the vision outcomes of patients previously
treated with PDT, triamcinolone, Avastin or Lucentis. The study
is expected to run for approximately one year, with the primary
endpoint being the proportion of subjects losing less than three
lines on the ETDRS chart at the end of 52 weeks, and the
secondary endpoints being the measurement of retinal thickness
and leakage. The study is expected to enroll between 750 and
1,000 patients, with the first patient expected to be enrolled
in the third quarter of 2006.

Investigator Sponsored Studies. In addition to the
studies listed above, there are currently 13
investigator-sponsored studies of Macugen being conducted at
various institutions in the United States. The most significant
is the prospective trial studying the efficacy of Macugen in the
treatment of early-stage wet AMD, a multi-center trial sponsored
by University of California at Los Angeles, or UCLA, which is
currently enrolling.

Additional studies explore monotherapy and combination uses of
Macugen. In addition to studies focusing on wet AMD and DME,
other research areas include: branch retinal vein occlusion;
retinal ischemia; histoplasmosis; diabetic retinopathy; angioid
streaks; myopia; and iris neovascularization.

Sales and Marketing. We commercialize Macugen with our
collaboration partner, Pfizer. Under this arrangement, we and
Pfizer co-promote Macugen in the United States. We have
granted Pfizer the exclusive right to develop and commercialize
Macugen outside the United States under a royalty-bearing
license. As of February 28, 2006 our commercial
organization in ophthalmology comprised approximately 70
employees, 54 of whom were in sales and marketing and the
remainder of whom were in medical affairs and reimbursement. We
also employ certain sales operations and training functions
dedicated to ophthalmology, while others are shared with the
oncology commercial organization. Our sales team performs the
majority of details of Macugen to retinal specialists, whereas
the Pfizer team details both ophthalmologists and retinal
specialists.

Collaboration with Pfizer. In December 2002, we entered
into several concurrent agreements with Pfizer to jointly
develop and commercialize Macugen for the prevention and
treatment of diseases of the eye and related conditions. Under
the terms of our collaboration agreements with Pfizer:




    Pfizer has funded, and is obligated to continue to fund, a
    majority of the ongoing development costs incurred pursuant to
    an agreed upon development plan covering the development of
    Macugen for AMD, DME and other agreed upon ophthalmic
    indications;
    In the United States, we are co-promoting Macugen with Pfizer
    through our own and Pfizers sales forces, we and Pfizer
    share in gross profits and losses from the sale of Macugen, and
    we book all U.S. product sales;
    Outside the United States, Pfizer markets the product under an
    exclusive license, for which we are entitled to royalty payments
    based on net sales; and
    Pfizer has the principal responsibility for regulatory filings.11



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Macugen has been approved by regulatory authorities in the
United States, Canada, Brazil, Argentina, Peru, Pakistan, the
Philippines and Switzerland, and was approved in February 2006
by the European Agency for the Evaluation of Medicinal Products,
which covers 25 countries. Pfizer has filed new drug
applications, or NDAs, for Macugen in 13 other countries.

We are entitled to milestone payments from Pfizer based on the
launch of Macugen in the EU, the achievement of additional
worldwide regulatory submissions and approvals and the
attainment of agreed upon sales levels of Macugen.

Under the agreements, the parties sharing of profits and
losses from the commercialization of Macugen in the United
States extends until the later of 15 years after commercial
launch in the United States and the expiration of the United
States patent rights licensed to Pfizer. The payment of
royalties to us by Pfizer based on net sales of Macugen outside
the United States extends, on a country-by-country basis, until
the later of 15 years after commercial launch and the
expiration of the patent rights licensed to Pfizer in each
particular country. The royalty rate on net sales of Macugen
outside the United States is reduced on a country-by-country
basis to the extent that the patent rights in a particular
country expire or a generic form of Macugen is marketed in that
country. The U.S. patent rights licensed by us to Pfizer
expire between 2010 and 2017. The corresponding foreign rights
include patents that expire between 2011 and 2017. Pfizer may
terminate the collaboration relationship without cause upon six
to 12 months prior notice, depending on when such
notice is given. Either party may terminate the collaboration
relationship based upon material uncured breaches by the other
party. In addition, we may terminate the collaboration
relationship if, during specified periods, net sales of Macugen
do not reach specified levels. If we elect to terminate the
collaboration in this situation, we would be required to pay
royalties to Pfizer based on net sales of Macugen following such
termination.

Distribution and Pricing. We distribute Macugen in the
United States primarily through national distributors that
specialize in pharmaceutical product distribution to specialty
markets. In January 2005, we announced the distribution of
Macugen through three distributors: McKesson Corporation,
Priority Healthcare Corporation and Besse Medical. Under these
arrangements, we ship Macugen to our distributors and title and
risk of loss pass upon shipment to the distributors. These
distributors sell Macugen to physicians, physician group
practices, hospitals, federal government buying groups and
clinics. Our agreement with Pfizer provides that the parties
will mutually agree on the pricing of Macugen.

Manufacturing. We currently depend on third parties to
manufacture Macugen. We engaged a third party manufacturer,
Raylo Chemicals Inc., an independently operating subsidiary of
Degussa AG, to produce the active pharmaceutical ingredient used
in Macugen. Under the terms of our agreement with Degussa, we
are obligated to purchase minimum specified percentages of our
requirements for the API.

For our commercial and clinical trial supply of Macugen, we
engaged Gilead Sciences, Inc. in December 2003 as a separate
fill and finish manufacturer to formulate the active
pharmaceutical ingredient from a solid into a solution and to
fill the solution into syringes. Under the terms of our
agreement with Gilead, we are obligated to purchase minimum
specified percentages of our requirements through the third
anniversary of the January 2005 commercial launch of Macugen in
the United States.

If our relationship with Raylo or Gilead terminates or if these
manufacturers are unable to meet their obligations, we would
need to find other sources of supply. We are currently in the
process of identifying an alternate supplier of Macugen, but
until this occurs, a loss of one of our suppliers could
potentially result in a delay in our supply of Macugen.

Macugen License Agreements. We license key components of
Macugen pursuant to the following two license agreements:



Gilead Sciences. In March 2000, we entered into an
    agreement with Gilead and one of its subsidiaries for an
    exclusive worldwide license for the API for Macugen. In exchange
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licensed from Gilead, we pay royalties to Gilead based on net
    sales of Macugen by us or our affiliates or sublicensees. Our
    royalty obligation extends on a country-by-country basis until
    the later of 10 years after first commercial sale of
    Macugen, which occurred in January 2005, or the expiration of
    the last-to-expire
    patent licensed from Gilead in each particular country. We also
    pay milestones based upon the commercial launch of Macugen in
    Europe and Japan. Upon the expiration of the
    last-to-expire royalty
    term, the agreement expires and, at our option, our license from
    Gilead either (1) survives and remains exclusive, in which
    case we would be obligated to continue paying Gilead a reduced
    royalty on product sales or (2) survives and converts to
    nonexclusive, in which case we would not have any further
    royalty obligation to Gilead. The agreement obligates us to use
    commercially reasonable efforts to develop, obtain regulatory
    approvals for and commercialize Macugen.Nektar Therapeutics. In February 2002, we entered into a
    license, manufacturing and supply agreement with Nektar
    Therapeutics, formerly Shearwater Corporation, pursuant to which
    Nektar supplies us with the reagent that we link to the aptamer
    to create the API in Macugen. Under the terms of the agreement,
    Nektar granted us various exclusive and non-exclusive worldwide
    licenses, with the right to grant sublicenses, under patents and
    know-how related to the reagent controlled by Nektar, to
    develop, manufacture and commercialize Macugen. In exchange for
    these rights, we pay Nektar royalties based on net sales of
    Macugen by us or our affiliates or sublicensees. Nektar also has
    an exclusive right to supply us with the pegylation reagent for
    Macugen, subject to Nektar meeting its supply obligations. The
    agreement expires upon the expiration of the
    last-to-expire patent
    licensed by us from Nektar. The United States patent rights
    licensed to us by Nektar expire between 2013 and 2016.Isis Pharmaceuticals. In December 2001, we entered into a
    non-exclusive license agreement with Isis Pharmaceuticals, Inc.,
    which grants us rights under patents owned or controlled by Isis
    to commercialize Macugen worldwide. In exchange for this
    license, we pay Isis royalties based on net sales of Macugen. We
    also will make milestone payments to Isis for additional NDA
    filings and approvals of Macugen for additional applications.
    The U.S. patent rights we license from Isis expire between
    2010 and 2014.

NovantroneNovantrone (mitoxantrone concentrate for injection) is an
anthracenedione used as an intravenous chemotherapy agent.
Novantrone is approved by the FDA for the treatment of acute
non-lymphocytic leukemia, and the relief of pain associated with
advanced hormone refractory prostate cancer. We market and
promote Novantrone for these approved oncology indications in
the United States pursuant to a co-promotion agreement with an
affiliate of Serono, S.A. signed in March 2003. We receive
commissions from Serono on net oncology sales in this market.
The patent for Novantrone will expire in April 2006. The
expiration of a product patent results in a loss of market
exclusivity for the covered pharmaceutical product. Therefore,
we expect a significant decrease in our commissions related to
Novantrone as we approach patent expiration or shortly
thereafter as a result of an expected decrease in oncology sales.

Our Research and Development Programs

The entire drug discovery and development process typically
takes well over a decade and is subject to significant risk and
attrition. A significant majority of drug candidates which enter
clinical trials fail to result in a successful product with
typical metrics for the industry suggesting that only
approximately one in eight drug candidates that enter clinical
trials will result in a successful product. We believe it is
essential, in this high risk setting, to have a portfolio
approach to drug discovery and development that manages a
pipeline of opportunity in a disciplined manner and leverages
the core expertise of the company. We have built, over two
decades, extensive expertise in the discovery and development of
molecular targeted therapies  drugs designed to
directly inhibit a biomolecule that we believe to be causally or
mechanistically involved in the disease state we are addressing.
In addition

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to our technology and scientific expertise in this area (which
includes automated high throughput screening, small molecule
libraries, molecular modeling, medicinal chemistry, molecular
and cellular biology, toxicology, pharmacology and regulatory
affairs), we believe that focused scientific and medical disease
area expertise is essential to success and we have either built
or acquired this expertise in the three disease areas in which
we operate, oncology, ophthalmology and diabetes. We have
focused our efforts on the discovery and development of novel
and differentiated agents that target significant unmet medical
needs in these three areas.

Our Proprietary Clinical and Pre-Clinical Diabetes and
Obesity Programs

Our diabetes and obesity research and development programs are
carried out through our wholly-owned UK-based subsidiary,
Prosidion, in conjunction with our core research and development
functional teams (handling screening, toxicology and regulatory
affairs, among other functional disciplines) based in the United
States. The programs are anchored by our assets relating to
DPIV, one of the most topical targets in diabetes drug
development today. DPIV inhibitors are designed to regulate
blood glucose by preventing the breakdown of GLP-1, a key
glucose regulatory hormone that is cleaved and inactivated by
DPIV. The development of DPIV inhibitors in the pharmaceutical
industry is a very competitive area. Our lead compound in this
area is PSN9301, a small molecule DPIV inhibitor currently in
Phase II studies. We believe that PSN9301, which is a
rapidly absorbed, short-acting oral agent designed to be
prandially dosed, may offer competitive advantages over other
DPIV agents by virtue of inhibiting GLP-1 breakdown only in the
prandial period when its activity is of primary physiological
importance to glucose regulation. By only acting at this time
PSN9301 also may avoid potential side-effects arising from the
chronic inhibition of DPIV activity. DPIV also cleaves and
inactivates other physiologically important substrates like PYY
and substance-P.

DPIV Assets. In July 2004, we acquired, through
Prosidion, a platform of DPIV technology from Probiodrug AG for
approximately $35 million in cash plus future milestones.
The milestone payments are payable upon the successful
development of PSN9301, the lead DPIV inhibitor acquired from
Probiodrug, which is currently in Phase II clinical trials
for the treatment of type 2 diabetes. These milestone payments
are payable in January 2007 and January 2010, or on such earlier
dates upon which the criteria are met, unless the development of
PSN9301 is terminated prior to such dates due to safety,
efficacy or regulatory issues, in which event the obligation to
make the milestone payments will lapse. Probiodrug, based in
Halle, Germany, pioneered much of the research and development
that has led to the characterization of DPIV as one of the most
important targets in diabetes drug development today. Included
in the acquired assets is a portfolio of medical use patents
around the target. This portfolio includes issued and pending
patents and patent applications with claims covering DPIV as a
target for anti-diabetes therapy and licensed rights to patent
applications claiming combinations of DPIV inhibitors with other
oral anti-diabetes drugs such as metformin. Our rights to this
patent estate of DPIV medical use patents provide us with a
potential source of milestone and royalty revenue through the
issuance of non-exclusive licenses to the patent estate. Six
major pharmaceutical companies, including Novartis and Merck,
have taken licenses to this patent estate. These licenses
provide us with upfront payments, milestones and royalties. In
February 2006, Merck announced that it had filed an NDA for its
DPIV inhibitor,
Januviatm
(sitagliptin phosphate), which has resulted in a milestone
payment to us and could potentially trigger additional milestone
and royalty payments to us if Januvia is approved by the FDA.
Novartis has stated that it expects to file an NDA for its DPIV
inhibitor,
Galvustm
(vildagliptin), during the first quarter of 2006.

PSN9301. PSN9301 is an oral, fast-acting inhibitor of
DPIV. DPIV cleaves and inactivates glucagon-like
peptide-1, or GLP-1, an
important mediator of blood glucose levels. Inhibition of DPIV
leads to enhanced GLP-1 activity which leads to increased
insulin secretion and decreased glucagon secretion resulting in
significant lowering of both mean and post-prandial blood
glucose levels. DPIV inhibitors have been shown in clinical
studies to have additional benefits. The increased insulin
secretion has been shown to be glucose-dependent, providing a
possible built-in safety mechanism against hypoglycaemia, or
abnormally low blood sugar levels. While the field is
competitive, with numerous pharma-

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ceutical companies currently developing DPIV inhibitors, we
believe that PSN9301 is potentially differentiated from these
competing products in that it has a very rapid onset of action
and a relatively short duration of action and, therefore, is an
ideal product candidate for prandial, or mealtime, dosing. It is
anticipated that prandial dosing may result in less interference
with other DPIV substrates between meals and overnight. Our goal
is to develop a safer product by reducing potential unwanted
side-effects arising from the chronic inhibition of the
breakdown of other physiologically important DPIV substrates
such as substance-P and
PYY. PSN9301 has undergone a Phase IIa clinical trial
investigating safety, tolerability, pharmacodynamics and
pharmacokinetics (generally, the study of the biochemical and
physiologic effects of drugs and their mechanisms and timing of
action) in type 2 diabetes patients. Primary endpoints included
improved oral glucose tolerance test, effect on insulin and DPIV
activity and the results demonstrated that PSN9301 reduced blood
glucose levels in type 2 diabetics by between 25% and 42% in
oral glucose tolerance tests. A Phase IIb clinical trial is
scheduled to commence in the middle of 2006.

Other Diabetes Clinical Candidates. In addition to
PSN9301, we have two further diabetes compounds in clinical
development. PSN357 is an oral, small molecule inhibitor of
glycogen phosphorylase which entered Phase IIa clinical
trials in late February 2006 and PSN010 is an oral, small
molecule activator of glucokinase which entered Phase I
clinical trials in mid February 2006. Both glycogen
phosphorylase and glucokinase are targets for therapeutic
intervention in type 2 diabetes. PSN357 inhibits glycogen
phosphorylase and reduces blood glucose by preventing glycogen
breakdown in the liver and has demonstrated safety in
Phase I trials and efficacy in animal models. Glucokinase
activators have a dual effect in the pancreas and the liver
resulting in increased hepatic glucose uptake in the liver and
stimulated insulin secretion by the pancreas. PSN010 has
demonstrated efficacy in animal models and successfully
completed pre-clinical toxicological profiling. Both PSN357 and
PSN010 have resulted from our target-based discovery efforts in
diabetes.

Diabetes and Obesity Discovery Research. We currently
have two advanced projects in discovery research which are
focused on diabetes and/or obesity. The first of these is a
central nervous system targeted approach which targets satiety
by Serotonin 1A agonism plus monoamine reuptake inhibition
(the S1RUP program) and is seeking the development of a drug
candidate that overcomes some of the cardiovascular side-effects
associated with the marketed product sibutramine. We anticipate
the selection of a development candidate from this project
during the course of 2006. The second project is targeting
selective agonists to the novel
G-protein coupled
receptor, GPR-119, a
program with potential utility both in the anti-obesity and
diabetes area. We anticipate selecting a development candidate
from this project by early 2007. We also have several
exploratory projects targeting diabetes and/or obesity.

Our Proprietary Clinical and Pre-Clinical Oncology
Programs

Dual c-Kit/ VEGFR
Program. OSI-930 is
a promiscuous tyrosine kinase inhibitor that principally acts as
a potent co-inhibitor of the receptor tyrosine kinases
c-kit and VEGFR. It is
designed to target both cancer cell proliferation and blood
vessel growth, or angiogenesis, in selected tumors.
OSI-930 is the first
development candidate to emerge from the independent,
non-collaborative efforts of our oncology discovery research
group. We have completed Phase I dose escalation studies of
OSI-930 in healthy
volunteer patients and will execute a Phase I dose
escalation study in cancer patients during 2006. We are also
investigating a second development candidate in our
c-Kit/VEGFR program,
OSI-817, which serves
as a back-up candidate to
OSI-930.

The mutated Kit receptor is directly involved in tumor
progression in the majority of gastrointestinal stromal tumors
and certain leukemias, and over-expressed normal Kit is thought
to play a role in small cell lung cancer. The inhibition of the
tyrosine kinase activity of Kit is expected to result in reduced
cancer cell proliferation and increased cellular apoptosis in
tumor types driven by Kit, resulting in inhibition of tumor
growth. In addition to inhibiting Kit activity, each of
OSI-930 and
OSI-817 is also capable
of inhibiting the receptor tyrosine kinase called KDR. KDR, or
vascular endothelial growth factor
receptor-2, or
VEGFR-2, is present on
endothelial cells and is a key mediator of blood vessel growth in

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response to the angiogenic growth factor VEGF. This pathway is
believed to be the single most important mechanism for
recruitment of new blood vessels in nearly all solid tumors;
hence, inhibition of this pathway should impact the growth and
metastases of a wide range of angiogenesis-dependent
malignancies. While the combination of Kit and KDR inhibition
would be expected to offer the greatest therapeutic benefit to
patients bearing Kit expressing solid tumors, the KDR component
is considered an attractive target for all solid tumors.

OSI-906.
OSI-906 is a tyrosine
kinase inhibitor that acts as a selective inhibitor of the
receptor tyrosine kinase
IGF-1R.
IGF-1R stimulates
proliferation, enables oncogenic transformation, and suppresses
apoptosis. It has been one of the most widely pursued targets of
drug discovery in the oncology arena over the last decade but
efforts have been hampered by the close resemblance of
IGF-1R to the insulin
receptor. Inhibitors of
IGF-1R are expected to
have broad utility in oncology since the over-expression of
IGF-1R and/or its
ligands (IGF-I and
IGF-II) or the
down-regulation of ligand binding proteins, or IGFBP, occurs in
numerous human malignancies including lung, colon, breast,
prostate, brain and skin cancers. Correlations with increased
risk and poor prognosis have been established. In addition,
signaling through the IGF system has been implicated in
protecting tumor cells from apoptosis induced by a number of
anti-cancer treatments such as EGFR inhibitors (e.g., Tarceva
and the anti-HER2/erbB2 anti-body
Herceptin®
(Trastuzumab)) and cytotoxic agents. We believe that
OSI-906 should be
useful both as a single agent and in the potentiation of other
molecularly targeted therapeutic agents. OSI-906 is on
investigational drug application, or IND, track, and we
anticipate filing an IND for
OSI-906 in the fourth
quarter of 2006.

Cessation of Certain Clinical Programs. During 2005, we
made the decision to cease development of
OSI-7904L and
OSI-461.
OSI-7904L is a
liposomal formulation of the thymidylate synthase inhibitor,
which was licensed from GlaxoSmithKline plc and acquired by us
as part of the acquisition of the oncology business of Gilead in
2001. OSI-461 is a pro
apoptotic cyclic GMP phosphodiesterase inhibitor that we
acquired from Cell Pathways, Inc. in 2003. We are seeking
licensees for these compounds, along with
OSI-211 and Aptosyn
(exisulind), which we ceased developing in 2004.

Oncology Research. It is becoming increasingly clear that
a critical development process known as epithelial mesenchymal
transition, or EMT, plays a major role in the progression of
cancer. EMT is characterized by the combined loss of epithelial
cell junction proteins, such as
E-cadherin, and the
gain of mesenchymal markers, such as vimentin, fibronectin or
MMP-2. The loss of
E-cadherin and the
acquisition of a more mesenchymal phenotype has been shown to
correlate with poor prognosis in multiple epithelial derived
solid tumors. By acquiring or co-opting a mesenchymal phenotype,
epithelial derived tumor cells acquire or gain the ability to
migrate, invade and metastasize. These properties may result in
the poorer prognosis of solid tumors that have undergone an
EMT-like transition and conversely with the need to target
distinctly different molecular targets in order to effectively
treat these tumors. With this insight, we have aligned our drug
discovery strategies to focus on EMT. This re-alignment
continues to build upon and extend our prior strategy of
exploiting signaling pathways involved in the control of
proliferation and/or in modulating tumor cell apoptosis. We are
employing various processes from an EMT perspective in our
oncology research, and such processes may allow us to identify
compounds and appropriate combinations of targeted therapies
that could have activity in a disease indication for which there
is strong biological support.

Cancer Applications for Pegaptanib. There are currently
other VEGF inhibitors either being marketed or in development
for the treatment of cancer. We are investigating whether
pegaptanib, our VEGF-targeted pegylated aptamer that is the API
for Macugen, may have applications for the treatment of certain
forms of cancer. We are currently sponsoring pre-clinical
experiments to determine if a sustained release version of
pegaptanib may be effective in the localized treatment of solid
cancerous tumors.

Collaborative Development Programs with Pfizer. From 1986
to 2001, our oncology drug discovery efforts in targeted
therapies were conducted in collaboration with Pfizer. During
the course of the alliance, five novel molecular targeted
therapies, including Tarceva, were advanced to clinical develop-

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ment. Pfizer is continuing to develop two clinical stage
targeted therapies from this prior alliance: CP-547,632, a VEGFR
inhibitor in Phase II trials, and CP-868,596, a PDGFR
inhibitor in Phase I trials. If Pfizer is successful in
commercializing either of these drug candidates, we will receive
a royalty from Pfizer on the sales of these drugs. Pursuant to
our agreement with Pfizer for this collaboration, if Pfizer
chooses to discontinue development of any of these drug
candidates, we will have the right to pursue development of
them. We have recently been informed that Pfizer has ceased
development of CP-724,714, a HER2-neu inhibitor discovered in
our collaboration with Pfizer which is in Phase I trials.
We are examining our options with respect to this candidate.

Our Proprietary Clinical and Pre-Clinical Ophthalmology
Programs

Anti-PDGF Program. We are currently studying the use of
E10030, an anti-platelet derived growth factor, or anti-PDGF,
aptamer, in combination with Macugen and other anti-VEGF agents.
We believe combining an anti-PDGF aptamer with an anti-VEGF
agent may significantly improve the efficacy of anti-VEGF
therapy by regressing abnormal blood vessels in the eye. To
date, anti-VEGF agents alone may slow or halt abnormal vessel
growth and leakage, but do not regress neovascular lesions, and
neovascular recurrence and leakage is frequent. Our anti-PDGF
aptamer has shown the ability to regress neovascularization in
three relevant models of ocular neovascularization when used in
combination with a VEGF inhibitor. Phase I clinical trials
regarding this combination therapy are expected to commence in
the second half of 2006.

Reduced Frequency Program. We believe that the number of
patients who utilize Macugen would increase if we can reduce the
required frequency of the treatment. Therefore, we are currently
exploring the development of sustained release formulations for
Macugen and also the possibility of conducting a clinical trial
program evaluating different dosing regimens.

Our Research and Development Core Capabilities

In order to provide optimal support to our oncology,
ophthalmology, and diabetes teams, we have created two core
groups (one research and one development) that house the skills
and expertise that enhance our drug discovery and development
capabilities. We have established internal development expertise
in the following areas: (i) regulatory affairs;
(ii) preclinical functions such as toxicology and
pharmacokinetics; (iii) clinical safety/medical writing;
(iv) quality assurance/quality control;
(v) chemistry/pharmacy/analytical; and
(vi) manufacturing. We complement this expertise, on an as
needed basis, with third party support. Our core research
expertise includes: (i) leads discovery, including
automated and in silicohigh throughput screening and
absorption, distribution, metabolism and excretion,
pre-screening and molecular modeling; and (ii) research
pharmacokinetics, drug metabolism and delivery. This group also
has expertise in aptamer chemistry, small molecules,
pharmacokinetics modeling, formulation and drug delivery. As of
February 28, 2006, we employed a total of 166 employees in
these areas of critical functional expertise. We have created
these groups in order to leverage our core scientific expertise
in biology and drug development and to minimize duplication
across the three disease areas. We believe that these core
groups foster synergies and opportunities across the disease
areas.

Our Intellectual Property

Patents and other proprietary rights are vital to our business.
Our policy is to protect our intellectual property rights
through a variety of means, including applying for patents in
the United States and other major industrialized countries, to
operate without infringing on the valid proprietary rights of
others and to prevent others from infringing our proprietary
rights. We also rely upon trade secrets and improvements,
unpatented proprietary know-how and continuing technological
innovations to develop and maintain our competitive position. In
this regard, we seek restrictions in our agreements with
third-parties, including research institutions, with respect to
the use and disclosure of our proprietary technology. We also
enter into confidentiality agreements with our employees,
consultants and scientific advisors.

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We have obtained patents for erlotinib, the API for Tarceva, in
the United States, Europe, Japan, and over 30 other countries.
These patents expire in the major commercial markets in 2015. We
are pursuing extensions of the patent term or of the data
exclusivity term in the countries where such extensions are
available. Significantly, we filed for a patent extension that
we anticipate will extend our U.S. patent for erlotinib to
November 2018. We also are currently pursuing United States and
international patents for various other formulations of
erlotinib and related intermediate chemicals and processes in an
effort to enhance our intellectual property rights in this
compound. We have obtained a patent covering key polymorphic
forms of Tarceva in the United States, which we anticipate will
provide us with added patent exclusivity for erlotinib through
2020. We are also currently seeking patent protection for
additional methods of use for Tarceva, including the use of
Tarceva in combination with other compounds.

We have filed a number of U.S. and international patent
applications relating to the OSI-930, OSI-817 and OSI-906
compounds, each of which we are developing as potential
treatments for cancer. We received approval for a
U.S. patent which protects the OSI-930 compound and method
of use until 2024.

In the ophthalmology arena, we license exclusively a patent
portfolio from Gilead related to Macugen which includes issued
patents in the United States, Europe, Japan and six other
countries. These patents expire between 2010 and 2017. We are
pursuing extensions of the patent term or of the data
exclusivity term in the countries where such extensions are
available. We also license exclusively and non-exclusively from
Nektar patents related to the pegylation reagent, and license
non-exclusively from Isis patents related to oligonucleotide
modifications, of the Macugen API. We are currently seeking U.S.
and international patents for additional formulations and
methods of use for Macugen, including a sustained release
formulation of Macugen.

We license exclusively a patent portfolio related to E10030, an
anti-PDGF aptamer, under our collaboration agreement with
Archemix Corp. This patent portfolio includes patents which have
issued in the United States and patent applications which are
pending in Europe, Japan, Canada and Australia. We are also
seeking U.S. and international patents for anti-VEGF/anti-PDGF
combination therapies.

We have obtained patents for PSN9301 in the United States,
Europe and six other countries. Corresponding patent
applications are pending in Japan and 11 other countries. These
patents will expire in 2019 with the possibility for patent term
extensions of up to five years. We have received an indication
of allowance for a patent on the specific salt form of PSN9301
in the United States and in Europe. Corresponding patent
applications are pending in Japan and 21 other countries. These
patents expire in 2022 and there may be the possibility for
patent term extension in some of these countries. We are also
pursuing patent applications for the use of PSN9301 in
combination with other antidiabetic agents, such as metformin,
and processes used in its manufacture. Uses of PSN9301 are also
protected by our DPIV medical use patent estate referred to
below.

Patents for PSN357, an inhibitor of glycogen phosphorylase with
potential for the treatment of type 2 diabetes, are pending in
the United States, Europe, Japan and 18 other countries. These
patents will expire in 2024 with the possibility for patent term
extensions of up to five years. We are also pursuing patents for
a specific salt form of PSN357.

Patents for PSN010, a glucokinase activator with potential for
the treatment of type 2 diabetes, are pending in the United
States, Europe, Japan and 30 other countries. These patents will
expire in 2024 with the possibility for patent term extensions
of up to five years. We are also pursuing patents to further
methods of manufacture for PSN010 and intermediates.

The DPIV technology we acquired from Probiodrug included a
portfolio of medical use patents. This portfolio contained a
number of patent families comprising issued and pending patents
and patent applications with claims covering DPIV as a target
for anti-diabetes therapy and related indications. We also have
licensed sub-licensable rights to patents and patent
applications claiming combinations of DPIV inhibitors with other
oral anti-diabetes drugs such as metformin. Merck and Novartis
are non-

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exclusive licensees under these medical use patents, together
with four other major pharmaceutical companies. We are entitled
to future potential milestones and royalties arising from the
licenses under this patent portfolio. Patents which are the
subject of these licenses will expire between 2017 and 2023. The
earliest of these patents, which claims the use of DPIV
inhibitors for lowering blood glucose levels, was revoked by the
European Patent Office in May 2004, and is being opposed in the
German and Australian patent offices. We are currently appealing
the revocation of our patent by the European Patent Office,
which has the effect of suspending the revocation of the patent
until the appeal is decided. No date has yet been set for the
hearing of the appeal proceedings. In Germany and Australia the
proceedings are still at an early stage and no dates have yet
been set for a hearing on substantive issues. If we are
unsuccessful in defending these oppositions and the patents are
revoked in one or more of these countries without the further
possibility of appeal, this will potentially reduce the royalty
revenue we derive from the non-exclusive licenses we have
granted under these patents in those territories where the
patent or patents are revoked.

We have assembled a strong gene transcription patent portfolio
which we have non-exclusively out-licensed to a number of
pharmaceutical companies. We also have non-exclusive licenses
from Cadus Pharmaceutical Corporation, or Cadus, consisting of
seven U.S. patents and additional U.S. and foreign
applications, and Wyeth, consisting of four U.S. patents
and additional foreign applications, to a portfolio of patents
and applications covering yeast cells engineered to express
heterologous GPCRs and G-protein polypeptides, methods of use
thereof in screening assays, and DNAs encoding biologically
active yeast-mammalian hybrid GPCRs.

Our Integration of Eyetech

On November 14, 2005, we completed our acquisition of
Eyetech. One of the factors in our decision to acquire Eyetech
was our belief that we could create significant efficiencies and
cost savings by leveraging our existing research and development
core capabilities and our operating infrastructure across a new
business area, ophthalmology. These anticipated cost savings
included a lower level of allocated costs for our core research,
pharmaceutical development and technical operations services, as
such costs would be shared by three rather than two disease
areas, and a reduction in the cost of running the Eyetech
business as it would no longer incur the general and
administrative costs of a public company.

On November 21, 2005, we announced our targeted plan to
integrate Eyetechs operations into our business in an
efficient and cost effective manner. Under this plan, our
Eyetech facilities located in Lexington Massachusetts and
Boulder Colorado will be closed before the end of 2006, and our
New York, New York facility has been consolidated. The unused
portion of our New York facility has already been closed
and sublet for a complete offset against our lease carrying
costs. We have entered into a letter of intent with a third
party to transfer assets and leases from our Eyetech facility in
Boulder. In addition, since the date of the acquisition,
approximately 129 former Eyetech employees have been terminated
or will be terminated by the end of 2006. In total, we estimate
our efforts will result in approximately $29 million of
annualized savings when compared with the original expected
level of annualized spending by Eyetech as a public company.

Our Competition

The pharmaceutical and biotechnology industries are very
competitive. We face, and will continue to face, intense
competition from large pharmaceutical companies, as well as from
numerous smaller biotechnology companies and academic and
research institutions. Our competitors are pursuing technologies
that are similar to those that comprise our technology platforms
and are pursuing pharmaceutical products or therapies that are
directly competitive with ours. Many of these competitors have
greater capital resources than we do, which provides them with
potentially greater flexibility in the development and marketing
of their products and has led us, in the case of both Tarceva
and Macugen, to seek partnerships with leading biotechnology and
pharmaceutical industry allies like Pfizer, Genentech and Roche,
in order to ensure our competitiveness on a global basis.

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The market for oncology products is very competitive, with
several products currently in Phase III development. Most
major pharmaceutical companies and many biotechnology companies,
including our collaborators for Tarceva, Genentech and Roche,
currently devote a portion or all of their operations to the
research and development of new oncology drugs or additional
indications for oncology drugs which are already marketed.

The near term competition to Tarceva in the second and third
line settings for the NSCLC indication includes existing
chemotherapy options such as Alimta. A key factor for
penetrating the second line setting is successfully convincing
oncologists to switch from conventional chemotherapy to Tarceva
and to employ Tarceva more extensively in the treatment of
patients with good performance status prior to the use of second
line chemotherapy agents. In addition, Genentech is currently
testing its oncology product, Avastin, in combination with
chemotherapy in first and second line NSCLC. If the combination
of Avastin plus chemotherapy proves to be more efficacious than
Tarceva as a single agent or Tarceva in combination with
Avastin, the market share of Tarceva may be more limited. Other
oncology drugs currently in clinical trials for treatment of
NSCLC either as a single agent or in combination, such as
Velcade®
(bortezomib),
Erbitux®
(cetuximab) and panitumumab, are not expected to have a
near term impact in 2006. However, if ongoing Phase III
trials for Erbitux have exceptional activity, it could pose a
serious competitive threat to Tarceva as early as 2007.

In the pancreatic setting, Tarceva may experience competition
from Avastin, Erbitux and
Eloxatin®
(oxaliplatin injection) if ongoing studies for those drugs
produce positive results. Additionally, Roche recently announced
favorable results for its chemotherapy product,
Xeloda®
(capecitabine), in pancreatic cancer in combination with
gemcitabine. However, it is uncertain at this time whether Roche
will seek approval in the United States for the use of Xeloda in
this indication or, if it does seek registration, whether it
will be successful in achieving approval.

OSI-930 is in Phase I clinical trials. As it is a dual
c-KIT/ KDR inhibitor, its potential commercial competitors could
be
Gleevec®
(imatinib mesylate),
Sutent®
(sunitinib), and
Nexavar®
(sorafenib tosylate), each of which is already in the market.

We expect competition for Macugen to intensify in 2006, both in
the market for the treatment of wet AMD, as well as for
Macugens other potential indications. Genentech and
Novartis are collaborating to develop Lucentis, an anti-VEGF
humanized antibody fragment, for intravitreous injection. This
product candidate may be viewed as particularly competitive with
Macugen because of the similarity of its mechanism of action and
favorable efficacy results recently announced from two
Phase III clinical studies in the treatment of wet AMD.
Genentech filed a BLA with the FDA in December of 2005 and
announced that it has been granted priority review in February
2006. As a result, we anticipate that Lucentis may launch as
early as July 2006. Genentechs collaborator, Novartis, has
also filed for approval of Lucentis as a treatment for wet AMD
in the EU and Switzerland.

The launch of Lucentis is likely to adversely impact the market
share for Macugen in the near term. An additional Phase IIb
study for Lucentis, known as the PIER study, is investigating an
alternative dosing regimen for Lucentis consisting of three
initial monthly injections followed by an injection once every
three months. If this trial demonstrates the same or very
similar efficacy to the monthly dosing frequency tested in the
pivotal Lucentis trials, it would eliminate the current
advantage Macugen enjoys over Lucentis in treatment frequency,
as Macugen currently requires administration every six weeks
versus every four weeks for Lucentis. Positive results from this
study could also undermine our strategy to capitalize on
Macugens established safety profile and to position
Macugen as safe and effective in the chronic treatment of wet
AMD.

In addition, extensive off-label use of Genentechs cancer
product, Avastin, for the treatment of wet AMD has also been
recently reported. Avastin is the full-length antibody from
which the Lucentis product candidate is derived. Off-label
systemic and more recently, widespread, intravitreous
administration of Avastin is being utilized by clinicians for
the treatment of patients with wet AMD, which we estimate
accounts for up to 20% share of the patient treatments for wet
AMD. To date, no formal, prospective clinical trials have been
conducted with Avastin, and in December 2005 local Medicare

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carriers began to decline reimbursement for both Avastin and the
injection procedure when used for this indication. In addition,
while Macugen, Lucentis and Avastin all target VEGF, Macugen is
a selective inhibitor of a single VEGF isoform, VEGF-165, the
pathological isoform involved in wet AMD. For this reason, we
believe Macugen may demonstrate a potentially superior safety
profile than either of the pan-VEGF inhibitors, Lucentis and
Avastin. We, together with Pfizer, plan to initiate trials, and
retrospective studies are under way, both of which explore the
ability of Macugen to sustain vision gains and preserve vision
in sequential regimens combining Macugen with short-courses of a
pan-VEGF therapy, either as an initial induction agent, or as a
short-term adjunct to Macugen first-line therapy in patients
with higher cardiovascular risk. These strategies offer the
potential to both limit the competitive threat associated with
the pan-VEGF therapies, and to optimize the risk/benefit in the
chronic management of wet AMD patients. However, this strategy
depends on a clear understanding by ophthalmologists and retinal
specialists of a higher risk for either ocular or systemic
adverse events related to pan-VEGF agents, as well as clinical
data which continues to support a lower risk profile for Macugen.

Macugen will also continue to face competition from the two
current therapies for the treatment of wet AMD: (i) PDT
with the drug Visudyne, commonly combined with off-label
intravitreous injection of the corticosteroid, triamcinolone,
and (ii) thermal laser treatment. In the United States, PDT
is approved only for the predominantly classic subtype of wet
AMD, which we estimate to currently represent approximately 18%
of the patient market share for subfoveal wet AMD. In the United
States, however, the Centers for Medicare & Medicaid
Services, or CMS, implemented a decision in April 2004 to
provide coverage for PDT to patients with wet AMD who have
occult and minimally classic lesions that are four disc areas or
less in size and show evidence of recent disease progression,
even though the FDA has not approved PDT for such treatment.

In the European Union, PDT was the only previously approved
therapy for wet AMD. Macugen received European regulatory
approval to treat wet AMD on February 2, 2006. We have
provided Pfizer with an exclusive license to market Macugen in
the EU and Pfizer plans to launch this product in the second
quarter of 2006.

Additional treatments for wet AMD and DME are in various stages
of preclinical or clinical testing. If approved, these
treatments would also compete with Macugen. Potential treatments
in late stage clinical trials include drugs sponsored by Alcon,
Inc., Allergan, Inc. through its acquisition of Oculex
Pharmaceuticals, Inc., Eli Lilly and Company, Bausch &
Lomb Incorporated, Regeneron Pharmaceuticals, Inc., Miravant
Medical Technologies, and Genaera Corporation. Some of the
sponsors of these potential products have announced favorable
results from advanced clinical trials. Alcon has filed an NDA
for
Retaane®
(anecortave acetate) for the treatment of the predominantly
classic form of wet AMD, and has initiated studies for the
primary prevention of the progression of dry AMD to the
neovascular form. Retaane was recently approved by the
Australian regulatory authorities for the treatment of wet AMD.
The current therapies for the treatment of DME are thermal laser
treatment and steroid treatment administered via intravitreous
injection, by physicians on an off-label basis. Unless
additional therapies are approved, these existing therapies
would represent the principal competition for Macugen in wet AMD
and, if Macugen is approved for DME, in DME.

Eli Lilly recently completed a Phase III clinical trial in
which its investigational drug, ruboxistaurin mesylate (proposed
brand name Arxxant) reduced the occurrence of moderate,
sustained vision loss in patients with the non-neovascular form
of diabetic retinopathy and has stated that it intends to submit
a new drug application to the FDA in early 2006 for
ruboxistaurin for the treatment of diabetic retinopathy. An
ongoing clinical trial to determine the effect of ruboxistaurin
on DME progression in patients with less severe diabetic
retinopathy is expected to be completed in 2010. Other laser,
surgical or pharmaceutical treatments for AMD and DME may also
compete against Macugen in AMD and, if Macugen is approved for
DME, in DME. Some physicians are currently using Avastin
off-label to treat certain patients with DME who are
unresponsive to thermal laser. This off-label use is occurring
because of Avastins perceived efficacy in the treatment of
DME and low acquisition cost, despite the fact that such
treatment is generally not reimbursable by private insurers and
local Medicare providers.

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A pilot study utilizing Lucentis in DME is also underway at the
Wilmer Eye Institute at Johns Hopkins University. Competitive
therapies may affect product pricing even if Macugen is
otherwise viewed as a preferable therapy. Future competitive
products may have superior efficacy, improved safety and
convenience or reduced frequency of administration compared to
Macugen.

In the diabetes and obesity arena, a number of pharmaceutical
and biotechnology companies are conducting clinical trials of
potential drugs in the same areas as our drug discovery and
development programs. We are aware of at least five competitors,
Merck, Novartis, Bristol-Myers Squibb Company, or BMS,
GlaxoSmithKline PLC, and Takeda Pharmaceutical Company Limited,
or Takeda, with DPIV inhibitor clinical candidates for the
treatment of diabetes. We believe that each of these potential
drugs are at a more advanced stage of development than our
clinical candidate, PSN9301. No DPIV inhibitors are currently
marketed, although in February 2006 Merck announced that the FDA
had accepted for review an NDA for Januvia, its DPIV inhibitor,
and Novartis has indicated that it expects to file an NDA for
its DPIV inhibitor, Galvus, in the first quarter of 2006. In the
event that our competitors products reach the market
earlier than PSN9301, we may be at a competitive disadvantage at
the time, if ever, that we receive regulatory approval to
commercialize PSN9301. We must therefore clearly distinguish the
profile of PSN9301 from other DPIV inhibitors if we are to
successfully compete in the marketplace with this product.
Additionally, if scientific developments change our
understanding of the product differentiation of PSN9301 from
that of our competitors products, the competitive
positioning and market potential of PSN9301 may be detrimentally
affected. Our other clinical candidates for diabetes, a glycogen
phosphorylase inhibitor, PSN357, and a glucokinase activator,
PSN010 face competition from at least three competitors. Roche,
Pfizer and Novo Nordisk A/ S, have, at various times, announced
similar research and development activities.

Government Regulation

We and our collaborative partners are subject to, and any
potential products discovered and developed by us must comply
with, comprehensive regulation by the FDA in the United States
and by comparable authorities in other countries. These national
agencies and other federal, state, and local entities regulate,
among other things, the pre-clinical and clinical testing,
safety, effectiveness, approval, manufacture, quality, labeling,
distribution, marketing, export, storage, record keeping,
advertising and promotion of pharmaceutical and diagnostic
products.

The process required by the FDA before a new drug
(pharmaceutical product) or a new route of administration of a
pharmaceutical product may be approved for marketing in the
United States generally involves:




    pre-clinical laboratory and animal tests;
    submission to the FDA of an IND, which must be in effect before
    clinical trials may begin;
    adequate and well-controlled human clinical trials to establish
    the safety and efficacy of the drug for its intended
    indication(s);
    FDA compliance inspection and/or clearance of all manufacturers;
    submission to the FDA of an NDA; and
    FDA review of the NDA or product license application in order to
    determine, among other things, whether the drug is safe and
    effective for its intended uses.

FDA Approval ProcessFDA approval of our own and our collaborators products is
required before the products may be commercialized in the United
States. FDA approval of an NDA will be based, among other
factors, on the comprehensive reporting of clinical data,
risk/benefit analysis, animal studies and manufacturing
processes and facilities. The process of obtaining NDA approvals
from the FDA can be costly and time consuming and may be
affected by unanticipated delays.

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New indications or other changes to an already approved product
also must be approved by the FDA. A supplemental new drug
application, or sNDA, is a supplement to an existing NDA that
provides for changes to the NDA and therefore requires FDA
approval. Changes to the NDA that require FDA approval are the
subject of either the active ingredients, the drug product
and/or the labeling and include a new indication or changes to a
manufacturing site or manufacturing process. A supplement is
required to fully describe the change. There are two types of
sNDAs depending on the content and extent of the change. These
two types are (i) supplements requiring FDA approval before
the change is made and (ii) supplements for changes that
may be made before FDA approval. Supplements to the labeling
that change the indication section require prior FDA approval
before the change can be made to the labeling. Clinical trials
are necessary to support sNDAs for new indications.

Pre-clinical tests include laboratory evaluation of product
chemistry and formulation, as well as animal studies, to assess
the potential safety and efficacy of the product. Certain
pre-clinical tests must comply with FDA regulations regarding
current good laboratory practices. The results of the
pre-clinical tests are submitted to the FDA as part of an IND to
support human clinical trials and are reviewed by the FDA, with
patient safety as the primary objective, prior to the
commencement of human clinical trials.

Clinical trials are conducted according to protocols that detail
matters such as a description of the condition to be treated,
the objectives of the study, a description of the patient
population eligible for the study and the parameters to be used
to monitor safety and efficacy. Each protocol must be submitted
to the FDA as part of the IND. Protocols must be conducted in
accordance with FDA regulations concerning good clinical
practices to ensure the quality and integrity of clinical trial
results and data. Failure to adhere to good clinical practices
and the protocols may result in FDA rejection of clinical trial
results and data, and may delay or prevent the FDA from
approving the drug for commercial use.

Clinical trials are typically conducted in three sequential
Phases, which may overlap.

During Phase I, when the drug is initially given to human
subjects, the product is tested for safety, dosage tolerance,
absorption, distribution, metabolism and excretion. Phase I
studies are often conducted with healthy volunteers depending on
the drug being tested; however, in oncology or other areas where
the product may be too inherently toxic to ethically administer
to healthy volunteers, Phase I trials are more often
conducted in patients.

Phase II involves studies in a limited patient population,
typically patients with the conditions needing treatment, to:




    evaluate preliminarily the efficacy of the product for specific,
    targeted indications;
    determine dosage tolerance and optimal dosage; and
    identify possible adverse effects and safety risks.Pivotal or Phase III adequate and well-controlled trials
are undertaken in order to evaluate efficacy and safety in a
comprehensive fashion within an expanded patient population for
the purpose of registering the new drug.

Success in early stage clinical trials does not assure success
in later stage clinical trials. The FDA may suspend or terminate
clinical trials at any point in this process if it concludes
that patients are being exposed to an unacceptable health risk
or if they decide it is unethical to continue the study.

Results of pre-clinical and clinical trials, along with
descriptions of the manufacturing process, analytical tests
conducted on the chemistry of the drug, and results of chemical
studies, must be submitted to the FDA as part of an NDA (or
sNDA) requesting approval to market the product (or to market
the product with the change requested). The FDA reviews all NDAs
submitted before it accepts them for filing. It may request
additional information rather than accept an NDA for filing.
Once an NDA is accepted for filing, the FDA begins an in-depth
review of the application. FDA approval of an NDA will

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be based, among other factors, on the comprehensive reporting of
clinical data, risk/benefit analysis, animal studies and
manufacturing processes and facilities. Data obtained from
clinical activities are not always conclusive and may be
susceptible to varying interpretations, which could delay, limit
or prevent regulatory approval. The process of obtaining NDA
approvals from the FDA can be costly and time consuming and may
be affected by unanticipated delays. Even if a product receives
regulatory approval, the approval may be significantly limited
to specific diseases and dosages. Further, even after regulatory
approval is obtained, later discovery of previously unknown
problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the
market.

There is an NDA review process referred to as the Fast Track
program which is designed to expedite the approval of new drugs
that are intended to treat serious or life-threatening
conditions and that demonstrate the potential to address unmet
medical needs. Applicants that meet the relevant acceptance
criteria may receive Fast Track designation. A clinical claim
that has received Fast Track designation is eligible for
consideration for certain programs, including the ability to
schedule meetings to seek FDA input into development plans, and
the option of submitting an NDA in sections on a rolling basis
rather than submitting all components simultaneously.

Both before and after market approval is obtained, a product,
its manufacturer and the holder of the NDA for the product are
subject to comprehensive regulatory oversight. Any drug products
manufactured or distributed pursuant to FDA approvals are
subject to continuing regulation by the FDA, including
record-keeping requirements, reporting of adverse experiences
with the drug, drug sampling and distribution requirements,
notifying the FDA and gaining its approval of certain
manufacturing or labeling changes, and complying with the
FDAs promotion and advertising requirements. The FDA may
also impose certain post-marketing commitments as a condition of
product approval, or Phase IV commitments. Phase IV
studies are required at the time of approval and involve
continued testing of a product and development of data,
including clinical data, about the products effects in
various populations and any side effects associated with
long-term use.

Manufacturing procedures must conform to current good
manufacturing practices, which must be followed at all times. In
complying with this requirement, manufacturers, including a drug
sponsors third-party contract manufacturers, must continue
to expend time, money and effort in the area of production,
quality assurance and quality control to ensure compliance.
Manufacturing establishments are subject to periodic inspections
by the FDA in order to assess, among other things, compliance
with current good manufacturing practices. To supply products
for use in the United States, foreign manufacturing
establishments also must comply with current good manufacturing
practices and are subject to periodic inspection by the FDA or
by regulatory authorities in certain countries under reciprocal
agreements with the FDA.

We are required to comply with requirements concerning
advertising and promotional labeling. Our advertising and
promotional labeling must be truthful and not misleading. We are
prohibited from promoting any non-FDA approved or off-label
indications of products. Failure to comply with this requirement
could result in significant enforcement action by the FDA,
including warning letters, orders to pull all promotional
materials, and substantial fines. The Department of Justice may
also pursue enforcement actions against off-label promotion
which could result in criminal and/or civil fines, as well as
other restrictions on the future sales of our products.

We are also required to comply with post-approval safety and
adverse event reporting requirements. Adverse events related to
our products must be reported to the FDA according to regulatory
timelines based on their severity and expectedness. Failure to
make required safety reports and to establish and maintain
related records could result in withdrawal of a marketing
application.

Violations of regulatory requirements at any stage, including
after approval, may result in various adverse consequences,
including the FDAs delay in approving or refusal to
approve a product, withdrawal of an approved product from the
market and the imposition of criminal penalties against the
manufacturer and NDA holder. In addition, later discovery of
previously unknown problems may result in restrictions on the
product, manufacturer or NDA holder, including withdrawal of the
product from

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the market. Furthermore, new government requirements may be
established that could delay or prevent regulatory approval of
our products under development.

Under the Drug Price Competition and Patent Term Restoration Act
of 1984, also known as the Hatch-Waxman Act, Congress created an
abbreviated FDA review process for generic versions of pioneer
(brand name) drug products like Tarceva and Macugen. The law
also provides incentives by awarding, in certain circumstances,
non-patent marketing exclusivities to pioneer drug
manufacturers. For example, the Hatch-Waxman Act provides five
years of new chemical entity exclusivity to the
first applicant to gain approval of an NDA for a product that
does not contain an active ingredient found in any other
approved product. Tarcevas new chemical entity exclusivity
expires on November 18, 2009. Macugens new chemical
entity exclusivity expires December 17, 2009.

During these respective periods of marketing exclusivity, the
FDA is prohibited from accepting any abbreviated new drug
application, or ANDA, for a generic version of Tarceva or
Macugen. During these exclusivity periods, the FDA is also
prohibited from accepting any NDA for a modified version of
Tarceva or Macugen where the applicant does not own or have a
legal right of reference to all of the data required for
approval, otherwise known as a 505(b)(2) application.

This exclusivity will not, however, prevent the submission or
approval of a full NDA, as opposed to an ANDA or 505(b)(2)
application. In addition, an ANDA or a 505(b)(2) application may
be submitted after four years, rather than five years, if that
ANDA or 505(b)(2) application contains a certification, or a
Paragraph IV certification, that, in the opinion of the
ANDA or 5059b0(2) applicant, the patents listed with the Tarceva
or Macugen NDA are invalid or will not be infringed by the
manufacture, use, or sale of the product described in that ANDA
or 505(b)(2) application. With regard to Tarceva and Macugen, an
ANDA or a 505(b)(2) application with a Paragraph IV
certification could not be submitted until late 2008.

The Hatch-Waxman Act also provides three years of new use
exclusivity for applications containing the results of new
clinical investigations (other than bioavailability studies)
essential to the FDAs approval of new indications, dosage
forms, strengths, or conditions of use of approved products.
Tarceva has received this new use exclusivity for its pancreatic
cancer indication. However, this exclusivity will not prohibit
the FDA from accepting or approving ANDAs or 505(b)(2)
applications for other products containing the same active
ingredient. It only protects against the approval of ANDAs and
505(b)(2) applications for the covered use of Tarceva.

The Hatch-Waxman Act also requires an applicant that has
submitted an ANDA or a 505(b)(2) application with a
certification to notify the owner of each patent that is the
subject of the Paragraph IV certification and the holder of
the approved NDA of the factual and legal basis for the
applicants opinion that that patent is invalid or will not
be infringed by the manufacture, use, or sale of the proposed
product. The NDA holder or patent owner may then sue such an
applicant for infringement. If the NDA holder or patent owner
files suit within 45 days of receiving notice of the
certification, a one-time
30-month stay of the
FDAs ability to approve the application is triggered.
However, the FDA may approve the application before the
expiration of the
30-month stay if a
court finds the patent invalid or not infringed. If a court
finds the patent valid and infringed, the ANDA or 505(b)(2)
application may not be made until the expiration of the patent.
In addition, if the NDA holder or patent owner chooses not to
sue such an applicant within the
45-day window, the FDA
may approve the ANDA or 505(b)(2) application whenever all of
the other requirements for approval are met.

The FDA Modernization Act of 1997 included a pediatric
exclusivity provision that was extended by the Best
Pharmaceuticals for Children Act of 2002. Pediatric exclusivity
is designed to provide an incentive to manufacturers to conduct
research about the safety and effectiveness of their products in
children. Pediatric exclusivity, if granted, provides an
additional six months of market exclusivity in the United States
for new or currently marketed drugs. Under Section 505a of
the Federal Food, Drug, and Cosmetic Act, the extra six months
of market exclusivity may be granted in exchange for the
voluntary completion of pediatric studies in accordance with an
FDA-issued Written Request. The FDA may issue a
Written Request for studies on unapproved or approved
indications, where it determines that information relating to
the use of a drug in a pediatric population, or part of a
pediatric population, may

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produce health benefits in that population. We have not received
a Written Request for such pediatric studies for Tarceva,
although we may ask the FDA to issue a Written Request for such
studies in the future. To receive the six-month pediatric
exclusivity, we would have to receive a Written Request from the
FDA, conduct the requested studies, and submit reports of the
studies in accordance with a written agreement or commonly
accepted scientific principles. There is no guarantee that the
FDA will issue a Written Request for such studies or accept the
reports of the studies.

Effective January 1, 2006, an expanded prescription drug
benefit for all Medicare beneficiaries known as Medicare
Part D commenced. This is a voluntary benefit that is being
implemented through private plans under contractual arrangements
with the federal government. Like pharmaceutical coverage
through private health insurance, Part D plans establish
formularies that govern the drugs and biologicals that will be
offered and the
out-of-pocket
obligations for such products. Because this program has just
commenced, it is difficult to predict its impact on our
operations.



Pricing and Reimbursement.Insurance companies, health maintenance organizations, other
third-party payors and federal and state governments seek to
limit the amount we can charge for our drugs. Although there are
currently no government price controls over private sector
purchases in the United States, federal legislation requires
pharmaceutical manufacturers to pay prescribed rebates on
certain drugs to enable them to be eligible for reimbursement
under certain public health care programs. Various states have
adopted mechanisms under Medicaid and otherwise that seek to
control drug prices, including by disfavoring certain higher
priced drugs and by seeking supplemental rebates from
manufacturers. In the absence of new government regulation,
managed care has become a potent force in the market place that
increases downward pressure on the prices of pharmaceutical
products. New federal legislation, enacted in December 2003, has
altered the way in which physician-administered drugs covered by
Medicare are reimbursed, generally leading to lower
reimbursement for physicians. As of January 1, 2005,
physicians are reimbursed for physician-administered drugs, such
as Macugen, based on the average sales price of the drug plus
6%. The average sales price is the average net price of a drug
to all non-federal purchasers. Price discounts will affect the
drug reimbursement rates. To date, we have not discounted the
sale of Tarceva and Macugen to non-federal purchasers, other
than routine prompt payment discounts, although there can be no
assurances that market pressures will not require us to provide
such discounts in the future.

Regulatory approval of prices is required in most foreign
countries as well. Certain countries will condition their
approval of a product on the agreement of the seller not to sell
that product for more than a certain price in that country and
in the past have required price reductions after or in
connection with product approval. Certain foreign countries also
require that the price of an approved product be reduced after
that product has been marketed for a period of time. Some
European governments, notably Germany and Italy, have
implemented, or are considering, legislation that would require
pharmaceutical companies to sell their products subject to
reimbursement at a mandatory discount. Such mandatory discounts
would reduce the revenue we receive from our drug sales in these
countries.

We are also subject to various federal and state laws pertaining
to health care fraud and abuse, including
anti-kickback laws and false claims laws. Anti-kickback laws
make it illegal for a prescription drug manufacturer to solicit,
offer, receive, or pay any remuneration in exchange for, or to
induce, the referral of business, including the purchase or
prescription of a particular drug. Due to the breadth of the
statutory provisions and the absence of guidance in the form of
regulations and very few court decisions addressing industry
practices, it is possible that our practices might be challenged
under anti-kickback or similar laws. False claims laws prohibit
anyone from knowingly and willingly presenting, or causing to be
presented for payment to third party payors (including Medicare
and Medicaid) claims for reimbursed drugs or services that are
false or fraudulent, claims for items or services not provided
as claimed, or claims for medically unnecessary items or
services. Our activities relating to the sale and marketing of
our products may be subject to scrutiny under these laws.
Violations of fraud and abuse laws may be punishable by criminal
and/or civil sanctions, including fines and civil monetary
penalties,

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as well as the possibility of exclusion from federal health care
programs (including Medicare and Medicaid). If the government
were to allege or convict us of violating these laws, our
business could be harmed. In addition, there is an ability for
private individuals to bring similar actions. Our activities
could be subject to challenge for the reasons discussed above
and due to the broad scope of these laws and the increasing
attention being given to them by law enforcement authorities.
Further, there are an increasing number of state laws that
require manufacturers to make reports to states on pricing and
marketing information. Many of these laws contain ambiguities as
to what is required to comply with the laws. Given the lack of
clarity in laws and their implementation, our reporting actions
could be subject to the penalty provisions of the pertinent
state authorities.



Other Regulation.In addition to regulations enforced by the FDA, we must also
comply with regulations under the Occupational Safety and Health
Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act and
other federal, state and local regulations. For example, sales,
marketing and scientific/educational grant programs must comply
with the Medicare-Medicaid Anti-Fraud and Abuse Act, as amended,
the False Claims Act, also as amended, the privacy provisions of
the Health Insurance Portability and Accountability Act, and
similar state laws. If products are made available to authorized
users of the Federal Supply Schedule of the General Services
administration, additional laws and requirements may apply. All
of these activities are also potentially subject to federal and
state consumer protection and unfair competition laws. In
addition, our research and development activities involve the
controlled use of hazardous materials, chemicals and various
radioactive compounds the handling and disposal of which are
governed by various state and federal regulations.

In addition to regulations in the United States, we are subject
to various foreign regulations governing clinical trials and the
commercial sales and distribution of our products, including
Tarceva and Macugen. We must obtain approval of a product by the
comparable regulatory authorities of foreign countries before we
can commence clinical trials or marketing of the product in
those countries. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement
and the regulatory approval process all vary greatly from
country to country. Additionally, the time it takes to complete
the approval process in foreign countries may be longer or
shorter than that required for FDA approval. Foreign regulatory
approvals of our products are necessary whether or not we obtain
FDA approval for such products. Finally, before a new drug may
be exported from the United States, it must either be approved
for marketing in the United States or meet the requirements of
exportation of an unapproved drug under Section 802 of the
Export Reform and Enhancement Act or comply with FDA regulations
pertaining to INDs.

Under European Union regulatory systems, we are permitted to
submit marketing authorizations under either a centralized or
decentralized procedure. The centralized procedure provides for
the grant of a single marketing authorization that is valid for
all member states of the European Union. The decentralized
procedure provides for mutual recognition of national approval
decisions by permitting the holder of a national marketing
authorization to submit an application to the remaining member
states. Within 90 days of receiving the applications and
assessment report, each member state must decide whether to
recognize approval.

Our Employees

We believe that our success is largely dependant upon our
ability to attract and retain qualified employees. As of
December 31, 2005, we had a total of 655 full time
employees worldwide, excluding 79 former Eyetech employees who
will be departing during 2006 as a result our integration plans
following the acquisition of Eyetech. Of these 655 employees,
185 primarily are involved in research activities, 210 primarily
are involved in development and manufacturing activities, 154
primarily are involved in the commercialization of our products,
and 106 primarily are involved in executive and administrative
functions. Within our executive and administrative group, 25% of
the employees are

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assigned to our information management group, many directly
working with our research and development groups, and 28% of the
employees are assigned to maintain our facilities and/or are
part of our safety group, with the remaining 47% of the
employees assigned to our finance, human resources, legal and
investor relations functions.

Change in Fiscal Year

In December 2004, we changed our fiscal year end from
September 30 to December 31. As a result, this
Form 10-K covers
the period from October 1, 2004 to December 31, 2005.

Available Information

We file our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q and
current reports on
Form 8-K pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 electronically with the Securities and Exchange Commission,
or SEC. The public may read or copy any materials we file with
the SEC at the SECs Public Reference Room at 100 F Street,
NE, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC. The address of that site
is http://www.sec.gov.

You may obtain a free copy of our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q and
current reports on
Form 8-K and
amendments to those reports on the day of filing with the SEC on
our website on the World Wide Web at http://www.osip.com or by
contacting the Investor Relations Department at our corporate
offices by calling (631) 962-2000 or sending an
e-mail message to
investorinfo@osip.com.







ITEM 1A.
    RISK FACTORSThis report contains forward-looking statements that do not
convey historical information, but relate to predicted or
potential future events, such as statements of our plans,
strategies and intentions, or our future performance or goals
for our product development programs. These statements can often
be identified by the use of forward-looking terminology such as
believe, expect, intend,
may, will, should, or
anticipate or similar terminology. The statements
involve risks and uncertainties and are based on various
assumptions. Stockholders and prospective stockholders are
cautioned that these statements are only projections. In
addition, any forward-looking statement that we make is intended
to speak only as of the date on which we made the statement.
Except for our ongoing obligations to disclose material
information under the federal securities laws, we will not
update any forward-looking statement to reflect events or
circumstances that occur after the date on which the statement
is made. The following risks and uncertainties, among others,
may cause our actual results to differ materially from those
described in forward-looking statements made in this report or
presented elsewhere by management from time to time.

Risks Related to Our Business

We have incurred losses since our inception, and we expect to
incur losses over the near term, which may cause the value of
our common stock to decrease.

We have had net operating losses since our inception in 1983. We
expect to continue to incur net operating losses in the near
term as a result of our expenses for the continued research,
development and commercialization of Tarceva, Macugen and our
other pipeline products, as well as due to our general operating
expenses. Although our goal is to reach profitability by the end
of 2006, there can be no guarantee that we will achieve
profitability in this time frame or remain profitable in
subsequent periods. If we continue to incur net operating
losses, the value of our common stock could decrease.

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We depend heavily on our two marketed products, Tarceva and
Macugen to generate revenues in order to fund our operations
and, to a lesser extent, potential upfront fees, milestones and
royalties from the licensing of our DPIV patent estate.

We currently derive, and are expected to continue to derive,
substantially all of our revenues from our two marketed
products, Tarceva and Macugen. We also have the potential to
derive revenues from the milestone and royalty obligations under
our license agreements for our DPIV patent portfolio, and from
upfront, milestone and royalty obligation under any future
licenses.

Our ability to maintain or increase our revenues and overall
market share for each of our two marketed products, together
with Genentech and Roche, our partners for Tarceva, and Pfizer,
our partner for Macugen, will depend on, and may be limited by,
a number of factors, including the following:



For Tarceva:


    We must successfully penetrate the market for second-line and
    third-line NSCLC and for first-line pancreatic cancer;
    Physicians may be reluctant to switch from existing treatment
    methods, including traditional chemotherapy agents, to Tarceva;
    The market for new oncology products is very competitive, with
    many products currently in Phase III development that could
    be competitive with Tarceva; and
    We must be successful in our clinical trials in additional
    indications and in receiving approval from the FDA and our
    foreign counterparts to market and sell Tarceva in such
    additional indications.

For Macugen:


    There must be continued acceptance of Macugen in the medical
    community by patients receiving therapy and by third party
    payors, including willingness of clinicians and patients to
    maintain continuous therapy at intervals of every six weeks;
    Off-label use of unapproved agents for the treatment of wet AMD,
    such as Avastin, could continue to reduce Macugens share
    of the wet AMD market;
    We must successfully compete with existing products for wet AMD
    and new products as they come to market, in particular,
    Lucentis, a clinical candidate currently in Phase III
    trials which we anticipate may be launched by Genentech as early
    as July 2006 and which will adversely impact our market share;
    Macugens efficacy and safety profile must continue to be
    demonstrated in a broad patient population to be consistent with
    that shown in its clinical trials, and we must continue to
    receive positive data from ongoing clinical trials for Macugen;
    Our ability to establish and demonstrate through clinical trials
    a new treatment paradigm that positions Macugen as safe and
    effective in the chronic management of wet AMD  both
    in sequential regimens, such as following induction therapy with
    pan-VEGF inhibitors such as Avastin or Lucentis, or PDT or
    steroids, or as first-line therapy in early-stage wet
    AMD; and
    Continued future commercial success for Macugen will depend on
    our ability to expand the indications for which we can market
    Macugen.In addition to the factors above, information from our
competitors or the academic community indicating that current
products or new products are more effective than Tarceva or
Macugen could, if and when it is generated, impede our market
penetration or decrease our existing market share for these
products. Our Tarceva and Macugen- derived revenues also would
diminish if third-party payors,

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including private health coverage insurers and health
maintenance organizations, do not provide adequate coverage or
reimbursement for these products.

Our ability to realize potential milestone and royalty payments
from the licenses for our DPIV patent portfolio is dependent on
the success of our licensees in developing and registering their
DPIV inhibitors. For example, while Merck has filed an NDA for
its DPIV inhibitor, Januvia, which filing triggered a milestone
payment to us, it is possible that the product may not receive
approval from the FDA, in which case we will not receive any
royalty revenue.

If our competitors succeed in developing products and
technologies that are more effective than our own, or if
scientific developments change our understanding of the
potential scope and utility of our products, then our products
and technologies may be rendered less competitive.

We face significant competition from industry participants that
are pursuing products and technologies that are similar to those
we are pursuing and who are developing pharmaceutical products
that are competitive with our products and potential products.
Some of our industry competitors have greater capital resources,
larger overall research and development staffs and facilities,
and a longer history in drug discovery and development,
obtaining regulatory approval and pharmaceutical product
manufacturing and marketing than we do. With these additional
resources, our competitors may be able to respond to the rapid
and significant technological changes in the biotechnology and
pharmaceutical industries faster than we can. Our future success
will depend in large part on our ability to maintain a
competitive position with respect to these technologies. Rapid
technological development, as well as new scientific
developments, may result in our compounds, products or processes
becoming obsolete before we can recover any of the expenses
incurred to develop them.

The market for new oncology products is very competitive, with
many products currently in Phase III development. Most
major pharmaceutical companies and many biotechnology companies,
including our collaborators for Tarceva, Genentech and Roche,
currently devote a portion or all of their operations to the
research and development of new oncology drugs or additional
indications for oncology drugs which are already marketed. In
the second and third line settings for the NSCLC indication,
Tarceva currently completes with existing chemotherapy options
such as Alimta, and may compete in the future against a number
of products in clinical trials, including Avastin. In the
pancreatic setting, Tarceva may experience competition from a
number of other drugs, including Avastin, Erbitux, Eloxatin and
Xeloda. If ongoing Phase III clinical trials for Erbitux
have exceptional activity, we would expect that Erbitux would
pose a serious competitive threat to Tarceva in as early as 2007.

Macugen competes against one FDA approved therapy for the
treatment of wet AMD, Visudyne, a photodynamic therapy, in
combination with thermal laser treatment. However, we believe
Macugen faces its most significant competition from two pan-VEGF
agents from Genentech: Avastin, and the clinical candidate
Lucentis, an antibody fragment of Avastin. Genentech announced
Phase III trial results for Lucentis which suggested that
pan-VEGF agents may have better efficacy than Macugen. Genentech
received priority review for Lucentis from the FDA in February
2006 for its BLA for Lucentis, and we anticipate that Lucentis
may launch as early as July 2006, which will adversely impact
the market share for Macugen. An additional clinical trial of
Lucentis, known as the PIER study, is also underway. The purpose
of the trial is to investigate an alternative, less intensive
dosing regimen for Lucentis. If this trial demonstrates the same
or very similar efficacy to the monthly dosing frequency tested
in the pivotal Lucentis trials, it would eliminate the current
advantage Macugen enjoys over Lucentis in treatment frequency,
as Macugen currently requires administration every six weeks
versus every four weeks for Lucentis. Positive results from this
study could also undermine our strategy to capitalize on
Macugens established safety profile and to position
Macugen as safe and effective in the chronic treatment of wet
AMD.

The promising clinical date for Lucentis has also resulted in a
significant number of ophthalmologists and retinal specialists
engaging in the off-label use of the anti-cancer agent Avastin
to treat wet

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AMD. We believe that the off-label use of Avastin has resulted,
and may continue to result, in a reduction of Macugens
share of the wet AMD market. We estimate that off-label Avastin
use currently accounts for up to a 20% share of patient
treatments for wet AMD. To date, no formal clinical trials have
been conducted testing Avastin for the treatment of wet AMD. As
a result, local Medicare carriers have been declining
reimbursement for both Avastin and the injection procedure for
the treatment of wet AMD. However, our revenues from Macugen
would be adversely affected if the Medicare program, local
Medicare carriers or fiscal intermediaries were to subsequently
make a determination to reimburse Avastin for the treatment of
wet AMD. Furthermore, if clinical trial data, when it becomes
available, relating to Avastin treatment for wet AMD does not
demonstrate the same or similar types of adverse events
highlighted in the prescribing information for Avastin for the
treatment of colorectal cancer, we will not be able to
capitalize on the established safety profile for Macugen which
is a key component of our strategy for stabilizing, maintaining,
and ultimately growing Macugens share of the wet AMD
market. Our inability to implement this strategy would have a
negative impact on our results of operations and financial
condition.

In the event that Macugen is approved for the treatment of DME,
it would compete against current treatments for DME, including
off-label use of intravitreous Avastin, and potentially against
a number of clinical trial candidates.

We expect that our lead clinical candidate for the treatment of
type 2 diabetes, PSN9301, will face competition from a number of
drugs currently in clinical development. Treatments from Merck,
Novartis and GlaxoSmithKline are at a more advanced stage of
development than PSN9301 and Takeda, BMS and other
pharmaceutical and biotechnology companies have development
programs that are competitive with PSN9301.

We depend heavily on our co-development and marketing
alliance with Genentech and Roche for Tarceva. If Genentech or
Roche terminate these alliances, or are unable to meet their
contractual obligations, it would negatively impact our revenues
and harm our business.

Tarceva is being developed and commercialized in an alliance
under co-development and marketing agreements with Genentech and
Roche. Genentech leads the marketing efforts in the United
States and Roche markets the drug in the rest of the world. The
OSI/ Genentech collaboration agreement continues until the date
on which neither we nor Genentech are entitled to receive a
share of the operating profits or losses on any products
resulting from the collaboration, that is, until the date that
we and Genentech mutually agree to terminate the collaboration
or until either party exercises its early termination rights as
described as follows. The OSI/ Genentech collaboration agreement
is subject to early termination in the event of certain
customary defaults, such as material breach of the agreement and
bankruptcy. In addition, since January 8, 2003, Genentech
has had the right to terminate the OSI/ Genentech collaboration
agreement with six months prior written notice. The
provisions of the amendment allowing us to co-promote are also
subject to termination by Genentech upon a material breach of
the amendment by us, which remains uncured, or upon a pattern of
nonmaterial breaches which remain uncured.

The OSI/ Roche agreement continues until the date on which we
are no longer entitled to receive a royalty on products
resulting from the development of Tarceva, that is, until the
date of expiration or revocation or complete rejection of the
last to expire patent covering Tarceva or, in countries where
there is no valid patent covering Tarceva, on the tenth
anniversary of the first commercial sale of Tarceva in that
country. The OSI/ Roche agreement is subject to early
termination in the event of certain customary defaults, such as
material breach of the agreement and bankruptcy. In addition,
since July 31, 2003, Roche has had the right to terminate
the agreement on a country-by-country basis with six
months prior written notice. We also currently have the
right to terminate the agreement on a country-by-country basis
if Roche has not launched or marketed a product in such country
under certain circumstances.

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If we do not maintain a successful collaborative alliance with
Genentech and Roche for the co-development and commercialization
of Tarceva, or if Genentech or Roche are unable to meet their
contractual obligations, we may be forced to focus our efforts
internally to further commercialize and develop Tarceva without
the assistance of a marketing and promotion partner. This would
require greater financial resources and would result in us
incurring greater expenses and may cause a delay in market
penetration while we expand our commercial operations or seek
alternative collaborative partners.

We depend heavily on our collaboration with Pfizer for the
continued development and commercialization of Macugen. Our
relationship with Pfizer involves a complex sharing of control
over decisions, responsibilities, and costs and benefits. Any
loss of Pfizer as a collaborator, or any adverse development in
the collaboration, could harm or cause a delay in the continued
development and commercialization of Macugen.

In December 2002, we entered into our collaboration with Pfizer
to develop and commercialize Macugen for the prevention and
treatment of diseases of the eye. The collaboration involves a
complex sharing of control over decisions, responsibilities and
costs and benefits. For example, with respect to the sharing of
costs and benefits, Pfizer co-promotes Macugen with us in
the United States and shares with us in gross profits and
losses. Outside the United States, Pfizer will commercialize
Macugen pursuant to an exclusive license and pay us a royalty on
net sales.

In addition, Pfizer generally is required to fund a majority of
the ongoing development costs incurred pursuant to an agreed
upon development plan. The collaboration is governed by a joint
operating committee, consisting of an equal number of
representatives of both Pfizer and us who control decisions and
responsibilities. There are also subcommittees with equal
representation from both parties that have responsibility over
development, regulatory, manufacturing and commercialization
matters.

Ultimate decision-making authority is vested in us as to some
matters and in Pfizer as to other matters. A third category of
decisions requires the approval of both Pfizer and us. Outside
the United States, ultimate decision-making authority as to most
matters is vested in Pfizer. Pfizer may terminate the
collaboration relationship without cause upon six to
12 months prior notice, depending on when such notice
is given. In addition, until May 14, 2006, Pfizer has the
contractual right, due to our acquisition of Eyetech, to
terminate a regulatory services agreement and distribution
agreement that were entered into at the time of the
collaboration agreement. To date, Pfizer has not given notice
that it intends to terminate any of these agreements. Any loss
of Pfizer as a collaborator in the development or
commercialization of Macugen, dispute over the terms of, or
decisions regarding, the collaboration or other adverse
development in our relationship with Pfizer could harm the
continued development and commercialization of Macugen.

Our revenues from our DPIV patent portfolio licenses are
contingent upon the ability of the licensees to successfully
develop and commercialize their products which are the subject
of these licenses.

We have licensed our DPIV medical use patent portfolio to
pharmaceutical companies developing DPIV inhibitor products and
expect to receive milestones and royalties in relation to such
products. The extent to which we receive revenue under such
licenses depends on the progress and success of the
licensees products. If any of our licensees terminate
their DPIV inhibitor programs or do not seek, or fail to
receive, regulatory approval for their DPIV inhibitor products,
the revenues we receive from such licensees will be reduced.

Our outstanding indebtedness increased substantially with the
issuance of our 3.25% convertible senior subordinated notes due
2023, or the 2023 Notes, and the 2025 Notes; we

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may not be able to make the required payments on any of these
notes when due and therefore we may face liquidity problems.

As a result of the issuance of our 2023 Notes and the 2025
Notes, our long-term debt was $265 million as of
December 31, 2005. Our 2023 Notes and the 2025 Notes
significantly increased our interest expense and related debt
service costs. Interest on the 2023 Notes accrues at the rate of
3.25% per annum and interest on the 2025 Notes accrues at a rate
of 2% per annum. This amounts to interest payments of
$2.4 million due and payable semi-annually on March 8 and
September 8 of each year on the outstanding amount of the 2023
Notes. In addition, interest payments of $2.3 million is
due and payable semi-annually on June 15 and December 15 of each
year on the outstanding amount of the 2025 Notes. Cumulative
interest payments of $85.3 million are scheduled to be paid
between September 8, 2006 and September 8, 2023 on the
2023 Notes and $46.0 million between June 15, 2006 and
December 15, 2025 on the 2025 Notes.

Our long-term debt may make it more difficult for us to obtain
any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other
purposes and make us more vulnerable in the event of a downturn
in our business.

We currently are not generating sufficient net cash flow in
excess of our operating budget to satisfy the annual debt
service payments on the 2023 Notes or the 2025 Notes. We may be
required to borrow additional funds or sell additional equity to
meet our obligations with respect to these notes in the future.
If we are unable to satisfy these obligations or repay the 2023
Notes or the 2025 Notes, we will default on our 2023 Notes and
the 2025 Notes.

Although we have clinical candidates in the pipeline for
oncology, diabetes and obesity and ophthalmology, that appear to
be promising at early stages of development, none of these
potential products may reach the commercial market for a number
of reasons.

Successful research and development of pharmaceutical products
is high risk. Most products and development candidates fail to
reach the market. Our success depends on the discovery of new
drugs that we can commercialize. Our pipeline for our oncology,
diabetes and obesity, and ophthalmology clinical programs is at
an early stage. Other than the development of Tarceva for
additional indications, there is currently one oncology clinical
candidate. This candidate, which is currently in Phase I
trials, targets the co-inhibition of
c-kit/VEGF receptor.
Our lead clinical candidate for diabetes is PSN9301, a DPIV
inhibitor that targets type 2 diabetes and is currently in
Phase II clinical trials. We are also developing PSN357, a
glycogen phosphorylase inhibitor currently in a Phase IIa
clinical trial, and PSN010, a glucokinase activator, currently
in a Phase I trial. In ophthalmology, we have an anti-PDGF
aptamer in pre-clinical development for the treatment of wet
AMD, in addition to DME and CRVO clinical programs for further
development of Macugen for these indications. Given the early
stage of each of these clinical candidates, there can be no
assurance at this time that any of them will become a marketed
drug.

The clinical candidates in our pipeline may never reach the
market for a number of reasons. They may be found ineffective or
may cause harmful side-effects during preclinical testing or
clinical trials or fail to receive necessary regulatory
approvals. Interim results of preclinical or clinical studies
are not necessarily predictive of their final results, and
acceptable results in early studies might not be seen in later
studies, in large part because earlier phases of studies are
often conducted on smaller groups of patients than later
studies, and without the same trial design features, such as
randomized controls and long-term patient
follow-up and analysis.
We may find that certain products cannot be manufactured on a
commercial scale and, therefore, they may not be economical to
produce. Our products could also fail to achieve market
acceptance or be precluded from commercialization by proprietary
rights of third parties.

We must provide the FDA and similar foreign regulatory
authorities with preclinical and clinical data that demonstrate
that our product candidates are safe and effective for each
target indication before they can be approved for commercial
distribution. The preclinical testing and clinical trials of any

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product candidates that we develop must comply with regulations
by numerous federal, state and local government authorities in
the United States, principally the FDA, and by similar agencies
in other countries. Clinical development is a long, expensive
and uncertain process and is subject to delays. We may encounter
delays or rejections based on our inability to enroll or keep
enrolled enough patients to complete our clinical trials,
especially as new competitors are approved to enter into the
market. Patient enrollment depends on many factors, including
the size of the patient population, the nature of the trial
protocol, the proximity of patients to clinical sites and the
eligibility criteria for the trial. Although we have not to date
experienced any significant delays in enrolling clinical trial
patients for our ongoing clinical trials, delays in patient
enrollment for future trials may result in increased costs and
delays, which could have a harmful effect on our ability to
develop products.

A significant portion of the research that we are conducting
involves new and unproven technologies. Research programs to
identify disease targets and product candidates require
substantial technical, financial and human resources whether or
not we ultimately identify any candidates. Our research programs
may initially show promise in identifying potential product
candidates, yet fail to yield candidates for clinical
development for a number of reasons, including difficulties in
formulation which cannot be overcome, inadequate intellectual
property protection and timing and competitive concerns.

If any of our current or future marketed products, including
Tarceva or Macugen, were to become the subject of problems
related to their efficacy, safety, or otherwise, or if new, more
effective treatments were introduced into the market, our
revenues from our marketed products could decrease.

If Tarceva or Macugen or any of our other current or future
marketed products become the subject of problems, including
those related to, among others:




    efficacy or safety concerns with the products, even if not
    justified;
    unexpected side-effects;
    regulatory proceedings subjecting the products to potential
    recall;
    publicity affecting doctor prescription or patient use of the
    product;
    pressure from competitive products; or
    introduction of more effective treatments;our revenues from such marketed products could decrease. For
example, efficacy or safety concerns from time to time arise,
whether or not justified, that could lead to additional safety
warnings on the label or to the recall or withdrawal of such
marketed products. In the event of a recall or withdrawal of
Tarceva or Macugen, our revenues would decline significantly.

In late 2005 and early 2006, reports of very infrequent but
serious hypersensitivity reactions related to the administration
of Macugen have led to changes in the approved label for Macugen
in the United States and internationally. While these reports
are rare, and their causal relationship to Macugen or other
drugs and procedures co-administered with Macugen cannot be
determined, the need for additional safety warnings or
precautions may alter or delay regulatory decisions related to
pending applications for approval to market Macugen in certain
territories.

We are responsible for the manufacture and supply of Tarceva
and Macugen in the United States. Because we have no commercial
manufacturing facilities, we are dependent on two suppliers for
the API for Tarceva, a single supplier for the tableting of
Tarceva in the United States and third parties for the
manufacture of Macugen. If any of these third parties fails to
meet its obligations, our revenues from our marketed products
could be negatively affected.

We are responsible for manufacturing and supplying Tarceva in
the United States under the terms of a Manufacturing and Supply
Agreement entered into with Genentech in 2004. We rely on two
third-

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party suppliers to manufacture erlotinib, the API for Tarceva.
We also currently rely on a single manufacturer to formulate the
Tarceva tablets. We are presently seeking another manufacturer
to serve as a back-up
provider of Tarceva tablets.

We do not currently manufacture Macugen or any component of
Macugen. We currently rely on separate single sources for the
API used in Macugen, pegaptanib sodium, the fill and finish for
the finished drug product, and the pegylation reagent. We are
presently seeking another manufacturer to serve as a backup
provider of API for Macugen.

If our relationships with any of these manufacturers with
respect to Tarceva and Macugen terminate or if these
manufacturers are unable to meet their obligations, we would
need to find other sources of supply. Such alternative sources
of supply may be difficult to find on terms acceptable to us or
in a timely manner, and, if found, would require FDA approval
which could cause delays in the availability of erlotinib and
ultimately Tarceva tablets, or pegaptanib sodium and ultimately
Macugen, which, in turn, would negatively impact our revenues
derived from Tarceva or Macugen.

A component of our business strategy is to enter into
collaborations with third parties to develop and commercialize
certain of our products when we believe that doing so will
maximize product value. We may not be successful in establishing
such collaborations, which could adversely affect our ability to
develop and commercialize certain of our products.

A component of our business strategy is to enter into
collaborations with third party collaborators for the
development and commercialization of certain of our product
candidates, similar to our collaborations with Genentech and
Roche for Tarceva and Pfizer for Macugen, when we believe that
doing so will maximize the potential for the product. We face
significant competition in seeking appropriate collaborators.
Moreover, these collaboration arrangements are complex to
negotiate and time consuming to document. We may not be
successful in our efforts to establish additional collaborations
or other alternative arrangements. If we are unable to reach
agreements with suitable collaborators, we may fail to meet our
business objectives for the affected product or program. The
terms of any additional collaborations or other arrangements
that we establish for our product candidates may not be as
favorable to us than if we had pursued independent development
and commercialization. Moreover, these collaborations or other
arrangements may not be successful and the termination of these
arrangements might adversely affect our ability to develop,
commercialize and market certain of our products.

The success of any of these potential collaboration arrangements
will depend heavily on the efforts and activities of our future
collaborators. Our collaborators will have significant
discretion in determining the efforts and resources that they
will apply to these collaborations. The risks that we face in
connection with these collaborations include the following:




    Our collaborators may develop and commercialize, either alone or
    with others, products and services that are similar to or
    competitive with the products that are the subject of our
    collaborations with them; and
    Our collaborators may change the focus of their development and
    commercialization efforts. Pharmaceutical and biotechnology
    companies historically have re-evaluated their priorities
    following mergers and consolidations, which have been common in
    recent years in these industries. The ability of our products to
    reach their potential could be limited if our collaborators
    decrease or fail to increase spending relating to such products.Our reliance on third parties, such as clinical research
organizations, or CROs, may result in delays in completing, or a
failure to complete, clinical trials if they fail to perform
under our agreements with them.

In the course of product development, we engage CROs to conduct
and manage clinical studies and to assist us in guiding our
products through the FDA review and approval process. For
example, we

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collaborated with the National Cancer Institute of Canadas
Clinical Trial Group based at Queens University, Ontario, in
connection with our Tarceva Phase III trials. Because we
have engaged and intend to continue to engage CROs to help us
conduct our clinical studies and obtain market approval for our
drug candidates, many important aspects of this process have
been and will be out of our direct control. If the CROs fail to
perform their obligations under our agreements with them or fail
to perform their responsibilities with respect to clinical
trials in a satisfactory manner, we may face delays in
completing our clinical trials, as well as commercialization of
our drug candidates. Furthermore, any loss or delay in obtaining
contracts with such entities may also delay the completion of
our clinical trials and the market approval of drug candidates.

Risks Relating to Regulatory Matters

The manufacture and packaging of pharmaceutical products such
as Tarceva and Macugen are subject to the requirements of the
FDA and similar foreign regulatory bodies. If we or our third
party manufacturers fail to satisfy these requirements, our or
their product development and commercialization efforts may be
materially harmed.

The manufacture and packaging of pharmaceutical products, such
as Tarceva and Macugen and our future product candidates, are
regulated by the FDA and similar foreign regulatory bodies and
must be conducted in accordance with the FDAs current good
manufacturing practices and comparable requirements of foreign
regulatory bodies. There are a limited number of manufacturers
that operate under these current good manufacturing practices
regulations who are both capable of manufacturing our products,
and willing to do so. Our failure or the failure of our third
party manufacturers to comply with applicable regulations,
requirements, or guidelines could result in sanctions being
imposed on us or them, including fines, injunctions, civil
penalties, failure of regulatory authorities to grant marketing
approval of our products, delays, suspension or withdrawal of
approvals, license revocation, seizures or recalls of product,
operating restrictions and criminal prosecutions, any of which
could significantly and adversely affect our business. We cannot
be certain that we or our present or future suppliers will be
able to comply with the pharmaceutical cGMP regulations or other
FDA regulatory requirements. If we fail to meet our
manufacturing obligations for Tarceva, our partner, Genentech,
has the contractual right to take over the supply of Tarceva in
the United States.

Changes in the manufacturing process or procedure, including a
change in the location where a product is manufactured or a
change of a third party manufacturer, require prior FDA review
and/or approval of the manufacturing process and procedures in
accordance with the FDAs current good manufacturing
practices. This review may be costly and time consuming and
could delay or prevent the launch of a product or the use of a
facility to manufacture a product. In addition, if we elect to
manufacture products at the facility of another third party, we
will need to ensure that the new facility and the manufacturing
process are in substantial compliance with good manufacturing
practices. Any such change in facility would be subject to a
pre-approval inspection by the FDA and the FDA would require us
to demonstrate product comparability. Foreign regulatory
agencies have similar requirements.

Any prolonged interruption in the operations of our
contractors manufacturing facilities could result in
cancellations of shipments, loss of product in the process of
being manufactured, or a shortfall or stock-out of available
product inventory, any of which could have a material adverse
impact on our business. A number of factors could cause
prolonged interruptions in manufacturing.

The FDA and similar foreign regulatory bodies may also implement
new standards, or change their interpretation and enforcement of
existing standards and requirements, for manufacture, packaging
or testing of products at any time. If we are unable to comply,
we may be subject to regulatory, civil actions or penalties
which could significantly and adversely affect our business. For
example, with regard to Macugen, as a result of a post-approval
commitment to the FDA to improve the control and environment for
our finished drug product, we may experience delays or
challenges in meeting our

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regulatory commitment, or need to change the final presentation
or packaging for Macugen. Such a change may lead to an increase
in cost of goods.

If government agencies do not grant us or our collaborative
partners required approvals for any of our potential products in
a timely manner or at all, we or our collaborative partners will
not be able to distribute or sell our products currently under
development.

All of our potential products must undergo extensive regulatory
approval processes in the United States and other countries.
These regulatory processes, which include preclinical testing
and clinical trials of each compound to establish safety and
efficacy, can take many years and require the expenditure of
substantial resources. The FDA and the other regulatory agencies
in additional markets which are material to us and our
collaborative partners, including the EMEA and the Japanese
Ministry of Health, may delay or deny the approval of our
potential products. Although we have been successful in gaining
regulatory approval for Tarceva and Macugen in the United States
and our collaboration partners have gained approval for Tarceva
and Macugen in Canada, the European Union and a number of other
territories, there can be no guarantee of subsequent approvals
either for Tarceva and Macugen in other territories or for other
indications in the United States or for other products in the
United States and other territories.

Delays or rejections may be encountered during any stage of the
regulatory process based upon the failure of the clinical data
to demonstrate compliance with, or upon the failure of the
product to meet, a regulatory agencys requirements for
safety, efficacy and quality. Any such delay could have a
negative effect on our business. A drug candidate cannot be
marketed in the United States until it has been approved by the
FDA. Once approved, drugs, as well as their manufacturers, are
subject to continuing and ongoing review, and discovery of
previously unknown problems with these products or the failure
to adhere to manufacturing or quality control requirements may
result in restrictions on their distribution, sale or use, or
their withdrawal from the market. The FDA also has the
authority, when approving a product, to impose significant
limitations on the product in the nature of warnings,
precautions and contra-indications that could negatively affect
the profitability of a drug. Failure to comply with a
Phase IV commitment can lead to FDA action either to
withdraw approval of a drug or to limit the scope of approval.

Furthermore, once a drug is approved, it remains subject to
ongoing FDA regulation. Approved drugs can only be marketed for
the indications and claims approved by the FDA. If we fail to
comply with the FDA regulations prohibiting promotion of
off-label uses and the promotion of products for which marketing
clearance has not been obtained, the FDA, or the Office of the
Inspector General of the U.S. Department of Health and
Human Services, or HHS, Department of Justice, or state Attorney
Generals could bring an enforcement action against us that would
inhibit our marketing capabilities as well as result in
significant penalties. Additional post-approval regulation by
FDA includes changes to the product label, new or revised
regulatory requirements for manufacturing practices, written
advisements to physicians or a product recall.

The current regulatory framework could change or additional
regulations could arise at any stage during our product
development or marketing, which may affect our ability to obtain
or maintain approval of our products or require us to make
significant expenditures to obtain or maintain such approvals.
The ability to market and sell a drug product outside of the
United States is also subject to stringent and, in some cases,
equally complex regulatory processes that vary depending on the
jurisdiction.

Competitors could challenge our patents and file an ANDA or a
505(b)(2) new drug application for a generic or a modified
version of Tarceva or Macugen and adversely affect their
competitive position.

Products approved for commercial marketing by the FDA are
subject to the provisions of the Drug Price Competition and
Patent Term Restoration Act of 1984, or Hatch-Waxman
Act. The Hatch-

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Waxman Act provides companies with marketing exclusivity for
varying time periods during which generic or modified versions
of a drug may not be marketed and allows companies to apply to
extend patent protection for up to five additional years. It
also provides a means for approving generic versions of a drug
once the marketing exclusivity period has ended and all relevant
patents have expired. The period of exclusive marketing,
however, may be shortened if a patent is successfully challenged
and defeated. Competitors with a generic or a modified version
of Tarceva or Macugen may attempt to file an ANDA or a 505(b)(2)
NDA and challenge our patents and marketing exclusivity. Such
applications would have to certify that the patents in the
Tarceva or Macugen NDA are invalid or not infringed by the
manufacture, use, or sale of the product described in that ANDA
or 505(b)(2) application under the Hatch-Waxman Act, or a
Paragraph IV certification. If successful, a
competitor could come to market at an earlier time than
expected. Since Tarceva and Macugen have five-year new chemical
entity exclusivity, such a Paragraph IV challenge could not
commence until at least late 2008. We can provide no assurances
that we can prevail in a challenge or litigation related to our
patents or exclusivity. Furthermore, regardless of the ultimate
outcome of any litigation, the mere submission of such
competitor application or the public announcement by a
competitor that it intends to submit an application in the
future may itself cause our stock price to decrease.

Some of our activities may subject us to risks under federal
and state laws prohibiting kickbacks and false or
fraudulent claims.

We are subject to the provisions of a federal law commonly known
as the Medicare/ Medicaid anti-kickback law, and several similar
state laws, which prohibit payments intended to induce
physicians or others either to purchase or arrange for or
recommend the purchase of healthcare products or services. While
the federal law applies only to products or services for which
payment may be made by a federal healthcare program, state laws
may apply regardless of whether federal funds may be involved.
These laws constrain the sales, marketing and other promotional
activities of manufacturers of drugs such as us, by limiting the
kinds of financial arrangements, including sales programs, with
hospitals, physicians, and other potential purchasers of drugs.
Other federal and state laws generally prohibit individuals or
entities from knowingly presenting, or causing to be presented,
claims for payment from Medicare, Medicaid, or other third-party
payors that are false or fraudulent, or are for items or
services that were not provided as claimed. Anti-kickback and
false claims laws prescribe civil and criminal penalties for
noncompliance that can be substantial, including the possibility
of exclusion from federal healthcare programs (including
Medicare and Medicaid).

Pharmaceutical companies have been the target of lawsuits and
investigations alleging violations of government regulation,
including claims asserting violations of the federal False Claim
Act, the federal anti-kickback statute, and other violations in
connection with off-label promotion of products and Medicare
and/or Medicaid reimbursement, or related to claims under state
laws, including state anti-kickback and fraud laws. While we
continually strive to comply with these complex requirements,
interpretations of the applicability of these laws to marketing
practices is ever evolving and even an unsuccessful challenge
could cause adverse publicity and be costly to respond to, and
thus could have a material adverse effect on our business,
results of operations and financial condition.

If we do not receive adequate third-party reimbursement for
the sales of our marketed products, we may not be able to sell
such products on a profitable basis.

Sales of our marketed products depend, in part, upon the extent
to which the costs of our products are paid by health
maintenance organizations, managed care, pharmacy benefit and
similar reimbursement sources, or reimbursed by government
health administration authorities, private health coverage
insurers and other third-party payors. Such third-party payors
continue to aggressively challenge the prices charged for
healthcare products and services. Additionally, federal and
state governments have prioritized the containment of healthcare
costs, and drug prices have been targeted in this effort. If
these organizations and third-party payors do not consider our
products to be cost-effective, they may

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not reimburse providers of our products, or the level of
reimbursement may not be sufficient to allow us to sell our
products on a profitable basis.

In some foreign countries, particularly Canada and the countries
of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities
can take six to 12 months or longer after the receipt of
regulatory marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be
required to conduct a clinical trial that compares the
cost-effectiveness of our products to other available therapies.

Because most persons suffering from wet AMD are elderly,
coverage for Macugen in the United States is primarily through
the Medicare program. Although drugs that are not usually
self-administered are ordinarily covered by Medicare, the
Medicare program has taken the position that it can decide not
to cover particular drugs if it determines that they are not
reasonable and necessary for Medicare beneficiaries.
Limitations on coverage could also be imposed at the local
Medicare carrier level or by fiscal intermediaries. In February
2005, CMS, the agency that administers Medicare, determined
that, effective January 1, 2005, Macugens Medicare
reimbursement will be average sales price plus six percent. By
February 28, 2005, Medicare carriers of all 50 states
confirmed Macugen reimbursement, according to the FDA label,
without restrictions. However, our revenues from Macugen could
be significantly negatively affected if the Medicare program,
local Medicare carriers or fiscal intermediaries were to
subsequently make a determination to deny or limit the
reimbursement of Macugen. Our revenues from Macugen also could
be negatively affected if physicians are not reimbursed by
Medicare for the cost of the procedure in which they administer
Macugen on a basis satisfactory to the administering physicians.
Also, if the local contractors that administer the Medicare
program are slow to reimburse physicians for Macugen, the demand
for Macugen may decrease and our revenues from Macugen could be
negatively affected.

The 2003 Medicare prescription drug coverage legislation, The
Medicare Prescription Drug Improvement and Modernization Act, or
the MMA, and future legislative or regulatory reform of the
healthcare system may affect our ability to sell certain of our
products, including Macugen, profitably.

In both the United States and some non-U.S. jurisdictions, there
have been a number of legislative and regulatory proposals to
change the healthcare system in ways that could affect our
ability to sell certain of our products, including Macugen,
profitably. In the United States, new legislation may be
proposed at the federal and state levels that would result in
significant changes to the healthcare system, either nationally
or at the state level. Effective January 2004, the MMA changed
the methodology used to calculate reimbursement for drugs such
as Macugen that are administered in physicians offices in
a manner intended to reduce the amount that is subject to
reimbursement. In addition, the legislation directs the
Secretary of HHS to contract with procurement organizations to
purchase physician-administered drugs from the manufacturers and
to provide physicians with the option to obtain drugs through
these organizations as an alternative to purchasing from the
manufacturers, which some physicians may find advantageous.
These changes may also cause private insurers to reduce the
amounts that they will pay for physician-administered drugs. Our
revenues from Macugen could be significantly negatively affected
if, as a result of the Medicare prescription drug coverage
legislation, reimbursement for Macugen were to be reduced and if
this legislation affects the amounts that private insurers will
pay.

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Risks Related to Intellectual Property and Legal Matters

If we or our collaborative partners are required to obtain
licenses from third parties, our revenues and royalties on any
commercialized products could be reduced.

The development of some of our products may require the use of
technology developed by third parties. The extent to which
efforts by other researchers have resulted or will result in
patents and the extent to which we or our collaborative partners
are forced to obtain licenses from others, if available, on
commercially reasonable terms is currently unknown. If we or our
collaborative partners must obtain licenses from third parties,
fees must be paid for such licenses, which would reduce the
revenues and royalties we may receive on commercialized products.

If we cannot successfully protect, exploit or enforce our
intellectual property rights, our ability to develop and
commercialize our products will be severely limited.

We hold numerous U.S. and foreign patents as well as trademarks
and trade secrets; we also have many pending applications for
additional patents. We intend to continue to seek patent
protection for, or maintain as trade secrets, the potentially
valuable intellectual property arising from our research and
development activities, including commercially promising product
candidates that we have discovered, developed or acquired. Our
success depends, in part, on our ability and our collaborative
partners ability to obtain and maintain patent protection
for new product candidates, maintain trade secret protection and
operate without infringing the valid and enforceable proprietary
rights of third parties. As with most biotechnology and
pharmaceutical companies, our patent position is highly
uncertain and involves complex legal and factual questions.
Without patent and other similar protection, other companies
could offer the same or substantially identical products for
sale without incurring the sizeable discovery and development
costs that we have incurred. Our ability to recover these
expenditures and realize profits upon the sale of products could
be diminished. The process of obtaining patents can be
time-consuming and expensive with no certainty of success. Even
if we spend the necessary time and money, a patent may not issue
or it may insufficiently protect the technology it was intended
to protect. Even if issued, such issuance is not conclusive as
to a patents validity or its enforceability. Patents may
be challenged, narrowed, invalidated or circumvented, which
could limit our ability to prevent or stop competitors from
marketing similar products or limit the length of term of patent
protection we may have for our products. For example, our patent
which claims the use of DPIV inhibitors for lowering blood
glucose levels was revoked by the European Patent Office in May
2004, and is being opposed in the German and Australian patent
offices. Although we are currently challenging the revocation of
our patent by the European Patent Office and the proceedings in
Germany and Australia are at an early stage, if we are
unsuccessful in defending these oppositions and the patent is
revoked without possibility of appeal, this will potentially
reduce the royalty revenue we derive from the non-exclusive
licenses we have granted under the revoked patent in these
territories where the patent is revoked.

We can never be certain that we were first to develop the
technology or that we were first to file a patent application
for the particular technology because most U.S. patent
applications are confidential until a patent publishes or
issues, and publications in the scientific or patent literature
lag behind actual discoveries. If our pending patent
applications are not approved for any reason or if we are unable
to receive patent protection for additional proprietary
technologies that we develop, the degree of future protection
for our proprietary rights will remain uncertain. Third parties
may independently develop similar or alternative technologies,
duplicate some or all of our technologies, design around our
patented technologies or challenge our pending or issued
patents. Furthermore, the laws of foreign countries may not
protect our intellectual property rights effectively or to the
same extent as the laws of the United States. In addition, some
countries do not offer patent protection for certain
biotechnology-related inventions. If our intellectual property
rights are not adequately protected, we may not be able to
commercialize our technologies, products or services and our
competitors could commercialize

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our technologies, which could result in a decrease in our sales
and market share that would harm our business and operating
results.

We are also party to a number of licenses that give us rights to
third-party intellectual property that is necessary or useful to
our business. Our success will depend in part on the ability of
our licensors to obtain, maintain and enforce our licensed
intellectual property, in particular, those patents to which we
have secured exclusive rights. Our licensors may not
successfully prosecute the patent applications to which we have
licenses. Even if patents issue in respect of these patent
applications, our licensors may fail to maintain these patents,
may determine not to pursue litigation against other companies
that are infringing these patents, or may pursue such litigation
less aggressively than we would. Without protection for the
intellectual property we license, other companies might to able
to offer substantially identical products for sale, which could
adversely affect our competitive business position and harm our
business prospects.

If we are unable to protect the confidentiality of our
proprietary information and know-how, the value of our
technology and products could be negatively impacted.

In addition to patented technology, we rely upon unpatented
proprietary technology, trade secrets, processes, and know-how.
We seek to protect this information in part by entering into
confidentiality agreements with our employees, consultants and
third parties. These agreements may be breached, and we may not
have adequate remedies for any such breach. In addition, our
trade secrets may otherwise become known or be independently
developed by competitors.

The failure to prevail in litigation or the costs of
litigation, including patent infringement claims, could harm our
financial performance and business operations and could cause
delays in product introductions.

We are susceptible to litigation. For example, as a public
company, we are subject to claims asserting violations of
securities laws and derivative actions. In particular, we
currently face a securities class action alleging violations of
securities laws which are described in our filings with the SEC.
In addition, as a biotechnology company, our processes and
potential products may conflict with patents that have been or
may be granted to competitors, academic institutions or others.
We cannot ensure that our products or methods do not infringe
upon the patents or other intellectual property rights of third
parties. As the biotechnology and pharmaceutical industries
expand and more patents are filed and issued, the risk increases
that our patents or patent applications for our product
candidates may give rise to a declaration of interference by the
U.S. Patent and Trademark Office, or to administrative
proceedings in foreign patent offices, or that our activities
lead to claims of patent infringement by other companies,
institutions or individuals. These entities or persons could
bring legal proceedings against us seeking substantial damages
or seeking to enjoin us from researching, developing,
manufacturing or marketing our products, which could result in
substantial costs and harm our reputation. If any of these
actions are successful, we may not only be required to pay
substantial damages for past use of the asserted intellectual
property but we may also be required to cease the infringing
activity or obtain the requisite licenses or rights to use the
technology, that may not be available to us on acceptable terms,
if at all. Litigation and other proceedings may also absorb
significant management time.

Litigation is inherently unpredictable and we may incur
substantial expense in defending ourselves or asserting our
rights in the litigation to which we are currently subject, or
in new lawsuits or claims brought against us. Litigation can be
expensive to defend, regardless of whether a claim has merit,
and the defense of such actions may divert the attention of our
management that would otherwise be engaged in running our
business and utilize resources that would otherwise be used for
the business. In the event of an adverse determination in a
lawsuit or proceeding, or our failure to license essential
technology, our sales could be harmed and/or our costs increase,
which would harm our financial condition and our stock price may
decline. While we currently maintain insurance that we believe
is adequate, we are subject to the risk that our insurance will
not be sufficient to cover claims.

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The use of any of our potential products in clinical trials
and the sale of any approved products exposes us to liability
claims.

The nature of our business exposes us to potential liability
risks inherent in the research, development, manufacturing and
marketing of drug candidates and products. If any of our drug
candidates in clinical trials or our marketed products harm
people or allegedly harm people, we may be subject to costly and
damaging product liability claims. Many patients who participate
in clinical trials are already ill when they enter a trial. The
waivers we obtain may not be enforceable and may not protect us
from liability or the costs of product liability litigation.
While we currently maintain product liability insurance that we
believe is adequate, we are subject to the risk that our
insurance will not be sufficient to cover claims. There is also
a risk that adequate insurance coverage will not be available in
the future on commercially reasonable terms, if at all. The
successful assertion of an uninsured product liability or other
claim against us could cause us to incur significant expenses to
pay such a claim, could adversely affect our product development
and could cause a decline in our product revenues. Even a
successfully defended product liability claim could cause us to
incur significant expenses to defend such a claim, could
adversely affect our product development and could cause a
decline in our product revenues.

If we fail to comply with our obligations in the agreements
under which we license development or commercialization rights
to products or technology from third parties, we could lose
license rights that are important to our business.

We are party to a number of technology licenses that are
important to our business and expect to enter into additional
licenses in the future. For example, we hold licenses from
Gilead, Nektar and Isis under patents relating to Macugen. These
licenses impose various commercialization, milestone payment,
royalty, insurance and other obligations on us. If we fail to
comply with these obligations, the licensor may have the right
to terminate the license, in which event we would not be able to
market products that utilize the licensed technology, such as
Macugen.

Risks Related to Our Common Stock

Our stock price remains highly volatile which could make it
difficult for our stockholders to resell our common stock.

If our stock price falls, our stockholders may not be able to
sell their stock when desired or at desirable prices. When the
stock prices of companies in the Nasdaq Biotechnology Index
fall, our stock price will most likely fall as well. The stock
price of biotechnology and pharmaceutical companies, including
our stock price, has been volatile and may remain volatile for
the foreseeable future. From January 1, 2004 through
December 31, 2004, the range of the closing price of our
common stock was between $29.81 and $91.10 and the range of the
Nasdaq Biotechnology Index was between 622.19 and 845.11. From
January 1, 2005 through December 31, 2005, the range
of the closing price of our common stock was between $21.99 and
$72.30, and the range of the Nasdaq Biotechnology Index was
between 641.35 and 812.65. From January 1, 2006 through
March 7, 2006, the range of the closing price of our common
stock was between $26.97 and $32.62 and the range of the Nasdaq
Biotechnology Index was between 800.97 and 874.18.

The following factors, among others, some of which are beyond
our control, may also cause our stock price to decline:




    a decline in sales of our marketed products, including Tarceva
    and Macugen;
    a decline in our business operating results or prospects;
    announcement or launching of technological innovations or new
    therapeutic products by third parties;
    positive clinical efficacy or safety results from our
    competitors products;42



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
    public concern as to the safety of our products and potential
    products;
    comments by securities analysts regarding us or our competitors
    and general market conditions;
    future sales of substantial amounts of our common stock by us or
    existing stockholders;
    negative developments concerning strategic alliance agreements;
    changes in government regulation, including pricing controls,
    that impact our products;
    negative or neutral clinical trial results;
    delays with the FDA in the approval process for products and
    clinical candidates; and
    developments in laws or regulations that impact our patent or
    other proprietary rights.We have outstanding options, convertible debt, contingent
value rights and warrants, the exercise, conversion or exchange
of which could dilute stockholder value and cause our stock
price to decline.

We grant stock options to our employees and other individuals as
part of our overall compensation plan which, upon vesting, are
exercisable for common stock. In addition, we have issued
convertible debt which may be converted into common stock and
warrants which may be exercised for common stock as well as
contingent value rights which, upon the occurrence of certain
events, may be exchanged for common stock. We are not able to
estimate when, if ever, the stock options or convertible debt
will be exercised or converted into common stock or when, if
ever, shares will be issued in connection with the contingent
value rights or warrants, but any such conversion or issuance
would almost certainly dilute stockholder value.

Further, if some or all of such shares are registered and sold
into the public market over a short time period, the price of
our stock is likely to decline, as the market may not be able to
absorb those shares at the prevailing market prices. This may
also make it more difficult for us to sell equity securities in
the future at a time and a price that we deem appropriate.

Our governance documents and state law provide certain
anti-takeover measures which will discourage a third party from
seeking to acquire us and may impede the ability of stockholders
to remove and replace our board of directors and, therefore, our
management.

We have had a shareholder rights plan, commonly referred to as a
poison pill, since January 1999. The purpose of the
shareholder rights plan is to protect stockholders against
unsolicited attempts to acquire control of us that do not offer
a fair price to our stockholders as determined by our board of
directors. Under the plan, the acquisition of 17.5% or more of
our outstanding common stock by any person or group, unless
approved by our board of directors, will trigger the right of
our stockholders (other than the acquiror of 17.5% or more of
our common stock) to acquire additional shares of our common
stock, and, in certain cases, the stock of the potential
acquiror, at a 50% discount to market price, thus significantly
increasing the acquisition cost to a potential acquiror. The
shareholder rights plan may have the effect of dissuading a
potential hostile acquiror from making an offer for our common
stock at a price that represents a premium to the then-current
trading price. In addition, our certificate of incorporation and
by-laws contain certain additional anti-takeover protective
devices. For example,




    no stockholder action may be taken without a meeting, without
    prior notice and without a vote; solicitations by consent are
    thus prohibited;
    special meetings of stockholders may be called only by our board
    of directors, although the proxy statement for our annual
    meeting of stockholders will include a proposed amendment to our
    bylaws that, if adopted by our stockholders, would allow
    stockholders holding 20% of our outstanding shares to call a
    special meeting of stockholders upon 90 days prior written
    notice;43



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
    nominations by stockholders of candidates for election to the
    board of directors at our annual meeting of stockholders must be
    made at least 45 days prior to the anniversary of the date
    on which we first mailed our proxy materials for the prior
    years annual meeting of stockholders; and
    our board of directors has the authority, without further action
    by the stockholders, to fix the rights and preferences, and
    issue shares, of preferred stock. An issuance of preferred stock
    with dividend and liquidation rights senior to the common stock
    and convertible into a large number of shares of common stock
    could prevent a potential acquiror from gaining effective
    economic or voting control.Further, we are subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions,
restricts certain transactions and business combinations between
a corporation and a stockholder owning 15% or more of the
corporations outstanding voting stock for a period of
three years from the date the stockholder becomes a 15%
stockholder. In addition to discouraging a third party from
acquiring control of us, the foregoing provisions could impair
the ability of existing stockholders to remove and replace our
management and/or our board of directors.







ITEM 1B.
    UNRESOLVED STAFF COMMENTSThere are no unresolved staff comments.







ITEM 2.
    PROPERTIESThe following is a summary of the principal facilities which we
utilize in our operations:

Melville, New York. On March 15, 2005, we purchased
a facility located at 41 Pinelawn Road, Melville, New York,
consisting of approximately 60,000 square feet. On
March 6, 2006, we relocated our corporate headquarters from
our leased premises at 58 South Service Road, Melville, New York
to this new location. Our facility at 41 Pinelawn Road houses
our principal executive, oncology, finance, legal and
administrative offices. We are currently attempting to sublease
our 58 South Service Road facility.

New York, New York. We lease a facility at 3 Times
Square, New York, New York, consisting of approximately
62,000 square feet. In March 2006, we subleased
approximately 31,000 square feet of this facility to
Bain & Co., Inc. Our 3 Times Square facility contains
the commercial and development operations for our ophthalmology
business.

Farmingdale, New York. We lease a facility at One
BioScience Park Drive, Farmingdale, New York, consisting of
approximately 53,000 square feet. Our Farmingdale facility
contains our drug discovery and pre-clinical laboratories for
oncology.

Cedar Knolls, New Jersey. We lease a facility at 140
Hanover Avenue, Cedar Knolls, New Jersey, consisting of
approximately 25,000 square feet. Our Cedar Knolls facility
contains our drug discovery and pre-clinical laboratories for
ophthalmology.

Boulder, Colorado. We occupy two facilities in Boulder,
Colorado, which together house our clinical research, regulatory
and drug development operations for oncology. The first facility
we lease is located at 2860 Wilderness Place, and consists of
approximately 60,000 square feet. The second facility we
lease is located at 2970 Wilderness Place, and consists of
approximately 31,000 square feet.

Oxford, England. We lease a facility at Windrush Court,
Watlington Road, Oxford, England, consisting of approximately
88,000 square feet. This facility houses our diabetes and
obesity corporate, research and development operations, as well
as certain oncology development operations.

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ITEM 3.
    LEGAL PROCEEDINGSOn or about December 16, 2004, several purported
shareholder class action lawsuits were filed in the United
States District Court for the Eastern District of New York
against us, certain of our current and former executive
officers, and the members of our Board of Directors. The
lawsuits were brought on behalf of those who purchased or
otherwise acquired our common stock during certain periods in
2004, which periods differed in the various complaints. The
Court has now appointed a lead plaintiff, and on
February 17, 2006, the lead plaintiff filed a consolidated
amended class action complaint seeking to represent a class of
all persons who purchased or otherwise acquired our common stock
during the period from April 26, 2004 through
November 22, 2004. The consolidated complaint alleges that
defendants made material misstatements and omissions concerning
the survival benefit associated with our product, Tarceva and
the size of the potential market of Tarceva upon FDA approval of
the drug. It alleges violations of Sections 11, and 15 of
the Securities Act of 1933, as amended, and Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5
promulgated thereunder. The consolidated complaint seeks
unspecified compensatory damages and other relief. We intend to
vigorously defend this action.







ITEM 4.
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSThere were no matters submitted to a vote of our security
holders during the fourth quarter of fiscal 2005.





PART II







ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket Information

Our common stock is traded in the
over-the-counter market
and is included for quotation on the NASDAQ National Market
under the symbol OSIP. The following is the range of high and
low sales prices by quarter for our common stock from
October 1, 2004 through December 31, 2005 as reported
on the NASDAQ National Market:

|                 |  |      |       |  |     |   |       | 
|---------------- |  | ---- | ----- |  | --- | - | ----- | 
|                 |  | HIGH |       |  | LOW |  
|2005 FISCAL YEAR |  |      |       |  |     |  
|First Quarter    |  | $    | 74.90 |  |     | $ | 41.25 | 
|Second Quarter   |  |      | 50.20 |  |     |   | 34.57 | 
|Third Quarter    |  |      | 47.65 |  |     |   | 28.15 | 
|Fourth Quarter   |  |      | 30.35 |  |     |   | 20.81 | 

|                                              |  |      |       |  |     |   |       | 
|--------------------------------------------- |  | ---- | ----- |  | --- | - | ----- | 
|THREE-MONTH TRANSITION PERIOD                 |  | HIGH |       |  | LOW |  
|                                              |  |      |       |  |     |  
|October 1, 2004 through
    December 31, 2004 |  | $    | 74.95 |  |     | $ | 44.34 | 

|                 |  |      |       |  |     |   |       | 
|---------------- |  | ---- | ----- |  | --- | - | ----- | 
|                 |  | HIGH |       |  | LOW |  
|2004 FISCAL YEAR |  |      |       |  |     |  
|First Quarter    |  | $    | 34.19 |  |     | $ | 24.47 | 
|Second Quarter   |  |      | 43.26 |  |     |   | 29.41 | 
|Third Quarter    |  |      | 98.70 |  |     |   | 33.94 | 
|Fourth Quarter   |  |      | 70.41 |  |     |   | 50.71 | 

Holders and Dividends




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foreseeable future. Declaration of dividends will depend, among
other things, upon future earnings, our operating and financial
condition, our capital requirements and general business
conditions.

Securities Authorized for Issuance Under Equity Compensation
Plans

Equity Compensation Plan Information as of December 31,
2005

|                                                               |  |                   |           |     |                   |   |       |                     |  |  |           |    
|-------------------------------------------------------------- |  | ----------------- | --------- | --- | ----------------- | - | ----- | ------------------- |  |  | --------- | ---
|                                                               |  | Number of         |           |     | Weighted-         |   |       | Number of           | 
|                                                               |  | securities to be  |           |     | average           |   |       | securities          | 
|                                                               |  | issued upon       |           |     | exercise price of |   |       | remaining available | 
|                                                               |  | exercise of       |           |     | outstanding       |   |       | for future issuance | 
|                                                               |  | outstanding       |           |     | options,          |   |       | under equity        | 
|                                                               |  | options, warrants |           |     | warrants and      |   |       | compensation        | 
|Plan category                                                  |  | and rights        |           |     | rights            |   |       | plans               | 
|                                                               |  |                   |           |     |                   |   |       |                     | 
|Equity compensation plans approved
    by security holders     |  |                   | 5,870,561 | (a) |                   | $ | 36.03 |                     |  |  | 2,184,546 | (c)
|Equity compensation plans not
    approved by security holders |  |                   | 1,050,924 | (b) |                   | $ | 30.96 |                     |  |  |          |    
|                                                               |  |                   |           |     |                   |   |       |                     | 
|Total                                                          |  |                   | 6,921,485 |     |                   | $ | 35.26 |                     |  |  | 2,184,546 |    
|                                                               |  |                   |           |     |                   |   |       |                     | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Consists of five plans: the 1989 Incentive and Non-Qualified
    Stock Option Plan, the 1993 Incentive and Non-Qualified Stock
    Option Plan, the 1997 Incentive and Non-Qualified Stock Option
    Plan, the 1999 Incentive and Non-Qualified Stock Option Plan,
    and the Amended and Restated Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(b) |  | In connection with the acquisition of certain oncology assets
    from Gilead on December 21, 2001, we adopted a
    Non-Qualified Stock Option Plan for Former Employees of Gilead
    Sciences, Inc. We granted ten-year options to purchase an
    aggregate of 693,582 shares of our common stock at a
    purchase price of $45.01 per share, which represented the
    fair value of our stock at the date granted. With respect to
    each option grant, one-third of the options vest on the first
    anniversary of the date of grant and the remainder vests ratably
    monthly thereafter for twenty-four months. 
     In connection with the acquisition of Cadus, we adopted a
    Non-Qualified Stock Option Plan for Former Employees of Cadus
    Pharmaceutical Corporation. We granted ten-year options to
    purchase an aggregate of 415,000 shares of our common stock
    at a purchase price of $5.00 per share, which represented
    the fair value of our stock at the date granted. These options
    became exercisable on July 30, 2000, one year from the date
    of the grant. 
     In connection with the acquisition of Eyetech, we adopted a
    Stock Incentive Plan for Pre-Merger Employees of Eyetech
    Pharmaceuticals, Inc. We granted seven-year options to purchase
    an aggregate of 625,810 shares of our common stock at a
    purchase price of $23.83, which represents the fair value of our
    stock at the date granted. With respect to each option grant,
    one-fourth of the options vest on the first anniversary and the
    remainder vest ratably monthly thereafter for 36 months.
    
     Also in connection with the acquisition of Eyetech, we assumed
    Eyetechs 2001 Stock Plan and. To facilitate such
    assumption, we adopted the Stock Plan for Assumed Options of
    Pre-Merger Employees of Eyetech Pharmaceuticals, Inc. The number
    of shares subject to each assumed option was determined by
    dividing the assumed Eyetech per share option exercise price by
    the conversion ratio of 0.491 and rounding that result down to
    the nearest whole number for a total of 153,290 shares. The
    exercise price was determined by dividing the assumed Eyetech
    per share option exercise price by the conversion ratio of 0.491
    and rounding up to the nearest whole cent. 
     Includes options established for certain outside consultants
    related to clinical trial operations.
|   
|(c) |  | Consists of 704,551 shares reserved for issuance under the
    1995 Employee Stock Purchase Plan, the stock purchase plan for
    employees of OSI-UK and the Amended and Restated Stock Purchase
    Plan for Non-Employee Directors and 1,479,995 shares
    reserved for issuance under the 1989 Incentive and Non-Qualified
    Stock Option Plan, the 1993 Incentive and Non-Qualified Stock
    Option Plan, the 1997 Incentive and Non-Qualified Stock Option
    Plan, 1999 Incentive and Non-Qualified Stock Option Plan, and
    the Amended and Restated Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

46



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We have a policy of rewarding employees who achieve 10, 15,
and 20 years of continued service with OSI with 100, 150,
and 200 shares, respectively, of our common stock. We grant
such shares of common stock on an annual basis to those
individuals who meet the stated requirements.

Purchases of Equity Securities

On December 21, 2005, we issued $100 million aggregate
principal amount of the 2025 Notes to UBS Securities, LLC, or
UBS. In addition, on December 28, 2005, we issued an
additional $15 million aggregate principal amount of the
2025 Notes pursuant to UBSs exercise of its option to
purchase an additional $15 million aggregate principal
amount of the 2025 Notes. The following table summarizes our
repurchase of common stock from UBS on December 21, 2005,
in connection with our issuance of the 2025 Notes:

|                  |  |                  |         |  |                    |                   |       |                 |                    |  |                  |  |  |  |     | 
|----------------- |  | ---------------- | ------- |  | ------------------ | ----------------- | ----- | --------------- | ------------------ |  | ---------------- |  |  |  | --- | 
|                  |  |                  |         |  |                    | Total Shares      |       |                 | Maximum Number     | 
|                  |  |                  |         |  |                    | Purchased as Part |       |                 | of Shares That May | 
|                  |  | Total Number of  |         |  | Average Price Paid |                   |       | of Publicly     |                    |  | Yet be Purchased | 
|Period            |  | Shares Purchased |         |  | Per Share          |                   |       | Announced Plans |                    |  | Under the Plan   | 
|                  |  |                  |         |  |                    |                   |       |                 |                    |  |                  | 
|December 21, 2005 |  |                  | 500,000 |  |                    | $                 | 23.54 |                 |                    |  | N/A              |  |  |  | N/A | 



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##### Table of Contents

ITEM 6.
    SELECTED CONSOLIDATED FINANCIAL DATASubsequent to the end of our 2004 fiscal year, we changed our
fiscal year end to December 31. On February 9, 2005,
we filed a transition report on
Form 10-QT for the
three-month period ended December 31, 2004. The following
table sets forth our selected consolidated financial data as of
and for the year ended December 31, 2005, the three months
ended December 31, 2004, and the years ended
September 30, 2004, 2003, 2002 and 2001. The information
below should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in
this report.

|                                     |                                                                                       |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |        |   |          |         |        |   |         |        |        | 
|------------------------------------ | ------------------------------------------------------------------------------------- | -------------------------------------------------- | ----------------------------------- | -------- | ------------ | ------ | - | ------------------------- | ------ | ------ | ------- | -------- | ------- | ------- | - | -------- | ------- | ------ | - | -------- | ------- | ------ | - | ------- | ------ | ------ | 
|                                     |                                                                                       |                                                    |                                     | Three    |              |        |   |                           |        |        |         |          |        
|                                     |                                                                                       |                                                    |                                     | Months   |              |        |   |                           |        |        |         |          |        
|                                     |                                                                                       | Year Ended                                         |                                     |          | Ended        |        |   |                          
|                                     |                                                                                       | December 31,                                       |                                     |          | December 31, |        |   | Years Ended September 30, |       
|(In thousands, except                |                                                                                       |                                                    |                                     |          |              |        |   |                           |       
|per share data)                      |                                                                                       | 2005(a)                                            |                                     |          | 2004(b)      |        |   | 2004(c)                   |        |        | 2003(d) |          |         | 2002(e) |   |          | 2001(f) |       
|                                     |                                                                                       |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |       
|Consolidated Statement of Operations |                                                                                       |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |        |   |          |         |        |   |        
|                                     | Data:                                                                                 |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |        |   |          |         |        |   |         |       
|                                     | Revenues                                                                              |                                                    | $                                   | 174,194  |              |        | $ | 12,347                    |        |        | $       | 42,800   |         |         | $ | 32,369   |         |        | $ | 21,816   |         |        | $ | 26,022  |       
|                                     | Expenses:                                                                             |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |        |   |          |         |        |   |         |       
|                                     |                                                                                       | Cost of goods sold                                 |                                     |          | 18,882       |        |   |                           | (1,247 | )      |         |          | 8,985   |         |   |          | 157     |        |   |          |        |        |   |         |       |       
|                                     |                                                                                       | Collaborative profit share                         |                                     |          | 12,312       |        |   |                           |       |        |         |          |        |         |   |          |        |        |   |          |        |        |   |         |       |       
|                                     |                                                                                       | Net expense from unconsolidated
    joint business |                                     |          |             |        |   |                           | 7,661  |        |         |          |        |         |   |          |        |        |   |          |        |        |   |         |       |       
|                                     |                                                                                       | Research and development                           |                                     |          | 125,953      |        |   |                           | 31,913 |        |         |          | 110,398 |         |   |          | 102,642 |        |   |          | 102,202 |        |   |         | 56,038 |       
|                                     |                                                                                       | Acquired in-process research and
    development   |                                     |          | 64,442       |        |   |                           |       |        |         |          | 32,785  |         |   |          | 31,451  |        |   |          | 130,200 |        |   |         |       |       
|                                     |                                                                                       |                                                    | Selling, general and administrative |          |              | 98,393 |   |                           |        | 20,313 |         |          |         | 98,909  |   |          |         | 70,532 |   |          |         | 28,146 |   |         |        | 16,033 | 
|                                     |                                                                                       | Impairment of intangible asset                     |                                     |          |             |        |   |                           |       |        |         |          | 24,599  |         |   |          |        |        |   |          |        |        |   |         |       |       
|                                     |                                                                                       | Amortization of intangibles                        |                                     |          | 17,544       |        |   |                           | 3,804  |        |         |          | 18,606  |         |   |          | 9,300   |        |   |          | 1,255   |        |   |         | 742    |       
|                                     |                                                                                       |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |       
|                                     | Loss from operations                                                                  |                                                    |                                     | (163,332 | )            |        |   | (50,097                   | )      |        |         | (251,482 | )       |         |   | (181,713 | )       |        |   | (239,987 | )       |        |   | (46,791 | )     
|                                     | Other income (expense) 
    net                                                      |                                                    |                                     | 6,209    |              |        |   | 1,702                     |        |        |         | (8,889   | )       |         |   | 356      |         |        |   | 7,904    |         |        |   | 25,661  |       
|                                     | Gain on sale of diagnostic business                                                   |                                                    |                                     |         |              |        |   |                          |        |        |         |         |         |         |   |         |         |        |   | 1,000    |         |        |   |        |       
|                                     | Gain on early retirement of
    convertible senior subordinated notes  net business  |                                                    |                                     |         |              |        |   |                          |        |        |         |         |         |         |   |         |         |        |   | 12,604   |         |        |   |        |       
|                                     |                                                                                       |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |       
|                                     | Loss before cumulative effect of
    accounting change                                |                                                    |                                     | (157,123 | )            |        |   | (48,395                   | )      |        |         | (260,371 | )       |         |   | (181,357 | )       |        |   | (218,479 | )       |        |   | (21,130 | )     
|                                     |                                                                                       |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |       
|                                     | Cumulative effect of the change in
    accounting for the recognition of upfront fees |                                                    |                                     |         |              |        |   |                          |        |        |         |         |         |         |   |         |         |        |   |         |         |        |   | (2,625  | )     
|                                     |                                                                                       |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |       
|                                     | Net loss                                                                              |                                                    | $                                   | (157,123 | )            |        | $ | (48,395                   | )      |        | $       | (260,371 | )       |         | $ | (181,357 | )       |        | $ | (218,479 | )       |        | $ | (23,755 | )     
|                                     |                                                                                       |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |       
|                                     | Basic and diluted net loss per
    common share:                                      |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |        |   |          |         |        |   |         |       
|                                     | Loss before cumulative effect of
    change in accounting policy                      |                                                    | $                                   | (3.02    | )            |        | $ | (1.02                     | )      |        | $       | (6.50    | )       |         | $ | (4.87    | )       |        | $ | (6.07    | )       |        | $ | (0.62   | )     
|                                     | Cumulative effect of change in
    accounting policy                                  |                                                    |                                     |         |              |        |   |                          |        |        |         |         |         |         |   |         |         |        |   |         |         |        | $ | (0.08   | )     
|                                     |                                                                                       |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |       
|                                     | Net loss                                                                              |                                                    | $                                   | (3.02    | )            |        | $ | (1.02                     | )      |        | $       | (6.50    | )       |         | $ | (4.87    | )       |        | $ | (6.07    | )       |        | $ | (0.70   | )     
|                                     |                                                                                       |                                                    |                                     |          |              |        |   |                           |        |        |         |          |         |         |   |          |         |       
|                                     | Weighted average number of shares
    of common stock outstanding                     |                                                    |                                     | 52,078   |              |        |   | 47,375                    |        |        |         | 40,083   |         |         |   | 37,249   |         |        |   | 35,978   |         |        |   | 33,852  |       

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##### Table of Contents



|                                 |                                                                                    |              |   |           |                     |  |   |         |  |  |         |         |  |         |   |         |         |  |   |         |  |  |   |         | 
|-------------------------------- | ---------------------------------------------------------------------------------- | ------------ | - | --------- | ------------------- |  | - | ------- |  |  | ------- | ------- |  | ------- | - | ------- | ------- |  | - | ------- |  |  | - | ------- | 
|                                 |                                                                                    | As of        |   |           |                    
|                                 |                                                                                    | December 31, |   |           | As of September 30, | 
|(In thousands, except            |                                                                                    |              |   |           |                     | 
|per share data)                  |                                                                                    | 2005(a)      |   |           | 2004(b)             |  |   | 2004(c) |  |  | 2003(d) |         |  | 2002(e) |   |         | 2001(f) | 
|                                 |                                                                                    |              |   |           |                     |  |   |         |  |  |         |         |  |         |   |         |         | 
|Consolidated Balance Sheet Data: |                                                                                    |              |   |           |                     |  |   |         |  |  |         |         |  |         |   |         |         |  |   |         |  |  |   |        
|                                 | Cash, cash equivalents and
    investment securities (unrestricted and restricted) |              | $ | 179,606   |                     |  | $ | 656,239 |  |  | $       | 257,229 |  |         | $ | 404,147 |         |  | $ | 476,277 |  |  | $ | 551,479 | 
|                                 | Receivables                                                                        |              |   | 152,482   |                     |  |   | 14,077  |  |  |         | 12,112  |  |         |   | 11,654  |         |  |   | 6,981   |  |  |   | 6,633   | 
|                                 | Working capital                                                                    |              |   | 276,171   |                     |  |   | 630,246 |  |  |         | 228,223 |  |         |   | 379,598 |         |  |   | 445,596 |  |  |   | 533,761 | 
|                                 | Total assets                                                                       |              |   | 1,058,582 |                     |  |   | 780,116 |  |  |         | 388,029 |  |         |   | 591,502 |         |  |   | 579,044 |  |  |   | 591,689 | 
|                                 | Long-term liabilities                                                              |              |   | 337,788   |                     |  |   | 195,814 |  |  |         | 186,574 |  |         |   | 338,592 |         |  |   | 169,774 |  |  |   | 14,387  | 
|                                 | Stockholders equity                                                               |              |   | 578,466   |                     |  |   | 539,390 |  |  |         | 154,233 |  |         |   | 218,057 |         |  |   | 379,108 |  |  |   | 549,831 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The calendar 2005 consolidated financial statements include the
    acquisition of Eyetech for aggregate consideration of
    $909.3 million, including the cash consideration of
    $702.1 million ($430.2 million net of cash and
    investments acquired), the value of 5.6 million of OSI
    stock issued, value of converted stock options issued, and
    transaction related costs in November 2005; in-process research
    and development charge of $60.9 million related to the
    acquisition of Eyetech; in-process research and development
    charges of $3.5 million related to the acquisition of the
    minority interest in Prosidion; the issuance of
    $115.0 million aggregate principle of convertible notes in
    a private placement for net proceeds of $111.0 million of
    which approximately $24.0 million was used to purchase
    concurrently with the offering 500,000 shares of our common
    stock and a call spread option with respect to our common stock.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | The three months ended December 31, 2004 includes the sale
    of 6.9 million shares of common stock for net proceeds of
    $419.9 million; net expense from unconsolidated joint
    business of $7.7 million related to our co-promotion and
    manufacturing agreements with Genentech for Tarceva and a net
    credit adjustment of $1.4 million to reduce a previously
    recorded provision for excess Gelclair inventory.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) | The fiscal 2004 consolidated financial statements include the
    acquisition of certain assets from Probiodrug for approximately
    $36.4 million in cash; the impairment of the Gelclair
    intangible asset of $24.6 million; the conversion of
    $160.0 million aggregate principle amount of convertible
    senior subordinated notes into 3.2 million shares of our
    common stock; the charge of $8.6 million relating to excess
    Gelclair inventory; and the recognition of $3.0 million of
    Tarceva related milestone revenues.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) | The fiscal 2003 consolidated financial statements include the
    acquisition of the marketing and promotion rights to Novantrone
    for approved oncology indications in the United States for
    approximately $45.0 million in cash; the acquisition of
    Cell Pathways for approximately $55.0 million in common
    stock, contingent value rights and cash; the issuance of
    $150.0 million of convertible senior subordinated notes for
    net proceeds of approximately $145.1 million and the
    purchase of 503,800 shares of our common stock for
    $19.0 million.                                                                                                              
|   
|(e) | The fiscal 2002 consolidated financial statements include the
    acquisition of certain assets from Gilead for approximately
    $175.7 million in cash and common stock; the receipt of
    $4.5 million from the phase-down of our collaboration with
    Anaderm Research Corporation, of which $1.8 million was
    recognized as revenue in accordance with SAB No. 101;
    the issuance of $200.0 million of convertible senior
    subordinated notes for net proceeds of approximately
    $192.9 million; and the early retirement of
    $40.0 million aggregate principal amount of convertible
    senior subordinated notes resulting in a net gain of
    approximately $12.6 million.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(f) | The fiscal 2001 consolidated financial statements include a
    cumulative effect of the change in accounting principle of
    $2.6 million relating to the adoption of
    SAB No. 101; the acquisition of certain assets from
    British Biotech plc for $13.9 million; $25.0 million
    in upfront fees received upon the execution of collaboration
    agreements with Genentech and Roche; net proceeds of
    approximately $404.0 million from a public offering of
    common stock in November 2000; the sale of newly-issued shares
    of common stock to Genentech and Roche for an aggregate purchase
    price of $35.0 million each; and a charge to operations of
    $5.1 million for the estimated cost of closing our
    Birmingham, England and Tarrytown, New York facilities.

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##### Table of Contents

ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONSOverview

We are a mid-cap biotechnology company committed to building a
scientifically strong and financially successful top tier
biopharmaceutical organization that discovers, develops and
commercializes innovative molecular targeted therapies
addressing major unmet medical needs in oncology, ophthalmology
and diabetes.

The launch in the United States in November 2004 of our flagship
anti-cancer product, Tarceva (erlotinib), a small molecule
inhibitor of the epidermal growth factor receptor, or HER1/
EGFR, represented a major milestone in the growth of our
company. Tarceva was initially approved for the treatment of
advanced non-small cell lung cancer, or NSCLC, patients who have
failed at least one prior chemotherapy regimen and subsequently,
in November 2005, for the treatment of patients with locally
advanced and metastatic pancreatic cancer in combination with
the chemotherapy agent, gemcitabine. Tarceva was also approved
for sale in the European Union, or EU, for the treatment of
NSCLC in September 2005. Tarceva was the most successful
oncology drug launch in the United States in terms of number of
patients treated during the first 12 months of launch, and
had the fourth most successful oncology drug launch in terms of
sales in the United States. Total U.S. net sales for
Tarceva for 2005 were approximately $275 million and
worldwide net sales (reflecting a late 2005 launch in the EU)
were approximately $309 million.

In 2005, we set out to define and execute a strategy that would
allow us to build upon our initial success with Tarceva and
establish a company capable of delivering long term, sustainable
growth and value creation to our stockholders. We believe that
in order to achieve this goal we need to:




    Operate in two to three areas of attractive commercial potential
    that allow us to broadly leverage our core strengths in the
    discovery and development of novel molecular targeted therapies;
    Continue to be a scientific innovator enabling us to deliver a
    novel and differentiated pipeline of products that represent
    major commercial opportunities by addressing significant unmet
    medical needs; and
    Establish sustainable revenue growth allowing the significant
    reinvestment in research and development programs necessary for
    the creation of a strong portfolio while delivering the
    profitability and financial strength anticipated by many
    stockholders following Tarceva approval.The successful execution of this strategy also will allow us to
mitigate the risks associated with dependence on a single
product and a single disease area while continuing to build on
our historical strengths in oncology and broader target-based
drug discovery.

We believe we now have established the strategic and operating
framework from which to build a scientifically strong and
financially successful biopharmaceutical company. Oncology,
ophthalmology and diabetes represent three of the most
attractive areas of commercial growth in the
biotechnology/pharmaceutical industries. In Tarceva and Macugen
we have two scientifically innovative products that are both in
the early stages of their product life cycles and which,
together with our partners (Genentech and Roche for Tarceva and
Pfizer Inc. for Macugen), we believe we can grow into
appreciable sources of ongoing revenue. Our emerging pipeline of
products in oncology and back of the eye disease, along with our
diabetes franchise (with three novel and differentiated agents
in clinical development) represents an additional source of
future value which, with our assembled research and development
infrastructure and established team of scientists and
clinicians, we believe we are well equipped to pursue. Our two
high quality commercial organizations in the specialty areas of
oncology and back of the eye disease give us the ability to add
significant value to our partners efforts to commercialize
Tarceva and Macugen in the United States and the future
opportunity to commercialize our oncology and ophthalmology
pipeline products in the U.S. market on our own. In
addition, our patent portfolio around dipeptidyl peptidase IV,
or DPIV, the target for our leading diabetes drug

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##### Table of Contents

candidate, PSN9301, an oral small molecule inhibitor of DPIV,
could generate a valuable nearer term flow of royalty revenues
from first-in-class
competitor products, one of which is currently under review at
the U.S. Food and Drug Administration, or FDA, and is
scheduled to come to market in the next nine to 12 months
if approved, and one of which is scheduled for filing with the
FDA in the first quarter of 2006.

As we move forward our focus will be on executing the core
elements of a business plan designed to draw out the growth and
value that we believe to be inherent in the strategic framework
that we have established. We are committed to achieving this in
a disciplined manner and to balance all of our investments in
the longer term against the need to deliver revenue growth and
profitability for our stockholders in the nearer term.

2006 will be an important year for us as we begin the transition
to a profitable, biopharmaceutical company. Many companies have
struggled with the challenge of balancing investment in research
and development, or R&D, to create and develop a successful
portfolio with the need to become a profitable enterprise. We
recognize that this transition will be no less challenging for
us. We have already assembled an innovative pipeline with six
product candidates in various stages of clinical and
pre-clinical development. If we are successful in developing
these product candidates into commercial products, they may
provide us with significant revenue streams and profitability
beyond 2010. However, it will take a great deal of capital and
financial resources over the next four to six years to bring
these products to the market. In the past few years, we have
primarily relied on the capital markets for the financial
resources to fund our R&D. While we may continue to access
the capital markets from time to time as needed, it is our
intention to primarily rely on our ability to generate profits
and related cash flows (including the cash flows from potential
partnering activities) to fund future R&D.

Our acquisition of Eyetech Pharmaceuticals, Inc. in November
2005, or the Eyetech Acquisition, was a core part of our
strategy to develop into a financially and scientifically
diversified biopharmaceutical company. Eyetechs lead
product, Macugen, was the first VEGF inhibitor approved by the
FDA to treat age-related macular degeneration, or wet AMD, a
disease which left untreated results in vision loss and
blindness. In 2005, it achieved approximately $185 million
of total U.S. net sales. Based on the sales trajectory in
the fourth quarter of 2005 and coupled with the significant cost
reductions we put into place in December 2005 after we acquired
Eyetech, Macugen was anticipated to generate a significant level
of cash flow in 2006, after considering the investment in
ophthalmology related R&D and commercial costs. However, the
competitive environment for Macugen is rapidly evolving and may
be especially challenging in 2006. Macugen is facing serious
competition from the off-label use of
Avastin®
(bevacizunab) a biological product approved by the FDA to
treat some forms of cancer. In addition, we anticipate that
Lucentistm
(ranibizumab), a key competitive agent from Genentech, may
launch as early as July 2006, six months sooner that we had
anticipated at the time of the Eyetech acquisition. We have
developed a strategy that we believe effectively positions
Macugen as a safe and effective agent that can be used as
chronic maintenance therapy in the long-term treatment of wet
AMD and in the primary treatment of patients with high
cardiovascular risk. However there is considerable uncertainty
in the rapidly changing wet AMD marketplace and this strategy
may not be successful. If we are not successful, this will
impact our ability to become profitable in 2006 and will also
reduce our current level of capital resources.

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
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

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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 accompanying
consolidated financial statements includes a summary of the
significant accounting policies used in the preparation of the
consolidated financial statements.

Eyetech Purchase Accounting

The purchase price related to the merger with Eyetech was
allocated to tangible and identifiable intangible assets
acquired and liabilities assumed based on the estimated fair
market values as of the acquisition date. A third party
valuation firm was engaged to assist in determining the fair
values of in-process research and development, identifiable
intangible assets, and certain property, plant and equipment,
and in determining the useful lives of such tangible and
identifiable intangible assets acquired. Such a valuation
requires significant estimates and assumptions including but not
limited to: determining the timing and expected costs to
complete the in-process projects, determining the product life
and term of estimated future cash flows, and developing
appropriate costs, expenses, depreciation and amortization
assumptions, tax rates, discount rates and probability rates by
project. We believe the fair values assigned to the assets
acquired and liabilities assumed are based on reasonable
assumptions. These assumptions are based on the best available
information that we had at the time. Additionally, certain
estimates for the purchase price allocation including
liabilities associated with restructuring activities may change
as subsequent information becomes available.

Revenue Recognition



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

Our revenue recognition policies for all nonrefundable upfront
license fees and milestone arrangements are in accordance with
the guidance provided in the Securities and Exchange Commission,
or SEC, Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, as amended by SEC
Staff Accounting Bulletin No. 104, Revenue
Recognition. In addition, we follow the provisions of
Emerging Issues Task Force Issue, or EITF, 00-21, Revenue
Arrangements with Multiple Deliverables for multiple
element revenue arrangements entered into or materially amended
after June 30, 2003. As a result of an amendment to our
collaboration agreement with Genentech in June 2004, milestone
payments received from Genentech after June 2004 and the
remaining portion of the unearned upfront fee are being
recognized in accordance with
EITF 00-21.
Milestones received from Genentech after June 2004 and the
remaining unearned upfront fee are being recognized over the
term of our Manufacturing and Supply Agreement with Genentech,
under which the last items of performance to be delivered to
Genentech are set forth, on a straight line basis, which
approximates the

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expected level of performance under the Manufacturing and Supply
Agreement. In March 2005, we agreed to a further global
development plan and budget with our partners, Genentech and
Roche, for the continued development of Tarceva. For purposes of
EITF 00-21, the
revised development plan and budget for Tarceva was deemed a
material amendment to our Roche agreement and therefore future
milestones received from Roche will be recognized in accordance
with EITF 00-21.
Accordingly, future milestone payments received from Roche after
March 2005 will be initially recorded as unearned revenue and
recognized over the expected term of the research collaboration
on a straight-line basis, which approximates the expected level
of performance under the development plan.



Product SalesProduct sales consists primarily of sales of Macugen, and to a
lesser extent,
Gelclair®,
a bioadherant oral gel for the relief of pain associated with
oral mucositis in the United States and its territories. Macugen
is sold primarily to distributors, who, in turn, sell to
physicians, a limited number of specialty pharmacy providers and
federal government buying groups. We recognize revenue from
product sales when there is persuasive evidence of an
arrangement, delivery has occurred, the price is fixed and
determinable, the buyer is obligated to pay us, the obligation
to pay is not contingent on resale of the product, the buyer has
economic substance apart from us, we have no obligation to bring
about sale of the product, the amount of returns can be
reasonably estimated and collectibility is reasonably assured.

Under an agreement with Pfizer dated February 2003, we share
sales and marketing responsibility for sales of Macugen in the
United States. We report product revenue on a gross basis for
these sales. We have determined that we are qualified as a
principal under the criteria set forth in EITF Issue 99-19,
Reporting Gross Revenue as a Principal vs. Net as an
Agent, based on our responsibilities under our contracts
with Pfizer, which include manufacture of product for sale in
the United States, distribution, ownership of product inventory
and credit risk from customers.

We record allowances for distribution fees, product returns and
governmental rebates for all of our products sold in the United
States (currently Macugen and Gelclair) at the time of sale, and
report revenue net of such allowances. We must make significant
judgments and estimates in determining these allowances. For
instance:




    Our distributors have a limited right of return for unopened
    product during a specified time period based on the
    products labeled expiration date. As a result, in
    calculating the allowance for product returns, we estimate the
    likelihood that product sold to distributors might be returned
    within a specific timeframe. We determine our estimates using
    actual product data from distributors, industry data on products
    with similar characteristics and the expiration dates of product
    sold.
    Certain government buying groups that purchase our product from
    wholesalers have the right to receive a discounted price from
    us. As a result, we estimate the amount of product which will
    ultimately be sold to these buying groups. We determine our
    estimates using actual product data from distributors and
    historical industry trends.If actual results differ from our estimates, we will be required
to make adjustments to these allowances in the future.

We defer the recognition of revenue on product shipments of
Gelclair to wholesale customers until such time as the product
is sold from the wholesale customer to the retail and non-retail
outlets. 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.



Collaborative revenueCollaborative program revenues represent funding arrangements
for Macugen R&D with Pfizer and are recognized when earned
in accordance with the terms of the contracts and related
research and development activities undertaken.

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Based on the terms of our collaboration agreement with Pfizer
Inc., revenues derived from reimbursements of costs associated
with the development of Macugen are recorded in compliance with
EITF Issue 99-19, Reporting Revenue Gross as a Principal
Versus Net as an Agent, and EITF
Issue 01-14,
Income Statement Characterization of Reimbursements
Received For
Out-of-Pocket
Expenses Incurred. According to the criteria established
by these EITF Issues, in transactions where we act as a
principal, with discretion to choose suppliers, bear credit risk
and perform part of the services required in the transaction, we
have met the criteria to record revenue for the gross amount of
the reimbursements.



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



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

At December 31, 2005, the cost reflected in a portion of
the finished goods inventory for Tarceva consisted solely of
cost incurred to package and label
work-in-process
inventory that had been previously expensed. As we continue to
process the inventory that was partially produced and expensed
prior to November 18, 2004, we will continue to reflect in
inventory only those incremental costs incurred to complete such
inventory into finished goods.

In November 2005, we recorded finished goods and work-in-process
inventory that we acquired from Eyetech at estimated fair value.
The estimated fair value was determined based on the estimated
selling price of the inventory less costs of disposal and a
reasonable selling profit to both complete and sell the product.
The increase in fair value of the inventory of
$55.3 million will be included in cost of goods when the
acquired inventory is sold in the future.

Macugen inventory is stated at the lower of cost or market, and
our inventory costs are determined using the weighted average
method. Inventory is comprised of three components: raw
materials, which are purchased directly by us, work in process,
which is primarily active pharmaceutical ingredient, or API,
where title has transferred from our contract manufacturer to
us, and finished goods, which is packaged product ready for
commercial sale.

Gelclair inventory is stated at the lower of cost or market, as
determined using the
first-in, first-out
method. During the year ended September 30, 2004, we
recorded a provision of $8.6 million for purchase
commitments and excess inventory that we considered to be in
excess of forecasted future demand based on the expiration date
of the product on hand. In late October 2004, we exercised our
right to terminate our distribution agreement with Helsinn for
Gelclair. The termination was effective January 2005, however,
we are continuing to sell off our remaining inventory per the
agreement. During the three months ended December 31, 2004,
we recorded an adjustment of $1.4 million to

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reduce the previously recorded provision for Gelclair inventory
as a result of a settlement agreement with Helsinn.

Accruals for Clinical
Research Organization and Clinical Site Costs

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

Goodwill and Other
Long-Lived Assets

We account for goodwill and other intangible assets in
accordance with Statements of Financial Accounting Standards, or
SFAS No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations. It
specifies the criteria which intangible assets acquired in a
business combination must meet in order to be recognized and
reported apart from goodwill. SFAS No. 142 requires
that goodwill and intangible assets determined to have
indefinite lives no longer be amortized but instead be tested
for impairment at least annually and whenever events or
circumstances occur that indicate impairment might have
occurred. We completed our annual impairment review of goodwill
at December 31, 2005, 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
most significant intangible asset is for the acquired core and
developed technology related to Macugen. We continually monitor
sales activity and market and regulatory conditions for Macugen
for the existence of any impairment indicators.

In October 2004, we determined that it was necessary to record
an impairment charge as of September 30, 2004 related to
our intangible asset for exclusive distribution rights to the
marketed product, Gelclair, in North America.

In the future, events could cause us to conclude that impairment
indicators exist and that certain other intangibles with
determinable lives and other long-lived assets are impaired
which may result in an adverse impact on our financial condition
and results of operations.

Years Ended December 31, 2005 and 2004

In December 2004, we changed our fiscal year end from
September 30 to December 31. The first fiscal year
(which will henceforth be the calendar year) affected by this
change ended on December 31, 2005. Included in Item 8
of this annual report on
Form 10-K, or the
Form 10-K, are the
consolidated balance sheets at December 31, 2005 and 2004
and the consolidated statements of operations, consolidated
statements of stockholders equity and consolidated
statements of cash flows for the year ended December 31,
2005, for the three-month transition period ending
December 31, 2004, and for the years ended
September 30, 2004 and 2003. In order to provide the reader
meaningful comparison, the following analysis provides
comparison of the audited year ended December 31, 2005 with
the

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unaudited year ended December 31, 2004 derived from the
results of operations of the last nine months of fiscal year
ended September 30, 2004 and the transition quarter ended
December 31, 2004 and the historical analysis for the years
ended September 30, 2004 and 2003.

Results of Operations

Our net losses for the years ended December 31, 2005 and
2004 were $157.1 million and $268.6 million,
respectively. Our results of operations for the year ended
December 31, 2005 include the results of operations of
Eyetech for the period from November 14, 2005, the date of
the acquisition, through December 31, 2005. On an overall
basis, our net loss declined significantly in 2005 as we
recognized the net profits from our Tarceva partnership with
Genentech and royalties from international sales of Tarceva from
Roche. The 2005 net loss included in-process R&D
charges of $64.4 million in connection with the acquisition
of Eyetech and the acquisition of the minority interest shares
in Prosidion. The 2004 net loss included an in process
R&D charge of $32.8 million for the acquisition of
certain assets of Probiodrug AG by Prosidion, a charge of
$24.6 million related to the impairment of the Gelclair
intangible asset and a charge of $7.2 million for excess
inventory.

Revenues

|                                                   |  |                         |         |  |      |   |        |          |  |   |         |  
|-------------------------------------------------- |  | ----------------------- | ------- |  | ---- | - | ------ | -------- |  | - | ------- | -
|                                                   |  | Year Ended December 31, |        
|                                                   |  |                         |        
|                                                   |  | (in thousands)          |        
|                                                   |  |                         |        
|                                                   |  | 2005                    |         |  | 2004 |   |        | $ Change | 
|                                                   |  |                         |         |  |      |   |        |          | 
|Net revenue from unconsolidated
    joint business |  | $                       | 84,727  |  |      | $ |       |          |  | $ | 84,727  |  
|Product sales                                      |  |                         | 32,411  |  |      |   | 1,285  |          |  |   | 31,126  |  
|Royalties on product sales                         |  |                         | 7,127   |  |      |   |       |          |  |   | 7,127   |  
|Sales commissions                                  |  |                         | 29,684  |  |      |   | 35,855 |          |  |   | (6,171  | )
|License, milestone and other
    revenues          |  |                         | 16,164  |  |      |   | 6,616  |          |  |   | 9,548   |  
|Collaborative program revenues                     |  |                         | 4,081   |  |      |   |       |          |  |   | 4,081   |  
|                                                   |  |                         |         |  |      |   |        |          | 
|Total revenues                                     |  | $                       | 174,194 |  |      | $ | 43,756 |          |  | $ | 130,438 |  
|                                                   |  |                         |         |  |      |   |        |          | 



| |                                               
| | ----------------------------------------------
| | Net Revenue from Unconsolidated Joint Business





| |              
| | -------------
| | Product Sales



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Royalties on Product SalesWe receive royalties on the sales of Tarceva and Macugen outside
of the United States and its territories. In September 2005,
Roche received approval from the European Commission for the
sale of Tarceva in the EU for the treatment of patients with
locally advanced or metastatic NSCLC. Tarceva was approved for
this indication by the Swiss health authority, Swissmedic, in
March 2005 and by Health Canada in July 2005. Our partner,
Roche, began selling in Switzerland and Canada in March 2005 and
July 2005, respectively. For the twelve months ended
December 31, 2005, Roche recorded $34.0 million in net
sales of Tarceva outside of the United States and its
territories, of which we recorded $7.0 million in royalty
revenues. Macugen royalties on rest of world sales were $141,000
from November 14, 2005, to December 31, 2005, and are
included in royalties on product sales for the twelve months
ended December 31, 2005. Macugen was approved for marketing
and sale in the EU in February 2006 and we expect our partner,
Pfizer, to launch Macugen in the EU in May 2006.



Sales CommissionsSales commissions represent commissions earned on the sales of
Novantrone in the United States for oncology indications. Sales
commissions for the years ended December 31, 2005 and 2004,
were $29.7 million and $35.9 million, respectively.
Sales commissions were lower compared to the prior year period
and are expected to be significantly lower in 2006 as we
approach patent expiration in April 2006. The expiration of a
product patent normally results in a loss of market exclusivity
for the covered pharmaceutical product; therefore, we expect a
significant decrease in our commissions related to Novantrone as
we approach patent expiration or shortly thereafter as a result
of an expected decrease in oncology sales. We also believe that
a worsening reimbursement environment under the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 may
have contributed to the decrease in the current period.



License, Milestone and Other RevenuesWe recognized $16.2 million of license, milestone and other
related revenues for the year ended December 31, 2005, of
which $14.2 million related to upfront fees and milestone
payments relating to worldwide non-exclusive license agreements
entered into by Prosidion under our DPIV patent portfolio
covering the use of DPIV inhibitors for treatment of type 2
diabetes and related indications. Also included in license and
milestone revenues is the recognition of the ratable portion of
the $25.0 million upfront fees from Genentech and the
ratable portion of the $42.0 million of milestone payments
received from Genentech and Roche to date in connection with
various regulatory acceptances and approvals for Tarceva in the
United States and Europe. These payments were initially deferred
and are being recognized as revenue in accordance with
EITF 00-21. The
ratable portion of these upfront fees and milestone payments for
the years ended December 31, 2005 and 2004 were
$1.6 million and $6.3 million, respectively. The
unrecognized deferred revenue related to these upfront fees and
milestone payments received from Genentech and Roche was
$42.0 million and $18.7 million as of
December 31, 2005 and 2004, respectively.

Upon regulatory approvals and filings subsequent to
December 31, 2005, additional milestone payments will be
due from Genentech, Roche and Pfizer. Future milestone payments
will be due from Roche upon the successful approval of Tarceva
in a second oncology indication in the EU. Additional milestone
payments will be due from Genentech and Roche upon approval of
adjuvant indications in the United States and Europe. Additional
milestone payments will be paid by Roche upon registration of
Tarceva in Japan. Milestone payments will be due from Pfizer
based on the launch of Macugen in the EU and future approvals of
Macugen for additional indications beyond the treatment of wet
AMD. The ultimate receipt of these additional milestone payments
is contingent upon the applicable regulatory approvals and other
future events.

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Collaborative Program RevenuesCollaborative program revenues represents reimbursement of a
portion of research and development costs for Macugen under our
collaboration agreement with Pfizer for the period
November 14, 2005 through December 31, 2005, and
totaled $4.1 million.

Expenses

|                                                   |  |                         |         |  |      |   |         |          |  |   |         |  
|-------------------------------------------------- |  | ----------------------- | ------- |  | ---- | - | ------- | -------- |  | - | ------- | -
|                                                   |  | Year Ended December 31, |        
|                                                   |  | (in thousands)          |        
|                                                   |  |                         |        
|                                                   |  | 2005                    |         |  | 2004 |   |         | $ Change | 
|                                                   |  |                         |         |  |      |   |         |          | 
|Cost of goods sold                                 |  | $                       | 18,882  |  |      | $ | 7,627   |          |  | $ | 11,255  |  
|Collaborative profit share                         |  |                         | 12,312  |  |      |   |        |          |  |   | 12,312  |  
|Net expense from unconsolidated
    joint business |  |                         |        |  |      |   | 7,661   |          |  |   | (7,661  | )
|Research and development                           |  |                         | 125,953 |  |      |   | 118,204 |          |  |   | 7,749   |  
|Acquired in-process research and
    development   |  |                         | 64,442  |  |      |   | 32,785  |          |  |   | 31,657  |  
|Selling, general and administrative                |  |                         | 98,393  |  |      |   | 98,403  |          |  |   | (10     | )
|Impairment of intangible asset                     |  |                         |        |  |      |   | 24,599  |          |  |   | (24,599 | )
|Amortization of intangibles                        |  |                         | 17,544  |  |      |   | 17,572  |          |  |   | (28     | )
|                                                   |  |                         |         |  |      |   |         |          | 
|                                                   |  | $                       | 337,526 |  |      | $ | 306,851 |          |  | $ | 30,675  |  
|                                                   |  |                         |         |  |      |   |         |          | 



| |                   
| | ------------------
| | Cost of Goods Sold



step-up




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For the years ended December 31, 2005 and 2004, Gelclair
cost of goods sold were $500,000 and $7.6 million,
respectively. The decrease in cost of goods for the year ended
December 31, 2005 compared to the prior year is primarily
related to a provision of $7.2 million for Gelclair
inventory that we deemed in excess of forecasted demand, based
on the expiration date of the product.



Collaborative Profit ShareCollaboration profit sharing represents Pfizers share of
net product sales of Macugen less cost of goods sold within the
United States for the period between November 14, 2005 and
December 31, 2005. Under our agreements with Pfizer, we
will share profits and losses from the commercialization of
Macugen in the United States until the later of 15 years
after commercial launch in the United States and the expiration
of the Unites States patent rights for Macugen.



Net Expense from Unconsolidated Joint BusinessNet expense from unconsolidated joint business is related to our
co-promotion and manufacturing agreements with Genentech for
Tarceva. It consists of our share of the pretax co-promotion
loss generated from our co-promotion arrangement with Genentech
for Tarceva, the partial reimbursement from Genentech of our
sales and marketing costs related to Tarceva, and the
reimbursement from Genentech of our manufacturing costs related
to Tarceva. For the period from the product launch on
November 22, 2004, through December 31, 2004,
Genentech recorded $13.3 million in net sales of Tarceva in
the United States and its territories. The resulting net expense
from unconsolidated joint business of $7.7 million was due
to the significant costs we, along with Genentech, incurred on
the sales and marketing of Tarceva during the period. In 2005,
this joint business turned profitable, and is reflected in net
revenue from unconsolidated joint business.



Research and DevelopmentWe consider the active management and development of our
clinical pipeline crucial to the long-term process of getting a
clinical candidate approved by the regulatory authorities and
brought to market. We manage our overall research, development
and in-licensing efforts in a manner designed to generate a
constant flow of clinical candidates into development to offset
both the advancement of products to the market and the
anticipated attrition rate of drug candidates that fail in
clinical trials or are terminated for business reasons. The
duration of each phase of clinical development and the
probabilities of success for approval of drug candidates
entering clinical development will be impacted by a variety of
factors, including the quality of the molecule, the validity of
the target and disease indication, early clinical data,
investment in the program, competition and commercial viability.
Because we manage our pipeline in a dynamic manner, it is
difficult to give accurate guidance on the anticipated
proportion of our research and development investments assigned
to any one program prior to the Phase III stage of
development, or to the future cash inflows from these programs.
For the years ended December 31, 2005 and 2004, we invested
a total of $48.3 million and $53.6 million,
respectively, in research and $77.6 million and
$64.6 million, respectively, in pre-clinical and clinical
development. We consider this level of investment suitable for a
company with our pipeline of clinical and pre-clinical
candidates.

Research and development expenses increased $7.7 million
for the year ended December 31, 2005 compared to the year
ended December 31, 2004. The increase was primarily due to
$9.3 million of research and development expenses related
to the programs we acquired from Eyetech on November 14,
2005. These expenses reflect the expenses incurred between
November 14, 2005 and December 31, 2005. The increase
is also associated with an increase in expenses related to our
diabetes research, offset by a decrease in oncology expenses.
Development costs associated with our diabetes pre-clinical and
clinical pipeline, including PSN9301, PSN357, and PSN010,
increased $20.7 million for the year ended
December 31, 2005 over the prior year. In January 2005, we
initiated a Phase II
proof-of-concept and
dose range finding study for our DPIV inhibitor, PSN9301.
Offsetting this increase was a $19.7 million net decrease
in our oncology research and development programs primarily

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associated with the decision to de-prioritize or cease
development of our clinical candidates, OSI-7904L and OSI-461,
and the consolidation of our U.K.-based oncology activities into
our New York locations, and the $4.7 million of related
realignment charges recorded in the year ended December 31,
2004.

We manage the ongoing development program for Tarceva with our
partners, Genentech and Roche, through a global development
committee under a Tripartite Agreement among the parties.
Together with our partners, we have implemented a broad-based
global development strategy for Tarceva that implements
simultaneous clinical programs currently designed to expand the
number of approved indications of Tarceva and evaluate the use
of Tarceva in new and/or novel combinations. Our global
development plan has included major Phase III clinical
trials in lung and pancreatic cancer in the past, and currently
includes additional major Phase III clinical trials in lung
cancer in the maintenance and adjuvant settings. Since 2001, the
partners have committed approximately $600 million combined
in the global development plan to be shared equally by the three
parties. As of December 31, 2005, we have invested in
excess of $141.0 million in the development of Tarceva,
representing our share of the costs incurred to date in the
tripartite global development plan and additional investments
outside of the plan.

We manage the ongoing development program for Macugen with
Pfizer through a collaboration entered into in December 2002
whereby the parties jointly develop Macugen for the prevention
and treatment of diseases. Our current development program
includes major Phase III clinical trials in age-related
macular degeneration and diabetic macular edema. For the period
between November 14, 2005, the date of our Eyetech
acquisition, and December 31, 2005, we have invested
$9.3 million in the development of Macugen, of which
$4.1 million has been reimbursed by Pfizer. Together with
Pfizer, we have committed a combined $52 million in 2006
for the ongoing development of Macugen.



Acquired In-Process Research and DevelopmentIn connection with the acquisition of Eyetech in November 2005,
we recorded an in-process R&D charge of $60.9 million
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 2(a) to the
accompanying consolidated financial statements).

We also recognized in-process R&D charges of
$3.5 million in connection with the acquisition of the
minority interest shares in Prosidion in calendar 2005, and
$32.8 million in connection with the acquisition of
Probiodrug in calendar 2004.



Selling, General and AdministrativeSelling, general and administrative expenses for the years
ending December 31, 2005 and 2004 remained constant at
$98.4 million. However, expenses increased by
$9.2 million as a result of the Eyetech acquisition on
November 14, 2005. These expenses reflect the expenses
incurred between November 14, 2005 and December 31,
2005. This increase was primarily offset by our share of
Genentechs commercial expenses relating to Tarceva no
longer being included in selling, general and administrative
expense and now being included as part of the co-promotion
profit and included in the calculation of net revenues from
unconsolidated joint business in the accompanying consolidated
statement of operations for the year ended December 31,
2005. The year ended December 31, 2005 also included a
charge of $4.2 million for estimated facility lease return
costs and the remaining rental obligations net of estimated
sublease rental income for the unused portion of our Oxford
facility resulting from the consolidation of our U.K.-based
oncology operations. The year ended December 31, 2004
included a charge of $1.8 million for the remaining rental
obligations net of estimated sublease rental income for our
Horsham, Pennsylvania facility which we assumed as part of the
Cell Pathways acquisition in June 2003.

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Impairment of Intangible AssetIn connection with our acquisition of Cell Pathways, we assumed
the exclusive rights to market and distribute Gelclair in North
America. We recorded an identifiable intangible asset of
$29.0 million which was being amortized over eight and a
half years, representing the remaining term of the agreement. We
assess the potential impairment of our long-lived asset under
the provisions of SFAS No. 144. In performing the
recoverability test prescribed by SFAS No. 144, we
determined that the total of the expected future undiscounted
cash flows directly related to the Gelclair asset was less than
the carrying value of the Gelclair asset. As a result an
impairment charge was required. The amount of the impairment
charge represents the difference between the fair value of the
intangible asset and its associated carrying value. We
calculated the fair value of the intangible asset using
discounted cash flows. The discounted cash flows calculation was
made utilizing various assumptions and estimates regarding
future revenues and expenses, cash flow and discount rates.
Based on these calculations, we determined that an impairment
charge of $24.6 million, which represented the full
unamortized balance of the Gelclair intangible asset, was
necessary as of September 30, 2004. The impairment charge
resulted from both the discontinuance of discussions with a
replacement dental partner and slower than originally expected
sales growth in the oncology marketplace.



Amortization of IntangiblesAmortization expense for the year ended December 31, 2005
and 2004 was $17.5 million and $17.6 million,
respectively. In 2005, we recorded amortization expense of
$2.3 million related to Macugen, and the related technology
platform and patent estate of $201.4 million acquired in
the Eyetech acquisition. The core technology is being amortized
over the estimated useful life of 11 years. Amortization
expense for our rights to Novantrone were $14.9 million in
each of 2005 and 2004. At December 31, 2005, we revised the
future recoverability period of Novantrone intangible asset to
extend through the end of 2008, and will amortize the remaining
balance on a straight line basis.

Other Income and Expense

|                              |  |                         |        |   |      |   |         |          |  |   |        |  
|----------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | -------- |  | - | ------ | -
|                              |  | Year Ended December 31, |       
|                              |  | (in thousands)          |       
|                              |  |                         |       
|                              |  | 2005                    |        |   | 2004 |   |         | $ Change | 
|                              |  |                         |        |   |      |   |         |          | 
|Investment income-net         |  | $                       | 13,322 |   |      | $ | 6,152   |          |  | $ | 7,170  |  
|Interest expense              |  |                         | (5,065 | ) |      |   | (11,835 | )        |  |   | 6,770  |  
|Other income (expenses)-net   |  |                         | (2,048 | ) |      |   | 146     |          |  |   | (2,194 | )
|                              |  |                         |        |   |      |   |         |          | 
|Total other income (expenses) |  | $                       | 6,209  |   |      | $ | (5,537  | )        |  | $ | 11,746 |  
|                              |  |                         |        |   |      |   |         |          | 





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ber 31, 2004 included interest expense on both the 2009
Notes and 2023 Notes, as well as a charge of $3.7 million
representing the guaranteed interest on the 2009 Notes upon the
conversion of the 2009 Notes in July 2004. Other income
expense-net for the periods include the amortization of debt
issuance costs related to the convertible senior subordinated
note, losses on derivatives and other miscellaneous income and
expense items.

Years Ended September 30, 2004 and 2003

Results of Operations

Our fiscal 2004 net loss of $260.4 million increased
$79.0 million compared to our fiscal 2003 net loss of
$181.4 million. The fiscal 2004 net loss included an
in-process R&D charge of $32.8 million in connection
with the acquisition of certain assets of Probiodrug by
Prosidion, a charge of $24.6 million related to the
impairment of the Gelclair intangible asset and a charge of
$8.6 million for excess inventory. The fiscal 2003 net
loss included an in-process R&D charge of $31.5 million
in connection with the acquisition of Cell Pathways.

Revenues

|                                          |  |                          |        |  |      |   |        |          |  |   |        |  
|----------------------------------------- |  | ------------------------ | ------ |  | ---- | - | ------ | -------- |  | - | ------ | -
|                                          |  | Year Ended September 30, |       
|                                          |  | (in thousands)           |       
|                                          |  |                          |       
|                                          |  | 2004                     |        |  | 2003 |   |        | $ Change | 
|                                          |  |                          |        |  |      |   |        |          | 
|Product sales                             |  | $                        | 1,235  |  |      | $ | 437    |          |  | $ | 798    |  
|Sales commissions                         |  |                          | 34,290 |  |      |   | 16,289 |          |  |   | 18,001 |  
|License, milestone and other
    revenues |  |                          | 7,275  |  |      |   | 6,088  |          |  |   | 1,187  |  
|Collaborative revenues                    |  |                          |       |  |      |   | 9,555  |          |  |   | (9,555 | )
|                                          |  |                          |        |  |      |   |        |          | 
|Total revenues                            |  | $                        | 42,800 |  |      | $ | 32,369 |          |  | $ | 10,431 |  
|                                          |  |                          |        |  |      |   |        |          | 





| |              
| | -------------
| | Product Sales





| |                  
| | -----------------
| | Sales Commissions



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License, Milestone and Other RevenuesLicense revenues consisted principally of the recognition of the
$25.0 million upfront fees from Genentech and Roche over
the expected term of the collaboration. We recognized
$4.0 million and $5.0 million in license revenue in
fiscal 2004 and 2003, respectively, relating to these upfront
fees. License fees in fiscal 2003 also included recognition of
the remaining $875,000 of the $3.5 million upfront fee
received from Tanabe Seiyaku Co., Ltd. relating to the research
collaboration that expired on October 1, 2003.

In the fourth quarter of fiscal 2004, we recognized
$3.0 million in milestone revenues from our partner Roche
based upon the EMEAs notice of acceptance for filing and
review of our NDA for the use of Tarceva as a monotherapy for
the treatment of patients with advanced NSCLC patients who have
failed at least one chemotherapy regimen.

In the fourth quarter of fiscal 2004, we also received a
$7.0 million milestone payment from Genentech based upon
the FDAs notice of acceptance for filing and review of our
NDA for the use of Tarceva as a monotherapy for the treatment of
NSCLC patients who have failed at least one chemotherapy
regimen. As a result of the amendment to the OSI/ Genentech
agreement in June 2004, we were required to account for the
Genentech milestone received and the remaining unearned upfront
fee of approximately $1.8 million, in accordance with
EITF 00-21,
Revenue Arrangements with Multiple Deliverables.
Milestones received from Genentech and the remaining unearned
upfront fee will be recognized over the term of the
manufacturing and supply agreement between Genentech and us.



Collaborative Program RevenuesCollaborative program revenues represent funding arrangements
for research and development in the field of biotechnology and
are recognized when earned in accordance with the terms of the
contracts and the related development activities undertaken.
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 in October 2003.

Expenses

|                                                 |  |                          |         |  |      |   |         |          |  |   |        | 
|------------------------------------------------ |  | ------------------------ | ------- |  | ---- | - | ------- | -------- |  | - | ------ | 
|                                                 |  | Year Ended September 30, |        
|                                                 |  | (in thousands)           |        
|                                                 |  |                          |        
|                                                 |  | 2004                     |         |  | 2003 |   |         | $ Change | 
|                                                 |  |                          |         |  |      |   |         |          | 
|Cost of goods sold                               |  | $                        | 8,985   |  |      | $ | 157     |          |  | $ | 8,828  | 
|Research and development                         |  |                          | 110,398 |  |      |   | 102,642 |          |  |   | 7,756  | 
|Acquired in-process research and
    development |  |                          | 32,785  |  |      |   | 31,451  |          |  |   | 1,334  | 
|Selling, general and administrative              |  |                          | 98,909  |  |      |   | 70,532  |          |  |   | 28,377 | 
|Impairment of intangible asset                   |  |                          | 24,599  |  |      |   |        |          |  |   | 24,599 | 
|Amortization of intangibles                      |  |                          | 18,606  |  |      |   | 9,300   |          |  |   | 9,306  | 
|                                                 |  |                          |         |  |      |   |         |          | 
|                                                 |  | $                        | 294,282 |  |      | $ | 214,082 |          |  | $ | 80,200 | 
|                                                 |  |                          |         |  |      |   |         |          | 



| |                   
| | ------------------
| | Cost of Goods Sold



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fourth quarter of fiscal 2004, we recorded an additional
provision of $6.6 million in relation to inventory on-hand
and 2004 and 2005 purchase commitments with Helsinn that we
deemed in excess of forecasted demand, based on the expiration
date of the product. This additional provision related to
$1.7 million of inventory on hand and $4.9 million of
purchase commitments. This excess inventory relates to the
inventory obtained from the Cell Pathways acquisition and the
required purchase commitments that we assumed in the Cell
Pathways acquisition and the low demand for the product.
Excluding the provision for obsolete inventory, cost of product
sales were $420,000 and $157,000 in fiscal 2004 and 2003,
respectively, or approximately one-third of product sales.



Research and DevelopmentFor fiscal 2004, we invested a total of $52.4 million in
research and $58.0 million in pre-clinical and clinical
development. For fiscal 2003, we invested a total of
$46.5 million in research and $56.1 million in
pre-clinical and clinical development. The marginal increase in
the research and development expense for fiscal 2004 was
primarily due to costs associated with the clinical development
of our pipeline, including increases for the development of
OSI-7904L, OSI-930, OSI-461 and Aptosyn, of $12.1 million,
as well as an increased investment in Prosidion of
$5.6 million. R&D expenses related to Prosidion for
fiscal 2004 were $12.7 million compared to expenses of
$7.1 million in fiscal 2003. Included in Prosidions
R&D expenses in fiscal 2004 was a $2.0 million
termination fee (paid in cash and Prosidion stock) to Tanabe
relating to a termination agreement with Tanabe, whereby
Prosidion obtained the rights to certain compounds and patents
developed under the collaboration. Tanabe retained the rights to
develop and commercialize, in certain Asian territories,
compounds covered by such patents. Prosidion was also required
to make payments to Tanabe upon the achievement of certain
milestones. Also included in research and development expense
for fiscal 2004 was $3.0 million relating to termination
benefits paid to employees and $1.7 million relating to the
acceleration of certain leasehold improvements, in connection
with our decision to consolidate our U.K.-based oncology
research and development activities into our New York locations.
These increases to research and development expense in fiscal
2004 were offset by a decrease in the development expense of
Tarceva of $8.2 million due to the completion of the
Phase III trials in NSCLC and pancreatic cancer, as well as
decreased investment in the OSI-211 and OSI-7836 programs of
approximately $6.1 million. In fiscal 2004, we decided to
halt the further development of OSI-211, since we were unable to
differentiate the program from a current competitors
product, and OSI-7836, since we were unable to overcome certain
toxicity issues.



Acquired In-Process Research and DevelopmentIn connection with the acquisition of certain assets from
Probiodrug by Prosidion in July 2004, we recorded an in-process
R&D charge of $32.8 million in fiscal 2004,
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 2(b) to the
accompanying consolidated financial statements). The in-process
R&D charge was assigned to the development project PSN9301,
which is recognized as an important target in diabetes.

In connection with the acquisition of Cell Pathways in June
2003, we recorded an in-process R&D charge of
$31.5 million during fiscal 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 2(d) to the accompanying
consolidated financial statements). The in-process R&D
charge was assigned to the two development projects and related
technology platform and patent estate, Aptosyn
($3.7 million) and OSI-461 ($27.8 million) based on
their value on the date of the acquisition.



Selling, General and AdministrativeThe increase in selling, general and administrative expenses of
$28.4 million during fiscal 2004 reflects increased
investment in our commercial infrastructure as we prepared for
the launch of Tarceva, as well as our continued investment in
supporting our other commercial and pipeline pro-

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grams. For fiscal 2004, our commercial operation expenses
increased approximately $17.9 million compared to fiscal
2003. The most significant component of our investment was
commercialization and marketing costs relating to Tarceva which
were shared with Genentech in accordance with the terms of our
collaboration. The increase in commercial cost was also due to
additional management and personnel relating to the
establishment of a commercial operation to support Tarceva,
Gelclair and Novantrone, as well as an additional two quarters
of maintenance fees paid to Serono relating to Novantrone. Also
included in selling, general and administrative expenses for
fiscal 2004 were exit costs of $4.8 million relating to
remaining rental obligations for our Horsham, Pennsylvania and
Uniondale, New York facilities, termination benefits to
employees relating to the consolidation of our U.K.-based
oncology research and development activities and the
acceleration of depreciation of certain equipment and leasehold
improvements at our Oxford and Uniondale facilities. Included in
selling, general and administrative expenses for fiscal 2003
were fees paid to Serono for transition services provided by
them after our acquisition of the Novatrone rights, fees paid to
Celgene Corporation in connection with our recovery of the full
rights to market and distribute Gelclair in North America, and
subcontracting expenses related to our transitional arrangement
with a contract sales organization as we were building our
commercial infrastructure.



Impairment of Intangible AssetIn connection with our acquisition of Cell Pathways, we assumed
the exclusive rights to market and distribute Gelclair in North
America. We recorded an identifiable intangible asset of
$29.0 million, which was being amortized over eight and a
half years, the remaining term of the agreement. We assess the
potential impairment of our long-lived assets, under the
provisions of SFAS No. 144. In performing such
recoverability test we determined that the total of the expected
future undiscounted cash flows directly related to the Gelclair
asset was less than the carrying value of the Gelclair asset. As
a result an impairment charge was required. The amount of the
impairment charge represents the difference between the fair
value of the intangible asset and its associated carrying value.
We calculated the fair value of the intangible asset using
discounted cash flows. The discounted cash flows calculation was
made utilizing various assumptions and estimates regarding
future revenues and expenses, cash flow and discount rates.
Based on these calculations, we determined that an impairment
charge of $24.6 million, which represented the full
unamortized balance of the Gelclair intangible asset, was
necessary as of September 30, 2004. The impairment charge
is non-cash and has not and will not result in future cash
expenditures. The impairment charge resulted from discontinuance
of discussions with a replacement dental partner, and slower
than originally expected sales growth in the oncology
marketplace.



Amortization of IntangiblesThe increase of $9.3 million in fiscal 2004 was primarily
related to amortization expense related to our rights to
Novantrone acquired in March 2003 and to Gelclair acquired in
June 2003. As noted above, in the fourth quarter of fiscal 2004,
we recorded an impairment charge for the remaining carrying
value of the Gelclair rights as of September 30, 2004.

Other Income and Expense

|                              |  |                          |         |   |      |   |        |          |  |   |        |  
|----------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | -------- |  | - | ------ | -
|                              |  | Year Ended September 30, |        
|                              |  | (in thousands)           |        
|                              |  |                          |        
|                              |  | 2004                     |         |   | 2003 |   |        | $ Change | 
|                              |  |                          |         |   |      |   |        |          | 
|Investment income-net         |  | $                        | 5,259   |   |      | $ | 7,808  |          |  | $ | (2,549 | )
|Interest expense              |  |                          | (13,436 | ) |      |   | (6,715 | )        |  |   | (6,721 | )
|Other expenses-net            |  |                          | (712    | ) |      |   | (737   | )        |  |   | 25     |  
|                              |  |                          |         |   |      |   |        |          | 
|Total other income (expenses) |  | $                        | (8,889  | ) |      | $ | 356    |          |  | $ | (9,245 | )
|                              |  |                          |         |   |      |   |        |          | 

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The decrease in investment income in fiscal 2004 from fiscal
2003 was primarily due to a decrease in the funds available for
investment and a decrease in the average rate of return on our
investments during these respective years. The increase in
interest expense in fiscal 2004 resulted from interest on the
2023 Notes that we issued in September 2003, as well as the
guaranteed interest on the 2009 notes that were converted into
common stock in July 2004. 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 the remainder of this
guaranteed interest on June 18, 2004, the date we called
the notes for redemption. Upon the conversion of the 2009 notes,
we issued 3.2 million shares of our common stock in July
2004 and recorded a charge of $3.7 million representing the
guaranteed interest on the 2009 notes. This resulted in an
additional interest charge of $2.1 million in fiscal 2004
representing the portion of the guaranteed interest from
October 1, 2004 to February 1, 2005. Included in other
expenses-net for fiscal 2004 and 2003 were amortization of debt
issuance costs of $1.7 million and $834,000, respectively,
related to the convertible senior subordinated notes. The
increase in the amortization of debt issuance costs related to
the 2023 Notes. The debt issuance costs are being amortized over
a period of five years, which represents the earliest date that
we may redeem the notes. Upon the conversion of the 2009 notes,
the unamortized balance of the debt issuance costs of
$3.7 million was reclassified to additional paid in
capital. Also included in other expenses-net for fiscal 2004 is
minority interest in the net losses of Prosidion of $907,000. As
of September 30, 2004, the minority interests represented
approximately 3% ownership of Prosidion.

Liquidity and Capital Resources

At December 31, 2005, cash and investments, including
restricted securities, was $179.7 million compared to
$651.5 million at December 31, 2004. The decrease of
$471.8 million was primarily due to the following changes
in working capital: (i) net cash of $430.2 million
used in the acquisition of Eyetech in November, 2005, net of
cash acquired, (ii) net cash of $114.8 million used in
operating activities and (iii) capital expenditures of
$26.7 million. The decrease in working capital was offset
by net proceeds of $111.0 million in connection with the
issuance of $115.0 million of convertible senior
subordinated notes in December, 2005, of which
$24.0 million was used to purchase common stock and call
spread options.

On November 12, 2004, during the transition quarter, we
concluded a public offering of 6.0 million shares of our
common stock at a price of $64.50 per share. Gross proceeds
totaled $387.0 million with net proceeds of approximately
$365.0 million after all related fees. In addition, on
November 17, 2004, underwriters associated with the
offering exercised their over-allotment option to purchase an
additional 900,000 shares of our common stock at a price of
$64.50 per share. Gross proceeds from the exercise of the
over-allotment option totaled $58.1 million with net
proceeds of approximately $54.9 million.

On November 14, 2005, we acquired all outstanding shares of
Eyetech common stock at a purchase price of $15.00 in cash and
0.12275 shares of OSI common stock. The acquisition reduced
the net cash and cash equivalents and investments by
approximately $430.2 million.

On December 21, 2005, we issued convertible notes (2025
Notes) in a private placement resulting in net proceeds to us of
$96.5 million. On December 28, 2005, the investment
bankers associated with this convertible debt offering exercised
an option to purchase an additional $15.0 million of the
2025 Notes, resulting in an additional net proceeds to us of
$14.5 million. The 2025 Notes bear interest at
2.00% per annum, payable semi-annually in arrears, and
mature on December 15, 2025. We used a part of the net
proceeds to (i) purchase through the initial purchaser or
its affiliates, concurrently with the offering,
500,000 shares of our common stock for $11.8 million,
and (ii) pay approximately $12.2 million to purchase a
call spread option with respect to the our common stock. The
call spread is a European type option with a lower strike price
of $29.425 and an upper strike price of $40.00 and involves an
aggregate of 3.4 million shares of our common stock and
expires on December 15, 2010. This would have the impact of
increasing the effective conversion price of the 2025 Notes from
the

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companys perspective to $40.00 per share,
representing a conversion premium of approximately 70% to the
per share closing price on December 21, 2005.

We estimate that over the next twelve to eighteen months,
assuming we are able to execute on our internal plans, including
our strategy to position Macugen as a safe and effective agent
that can be used as chronic maintenance therapy in the long-term
treatment of wet AMD and as primary treatment for patients with
high cardiovascular risk, our cash flow will become positive,
but will fluctuate on a quarter-by-quarter basis. However, there
continues to be risk that we will not be able to execute on our
internal plans. Tarceva, while expected to achieve significant
revenues on a worldwide basis and therefore generate significant
levels of cash flow for us, potentially faces emerging
competition in the United States over the long term and is in
the early stages of gaining acceptance in markets outside of the
United States including the EU and, in 2007, Japan. Macugen is
facing intense competition from the continued off-label use of
Avastin in the treatment of wet AMD and will face additional
competition from Lucentis, which we anticipate will launch as
early as July 2006. We believe we have developed a strategy to
meet Macugens competitive threats. In addition, barriers
to the reimbursement of off-label Avastin for the treatment of
wet AMD should slow its use. However, if we are unsuccessful in
executing this strategy, our ability to generate positive cash
flow in 2006 will be impacted and we may not achieve
profitability by the end of 2006 as originally expected. We
believe that we can manage Macugen and the related eye disease
franchise of Eyetech in a cash flow positive manner in 2007 and
beyond. However, it is difficult to estimate the impact of
competition from Avastin and Lucentis on our future revenues for
Macugen.

If we are able to execute on our internal plans, we expect that
our R&D investments and capital requirements over the next
twelve to eighteen months can be funded from the generation of
cash flow and partnering activities. However, due to the
expected fluctuation of cash flow, we may choose to access a
borrowing facility on a short-term basis to bridge any
difference between cash availability and cash needs. As such, on
December 14, 2005, we signed a commitment letter with our
commercial banking partner JPMorgan Chase Bank, N.A. for a
$75.0 million senior secured revolving credit facility. The
terms of the Revolving Credit Facility are currently being
negotiated and if negotiations are successful, it is expected
that the facility will be available to us in the second quarter
of 2006.

As previously stated, we are currently transitioning from an
R&D stage company, fully dependent on the capital markets
for liquidity and capital resources, to a fully integrated and
profitable biopharmaceutical company. When this transition is
complete, we anticipate funding the majority, if not all of our
liquidity and capital needs from the generation of cash flow
from operations, with the potential exception of strategic
acquisitions of products and/or businesses.

Summary of Cash Flows

The following table summarizes our cash flows for year ended
December 31, 2005, the three months ended December 31,
2004, and the years ended September 30, 2004 and
September 30, 2003 (in thousands):

|                                                         |  |              |          |              |              |   |          |               |  |   |               |   |  |   |          |  
|-------------------------------------------------------- |  | ------------ | -------- | ------------ | ------------ | - | -------- | ------------- |  | - | ------------- | - |  | - | -------- | -
|                                                         |  |              |          | Three Months |              |   |          |               | 
|                                                         |  | Year Ended   |          |              | Ended        |   |          | Year Ended    |  |   | Year Ended    |  
|                                                         |  | December 31, |          |              | December 31, |   |          | September 30, |  |   | September 30, |  
|                                                         |  | 2005         |          |              | 2004         |   |          | 2004          |  |   | 2003          |  
|                                                         |  |              |          |              |              |   |          |               |  |   |               |  
|Cash provided by (used in):                              |  |              |          |              |              |   |          |               |  |   |               |   |  |   |          |  
|Operating activities                                     |  | $            | (114,819 | )            |              | $ | (31,793  | )             |  | $ | (144,908      | ) |  | $ | (147,784 | )
|Investing activities                                     |  |              | (148,742 | )            |              |   | (155,961 | )             |  |   | (11,987       | ) |  |   | 65,162   |  
|Financing activities                                     |  |              | 99,440   |              |              |   | 431,007  |               |  |   | 39,134        |   |  |   | 132,586  |  
|                                                         |  |              |          |              |              |   |          |               |  |   |               |  
|Net (decrease) increase in cash and
    cash equivalents |  | $            | (164,121 | )            |              | $ | 243,253  |               |  | $ | (117,761      | ) |  | $ | 49,964   |  
|                                                         |  |              |          |              |              |   |          |               |  |   |               |  

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Included in cash used in operating activities are fluctuations
in the timing of cash disbursements and receipts, as well as
increases in operating expenses, and increases in revenues. For
the year ended December 31, 2005, revenues were
significantly higher than prior periods reflecting first year
revenues of $84.7 million for Tarceva unconsolidated joint
business revenue in the United States, first year Tarceva rest
of world royalties of $7.0 million, and Macugen sales for
the period November 14, 2005 through December 31, 2005
of $31.5 million.

Included in cash provided by (used in) investing activities are
net payments related to the acquisitions of (i) Eyetech for
$430.2 million and the Prosidion minority interest buyback
for $0.8 million for the year ended December 31, 2005,
(ii) the DPIV assets of Probiodrug for $36.4 million
for the year ended September 30, 2004, and (iii) the
Novantrone rights for $46.0 million for the year ended
September 30, 2003.

Included in cash provided by financing activities are net
proceeds of (i) net proceeds of $111.0 million in
connection with the issuance of $115.0 million of
convertible senior subordinated notes in December 2005, of which
$24.0 million was used to repurchase common stock and a
call spread option. (ii) $419.6 million related to the
issuance of 6.9 million shares in a public offering for the
three months ended December 31, 2004,
(iii) $39.3 million relating primarily to the exercise
of stock options for the year ended September 30, 2004, and
(iv) $131.0 million (net of purchase of treasury stock)
relating to the issuance convertible senior subordinated notes
for the year ended September 30, 2003.

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 December 31, 2005 and the effect such
obligations are expected to have on our liquidity and cash flow
in future periods (in thousands):

|                              |                                               |                         |        |       |        |   |        |       |        |   |        |        |        |      |        |       |            |   |        |       |       |   |         |         |        |   |         |         |         | 
|----------------------------- | --------------------------------------------- | ----------------------- | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ------ | ------ | ---- | ------ | ----- | ---------- | - | ------ | ----- | ----- | - | ------- | ------- | ------ | - | ------- | ------- | ------- | 
|                              |                                               |                         |        |       |        |   |        |       |        |   |        | 2011 & |        |      |       
|                              |                                               | 2006                    |        |       | 2007   |   |        | 2008  |        |   | 2009   |        |        | 2010 |        |       | Thereafter |   |        | Total |      
|                              |                                               |                         |        |       |        |   |        |       |        |   |        |        |        |      |        |       |            |   |        |       |      
|Contractual Obligations:      |                                               |                         |        |       |        |   |        |       |        |   |        |        |        |      |        |       |            |   |        |       |       |   |         |         |        |   |         |        
|                              | Senior convertible debt(a)                    |                         | $      | 7,175 |        |   | $      | 7,175 |        |   | $      | 7,175  |        |      | $      | 7,175 |            |   | $      | 7,175 |       |   | $       | 362,875 |        |   | $       | 398,750 |        
|                              |                                               | Operating leases        |        |       | 12,960 |   |        |       | 12,154 |   |        |        | 11,800 |      |        |       | 11,573     |   |        |       | 9,977 |   |         |         | 97,266 |   |         |         | 155,730 | 
|                              |                                               | Capital commitments     |        |       | 2,227  |   |        |       |       |   |        |        |       |      |        |       |           |   |        |       |      |   |         |         |       |   |         |         | 2,227   | 
|                              |                                               | Purchase obligations(b) |        |       | 39,805 |   |        |       | 22,686 |   |        |        | 8,485  |      |        |       | 5,186      |   |        |       | 4,028 |   |         |         | 9,800  |   |         |         | 89,990  | 
|                              | Obligations related to exit
    activities(c) |                         |        |      |        |   |        |      |        |   |        |       |        |      |        | 2,259 |            |   |        |      |       |   |         | 780     |        |   |         | 3,039   |        
|                              |                                               |                         |        |       |        |   |        |       |        |   |        |        |        |      |        |       |            |   |        |       |      
|Total contractual obligations |                                               | $                       | 62,167 |       |        | $ | 42,015 |       |        | $ | 27,460 |        |        | $    | 26,193 |       |            | $ | 21,180 |       |       | $ | 470,721 |         |        | $ | 649,736 |        
|                              |                                               |                         |        |       |        |   |        |       |        |   |        |        |        |      |        |       |            |   |        |       |      






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes interest payments at a rate of 3.25% per annum
    relating to the $150.0 million principal amount of the 2023
    Notes and at a rate of 2% per annum relating to the
    $115.0 million principal amount of the 2025 Notes. The
    holders of the 2023 Notes have the right to require us to
    purchase, for cash, all of the 2023 Notes, or a portion thereof,
    in September 2008, and the holders of the 2025 Notes have the
    right to require us to purchase, for cash, all of the 2025
    Notes, or a portion thereof, in December 2010.
|   
|(b) | Purchase obligations include inventory commitments, commercial
    and research commitments and other significant purchase
    commitments.                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(c) | Includes payments for termination benefits and facility
    refurbishments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



| |                                                                           
| | --------------------------------------------------------------------------
| | Other significant commitments and contingencies include
    the following:



| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We are committed to share equally with Genentech and Roche
    approximately $600.0 million combined amount of certain
    global development costs for Tarceva, which represents an
    increase of approximately $300.0 million over the
    originally committed $300.0 million in 2001. The

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additional $300.0 million was agreed to by the three
    parties during 2005. These costs will be shared by the parties
    pursuant to the terms of our agreement with our partners. As of
    December 31, 2005, the parties have spent approximately 55%
    of our commitment under the agreement. We are also committed to
    share certain commercialization costs relating to Tarceva with
    Genentech. Under the terms of our agreement, there are no
    contractually determined amounts for future commercial and
    development costs.
    Under agreements with external CROs we will continue to incur
    expenses relating to clinical trials of Tarceva and other
    clinical candidates. The timing and amount of these
    disbursements can be based upon the achievement of certain
    milestones, patient enrollment, services rendered or as expenses
    are incurred by the CROs and therefore we cannot reasonably
    estimate the potential timing of these payments.
    We have outstanding letters of credit issued by a commercial
    bank totaling $2.9 million of which the full amounts were
    available on December 31, 2005. One is an irrevocable
    letter of credit related to our Oxford, England facility which
    expires and is renewed annually with a final expiration date of
    September 27, 2007. Another is an irrevocable letter of
    credit related to our Horsham, Pennsylvania facility, whose
    lease we assumed through the acquisition of Cell Pathways. The
    letter expires and is renewed annually with a final expiration
    date of September 22, 2008. In connection with the Eyetech
    Acquisition, we assumed $5.6 million of letters of credit
    associated with the leases of office and laboratory facilities
    in New York, New York, Cedar Knolls, New Jersey, Lexington,
    Massachusetts and Woburn, Massachusetts. These irrevocable
    letters of credit for our acquired leased facilities expire
    annually with a final expiration date of 2012. These letters of
    credit are collateralized by $5.6 million invested in high
    quality certificates of deposit, which is reflected as
    restricted investments on our balance sheet at December 31,
    2005.
    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 $5.4 million at
    December 31, 2005.
    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 our 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.
    Under certain license and collaboration agreements with
    pharmaceutical companies and educational institutions, we are
    required to pay royalties and/or milestone payments upon the
    successful development and commercialization of products.
    However, successful research and development of pharmaceutical
    products is high risk, and most products fail to reach the
    market. Therefore, at this time the amount and timing of the
    payments, if any, are not known.
    Under certain license and other agreements, we are required to
    pay license fees for the use of technologies and products in our
    research and development activities or milestone payments upon
    the achievement of certain predetermined conditions. These
    license fees are not deemed material to our consolidated
    financial statements and the amount and timing of the milestone
    payments, if any, are not known due to the uncertainty
    surrounding the successful research, development and
    commercialization of the products.
    In connection with the Eyetech Acquisition, we assumed various
    contracts related to the in-licensing, development, manufacture
    and marketing of Macugen. These license agreements represent
    rights and obligations of OSI Eyetech. Under the terms of the
    license agreements, we may be required to make additional
    milestone payments, and may also be required to pay royalties on
    net sales.69



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Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 123(R), which requires companies
to expense the estimated fair value of employee stock options
and similar awards. SFAS No. 123(R) replaces
SFAS No. 123 and supersedes APB Opinion No. 25.
In March 2005, the Securities Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107) which
generally provides the SEC staffs views regarding
SFAS No. 123(R). SAB 107 provides guidance on how
to determine the expected volatility and expected term inputs
into a valuation model used to determine the fair value of
share-based payments. SAB 107 also provides guidance
related to numerous aspects of the adoption of
SFAS No. 123(R) such as income taxes, capitalization
of compensation costs, modification of share-based payments
prior to adoption and the classification of expenses. We will
apply the principles of SAB 107 in conjunction with our
adoption of SFAS No. 123(R).

Beginning with the first quarter of fiscal 2006, we will adopt
the provisions of SFAS No. 123(R) using a modified
prospective application. Under the modified prospective
application, SFAS No. 123(R), which provides certain
changes to the methodology for valuing share-based compensation
among other changes, will apply to new awards and to awards
outstanding on the effective date that are subsequently modified
or cancelled. Compensation expense for outstanding awards for
which the requisite service had not been rendered as of the
effective date will be recognized over the remaining service
period using the compensation cost calculated for pro forma
disclosure purposes under SFAS No. 123.

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

In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, effective
for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
SFAS No. 154 supersedes APB Opinion No. 20,
Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements and requires retrospective application to prior
periods of any voluntary changes to alternatively permitted
accounting principles, unless impracticable.

Forward Looking Statements

A number of the matters and subject areas discussed in this
Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations, in
Item 1 Business 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 and uncertainties that are
described in this report in Item 1A
Business  Risk Factors.







ITEM 7A.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISKSOur 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

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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 with maturities at various dates
through August 2006 and November 2004, respectively. Upon
conversion of the 2009 Notes into our common stock in July 2004,
we were required to pay the remaining part of the guaranteed
interest. Therefore, the restricted investment securities
pledged in relation to these notes were liquidated. Upon
maturity, the proceeds of the restricted investment securities
will be sufficient to pay the first six scheduled interest
payments of the 2023 Notes when due. We consider our restricted
investment securities to be
held-to-maturity as
defined by SFAS No. 115. These securities are reported
at their amortized cost, which includes the direct costs to
acquire the securities, plus the amortization of any discount or
premium, and accrued interest earned on the securities. We have
not used or held derivative financial instruments in our
investment portfolio.

At December 31, 2005, we maintained a portion of our cash
and cash equivalents in financial instruments with original
maturities of three months or less. We also maintained an
investment portfolio principally comprised of government and
government agency obligations and corporate obligations that are
subject to interest rate risk and will decline in value if
interest rates increase.

A hypothetical 10% change in interest rates during the twelve
months ended December 31, 2005 would have resulted in a
$1.3 million change in our net loss for 2005.

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 December 31, 2005, there were no foreign
exchange contracts.

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 $265.0 million at
December 31, 2005 and was comprised of our 2023 Notes which
bear interest at a fixed rate of 3.25% and our 2025 Notes which
bear interest at a fixed rate of 2.00%. 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 which 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.

Underlying market risk exists related to an increase in our
stock price or an increase in interest rates which may make the
conversion of the 2023 Notes or 2025 Notes to common stock
beneficial to the holders of such notes. Conversion of the 2023
Notes or 2025 Notes would have a dilutive effect on any future
earnings and book value per common share.

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ITEM 8.
    CONSOLIDATED FINANCIAL STATEMENTSIndex to Consolidated Financial Statements:

|                                                                                                                                                                                           |  |        |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------ | -- | 
|                                                                                                                                                                                           |  | Page   |   
|                                                                                                                                                                                           |  | Number |   
|                                                                                                                                                                                           |  |        |   
|Report of
    Independent Registered Public Accounting Firm on the
    Consolidated Financial Statements                                                                                   |  |        | 73 | 
|Consolidated
    Balance Sheets at December 31, 2005 and 2004                                                                                                                              |  |        | 74 | 
|Consolidated
    Statements of Operations for the Year Ended December 31,
    2005, the Three Months Ended December 31, 2004 and the
    Years Ended September 30, 2004 and 2003           |  |        | 75 | 
|Consolidated
    Statements of Stockholders Equity for the Year Ended
    December 31, 2005, the Three Months Ended December 31,
    2004 and the Years Ended September 30, 2004 and 2003 |  |        | 76 | 
|Consolidated
    Statements of Cash Flows for the Year Ended December 31,
    2005, the Three Months Ended December 31, 2004 and the
    Years Ended September 30, 2004 and 2003           |  |        | 78 | 
|Notes to
    Consolidated Financial Statements                                                                                                                                             |  |        | 79 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON THE CONSOLIDATED FINANCIAL STATEMENTS

To the Stockholders and Board of Directors

OSI Pharmaceuticals, Inc.:

We have audited the accompanying consolidated balance sheets of
OSI Pharmaceuticals, Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity, and cash
flows for the year ended December 31, 2005, for the three
months ended December 31, 2004, and for each of the two
fiscal years in the period ended September 30, 2004. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of OSI Pharmaceuticals, Inc. and subsidiaries as of
December 31, 2005 and 2004, and the results of their
operations and their cash flows for the year ended
December 31, 2005, for the three months ended
December 31, 2004, and for each of the two fiscal years in
the period ended September 30, 2004, in conformity with
U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of OSI Pharmaceuticals, Inc. and
subsidiaries internal control over financial reporting as
of December 31, 2005, based on criteria established in
Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 15, 2006 expressed an
unqualified opinion on managements assessment of, and the
effective operation of, internal control over financial
reporting. Such report contains an explanatory paragraph
relating to the exclusion from managements assessment of
the effectiveness of and from our evaluation of the
Companys internal control over financial reporting as of
December 31, 2005 associated with one entity acquired
during 2005.

As discussed in note 1(b) to the consolidated financial
statements, the Company adopted
EITF 00-21
Revenue Arrangements with Multiple Deliverables in
fiscal 2004.

As discussed in notes 1(j) to the consolidated financial
statements, the Company fully adopted the provisions of
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets in fiscal 2003.



/s/ KPMG LLPMelville, New York

March 15, 2006

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2005 AND 2004

(In thousands except per share data)

|                                                                                                          |                                                                                                                                              |                            |           |           |         |   |         |           |         | 
|--------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | --------- | ------- | - | ------- | --------- | ------- | 
|                                                                                                          |                                                                                                                                              | December 31,               |          
|                                                                                                          |                                                                                                                                              |                            |          
|                                                                                                          |                                                                                                                                              | 2005                       |           |           | 2004    |  
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|ASSETS                                                                                                   
|Current assets:                                                                                           |                                                                                                                                              |                            |           |           |         |   |         |          
|                                                                                                          | Cash and cash equivalents                                                                                                                    |                            | $         | 164,084   |         |   | $       | 329,556   |        
|                                                                                                          | Investment securities                                                                                                                        |                            |           | 5,061     |         |   |         | 317,103   |        
|                                                                                                          | Restricted investment
    securities  short-term                                                                                            |                            |           | 10,461    |         |   |         | 4,844     |        
|                                                                                                          | Accounts receivables  net                                                                                                                   |                            |           | 152,482   |         |   |         | 14,077    |        
|                                                                                                          | Inventory  net                                                                                                                              |                            |           | 75,715    |         |   |         | 2,122     |        
|                                                                                                          | Interest receivable                                                                                                                          |                            |           | 78        |         |   |         | 1,641     |        
|                                                                                                          | Prepaid expenses and other current
    assets                                                                                                |                            |           | 10,618    |         |   |         | 5,815     |        
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|                                                                                                          |                                                                                                                                              | Total current assets       |           |           | 418,499 |   |         |           | 675,158 | 
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|Restricted investment
    securities  long-term                                                          |                                                                                                                                              |                            |          |           |         |   | 4,736   |          
|Property, equipment and leasehold
    improvements  net                                                  |                                                                                                                                              |                            | 61,947    |           |         |   | 31,762  |          
|Debt issuance costs  net                                                                                 |                                                                                                                                              |                            | 6,667     |           |         |   | 3,891   |          
|Goodwill                                                                                                  |                                                                                                                                              |                            | 359,035   |           |         |   | 39,162  |          
|Other intangible assets 
    net                                                                         |                                                                                                                                              |                            | 207,194   |           |         |   | 22,911  |          
|Other assets                                                                                              |                                                                                                                                              |                            | 5,240     |           |         |   | 2,496   |          
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|                                                                                                          |                                                                                                                                              | $                          | 1,058,582 |           |         | $ | 780,116 |          
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|LIABILITIES AND
    STOCKHOLDERS EQUITY                                                                 
|Current liabilities:                                                                                      |                                                                                                                                              |                            |           |           |         |   |         |          
|                                                                                                          | Accounts payable and accrued
    expenses                                                                                                    |                            | $         | 80,467    |         |   | $       | 42,359    |        
|                                                                                                          | Collaboration profit share payable                                                                                                           |                            |           | 49,869    |         |   |         |          |        
|                                                                                                          | Unearned revenue  current                                                                                                                   |                            |           | 10,737    |         |   |         | 2,549     |        
|                                                                                                          | Other liabilities 
    current                                                                                                              |                            |           | 1,255     |         |   |         | 4         |        
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|                                                                                                          |                                                                                                                                              | Total current liabilities  |           |           | 142,328 |   |         |           | 44,912  | 
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|Other liabilities:                                                                                        |                                                                                                                                              |                            |           |           |         |   |         |          
|                                                                                                          | Rent obligations and deferred rent
    expense                                                                                               |                            |           | 6,337     |         |   |         | 2,085     |        
|                                                                                                          | Unearned revenue 
    long-term                                                                                                             |                            |           | 39,051    |         |   |         | 17,479    |        
|                                                                                                          | Convertible senior subordinated
    notes                                                                                                    |                            |           | 265,000   |         |   |         | 150,000   |        
|                                                                                                          | Contingent value rights                                                                                                                      |                            |           | 22,047    |         |   |         | 22,047    |        
|                                                                                                          | Accrued postretirement benefit cost                                                                                                          |                            |           | 5,353     |         |   |         | 4,203     |        
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|                                                                                                          |                                                                                                                                              | Total liabilities          |           |           | 480,116 |   |         |           | 240,726 | 
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|Stockholders equity:                                                                                     |                                                                                                                                              |                            |           |           |         |   |         |          
|                                                                                                          | Preferred stock, $.01 par
    value; 5,000 shares authorized; no shares issued at
    December 31, 2005 and 2004 , respectively              |                            |           |          |         |   |         |          |        
|                                                                                                          | Common stock, $.01 par value;
    200,000 shares authorized, 58,728 and 52,398 shares
    issued at December 31, 2005 and 2004, respectively |                            |           | 587       |         |   |         | 524       |        
|                                                                                                          | Additional paid-in capital                                                                                                                   |                            |           | 1,592,155 |         |   |         | 1,375,486 |        
|                                                                                                          | Deferred compensation                                                                                                                        |                            |           | (7,341    | )       |   |         | (81       | )      
|                                                                                                          | Accumulated deficit                                                                                                                          |                            |           | (971,469  | )       |   |         | (814,346  | )      
|                                                                                                          | Accumulated other comprehensive
    income                                                                                                   |                            |           | 1,755     |         |   |         | 3,258     |        
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|                                                                                                          |                                                                                                                                              |                            | 615,687   |           |         |   | 564,841 |          
|Less: treasury stock, at cost;
    1,943 and 1,443 shares at December 31, 2005 and 2004,
    respectively |                                                                                                                                              |                            | (37,221   | )         |         |   | (25,451 | )        
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|                                                                                                          |                                                                                                                                              | Total stockholders equity |           |           | 578,466 |   |         |           | 539,390 | 
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  
|Commitments and contingencies (See
    Note 13)                                                           |                                                                                                                                              |                            |           |           |         |   |         |          
|                                                                                                          |                                                                                                                                              | $                          | 1,058,582 |           |         | $ | 780,116 |          
|                                                                                                          |                                                                                                                                              |                            |           |           |         |  



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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE

YEAR ENDED DECEMBER 31, 2005, THE THREE MONTHS ENDED

DECEMBER 31, 2004 AND YEARS ENDED SEPTEMBER 30,
2004 AND 2003

(In thousands except per share data)

|                                                        |                                                           |                      |          |         |              |   |         |                          |         |   |          |         |          |   |          |         |          |  
|------------------------------------------------------- | --------------------------------------------------------- | -------------------- | -------- | ------- | ------------ | - | ------- | ------------------------ | ------- | - | -------- | ------- | -------- | - | -------- | ------- | -------- | -
|                                                        |                                                           |                      |          | Three   |              |   |         |                          |        
|                                                        |                                                           |                      |          | Months  |              |   |        
|                                                        |                                                           | Year Ended           |          |         | Ended        |   |         | Year Ended September 30, |        
|                                                        |                                                           | December 31,         |          |         | December 31, |   |         |                          |        
|                                                        |                                                           | 2005                 |          |         | 2004         |   |         | 2004                     |         |   | 2003     |        
|                                                        |                                                           |                      |          |         |              |   |         |                          |         |   |          |        
|Revenues:                                               |                                                           |                      |          |         |              |   |         |                          |         |   |          |         |          |   |          |        
|                                                        | Net revenue from unconsolidated
    joint business        |                      | $        | 84,727  |              |   | $       |                         |         |   | $        |        |          |   | $        |        |         
|                                                        | Product sales                                             |                      |          | 32,411  |              |   |         | 360                      |         |   |          | 1,235   |          |   |          | 437     |         
|                                                        | Royalties on product sales                                |                      |          | 7,127   |              |   |         |                         |         |   |          |        |          |   |          |        |         
|                                                        | Sales commissions                                         |                      |          | 29,684  |              |   |         | 11,396                   |         |   |          | 34,290  |          |   |          | 16,289  |         
|                                                        | License, milestone and other
    revenues                 |                      |          | 16,164  |              |   |         | 591                      |         |   |          | 7,275   |          |   |          | 6,088   |         
|                                                        | Collaborative program revenues                            |                      |          | 4,081   |              |   |         |                         |         |   |          |        |          |   |          | 9,555   |         
|                                                        |                                                           |                      |          |         |              |   |         |                          |         |   |          |        
|                                                        |                                                           |                      | 174,194  |         |              |   | 12,347  |                          |         |   | 42,800   |         |          |   | 32,369   |        
|                                                        |                                                           |                      |          |         |              |   |         |                          |         |   |          |        
|Expenses:                                               |                                                           |                      |          |         |              |   |         |                          |         |   |          |         |          |   |          |        
|                                                        | Cost of goods sold                                        |                      |          | 18,882  |              |   |         | (1,247                   | )       |   |          | 8,985   |          |   |          | 157     |         
|                                                        | Collaborative profit share                                |                      |          | 12,312  |              |   |         |                         |         |   |          |        |          |   |          |        |         
|                                                        | Net expense from unconsolidated
    joint business        |                      |          |        |              |   |         | 7,661                    |         |   |          |        |          |   |          |        |         
|                                                        | Research and development                                  |                      |          | 125,953 |              |   |         | 31,913                   |         |   |          | 110,398 |          |   |          | 102,642 |         
|                                                        | Acquired in-process research and
    development (note 2) |                      |          | 64,442  |              |   |         |                         |         |   |          | 32,785  |          |   |          | 31,451  |         
|                                                        | Selling, general and administrative                       |                      |          | 98,393  |              |   |         | 20,313                   |         |   |          | 98,909  |          |   |          | 70,532  |         
|                                                        | Impairment of intangible asset                            |                      |          |        |              |   |         |                         |         |   |          | 24,599  |          |   |          |        |         
|                                                        | Amortization of intangibles                               |                      |          | 17,544  |              |   |         | 3,804                    |         |   |          | 18,606  |          |   |          | 9,300   |         
|                                                        |                                                           |                      |          |         |              |   |         |                          |         |   |          |        
|                                                        |                                                           |                      | 337,526  |         |              |   | 62,444  |                          |         |   | 294,282  |         |          |   | 214,082  |        
|                                                        |                                                           |                      |          |         |              |   |         |                          |         |   |          |        
|                                                        |                                                           | Loss from operations |          |         | (163,332     | ) |         |                          | (50,097 | ) |          |         | (251,482 | ) |          |         | (181,713 | )
|Other income (expense):                                 |                                                           |                      |          |         |              |   |         |                          |         |   |          |         |          |   |          |        
|                                                        | Investment income  net                                   |                      |          | 13,322  |              |   |         | 2,380                    |         |   |          | 5,259   |          |   |          | 7,808   |         
|                                                        | Interest expense                                          |                      |          | (5,065  | )            |   |         | (1,219                   | )       |   |          | (13,436 | )        |   |          | (6,715  | )       
|                                                        | Other (expense) income 
    net                          |                      |          | (2,048  | )            |   |         | 541                      |         |   |          | (712    | )        |   |          | (737    | )       
|                                                        |                                                           |                      |          |         |              |   |         |                          |         |   |          |        
|Net loss                                                |                                                           | $                    | (157,123 | )       |              | $ | (48,395 | )                        |         | $ | (260,371 | )       |          | $ | (181,357 | )      
|                                                        |                                                           |                      |          |         |              |   |         |                          |         |   |          |        
|Basic and diluted net loss per
    common share         |                                                           | $                    | (3.02    | )       |              | $ | (1.02   | )                        |         | $ | (6.50    | )       |          | $ | (4.87    | )      
|                                                        |                                                           |                      |          |         |              |   |         |                          |         |   |          |        
|Weighted average shares of common
    stock outstanding |                                                           |                      | 52,078   |         |              |   | 47,375  |                          |         |   | 40,083   |         |          |   | 37,249   |        
|                                                        |                                                           |                      |          |         |              |   |         |                          |         |   |          |        



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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY FOR
THE

YEAR ENDED DECEMBER 31, 2005, THE THREE MONTHS ENDED

DECEMBER 31, 2004 AND THE YEARS ENDED SEPTEMBER 30,
2004 AND 2003

(In thousands)

|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |       |   |   |         |   |  |   |          |          |  
|------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------ | ------ | - | ---------- | - | --- | -------- |  | ----------- | ------------ | ----- |  | ------------- | ---- | - | ------------- | - | -------- | ------------- | - | - | ------ | ----- | - | - | ------- | - |  | - | -------- | -------- | -
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  | Accumulated |              |       |  |               |     
|                                                                                      |                                                                                          | Common Stock |        |   | Additional |   |     |          |  |             |              | Other |  |               |      |   | Total         |  
|                                                                                      |                                                                                          |              |        |   | Paid-In    |   |     | Deferred |  |             | Accumulated  |       |  | Comprehensive |      |   | Treasury      |   |          | Stockholders |  
|                                                                                      |                                                                                          | Shares       |        |   | Amount     |   |     | Capital  |  |             | Compensation |       |  | Deficit       |      |   | Income (Loss) |   |          | Stock         |   |   | Equity |      
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |      
|Balance at September 30,
    2002                                                     |                                                                                          |              | 37,335 |   |            | $ | 373 |          |  | $           | 708,435      |       |  | $             | (49  | ) |               | $ | (324,223 | )             |   | $ | 1,005  |       |   | $ | (6,433  | ) |  | $ | 379,108  |         
|Comprehensive income (loss):                                                          |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |       |   |   |         |   |  |   |          |         
|                                                                                      | Net loss                                                                                 |              |        |  |            |   |     |         |  |             |              |      |  |               |      |  |               |   |          | (181,357      | ) |   |        |      |   |   |         |  |  |   |          | (181,357 | )
|                                                                                      | Unrealized holding loss on
    investment securities, net of reclassification adjustment |              |        |  |            |   |     |         |  |             |              |      |  |               |      |  |               |   |          |              |   |   |        | (991  | ) |   |         |  |  |   |          | (991     | )
|                                                                                      | Translation adjustment                                                                   |              |        |  |            |   |     |         |  |             |              |      |  |               |      |  |               |   |          |              |   |   |        | 1,150 |   |   |         |  |  |   |          | 1,150    |  
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |      
|Total comprehensive loss                                                              |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |       |   |   |         |   |  |   | (181,198 | )       
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |      
|Options exercised                                                                     |                                                                                          |              | 636    |   |            |   | 6   |          |  |             | 6,773        |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 6,779    |         
|Warrants issued                                                                       |                                                                                          |              |       |   |            |   |    |          |  |             | 146          |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 146      |         
|Issuance of common stock for
    directors annual retainer                           |                                                                                          |              | 31     |   |            |   |    |          |  |             | 487          |       |  |               | (487 | ) |               |   |         |               |   |   |       |       |   |   |        |   |  |   |         |         
|Issuance of common stock for
    employee purchase plan and other                     |                                                                                          |              | 42     |   |            |   | 1   |          |  |             | 803          |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 804      |         
|Issuance of common stock in
    connection with acquisition of Cell Pathways          |                                                                                          |              | 2,246  |   |            |   | 23  |          |  |             | 31,223       |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 31,246   |         
|Issuance of common stock to
    consultant                                            |                                                                                          |              | 8      |   |            |   |    |          |  |             | 286          |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 286      |         
|Registration costs in connection
    with acquisition of Cell Pathways                |                                                                                          |              |       |   |            |   |    |          |  |             | (416         | )     |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | (416     | )       
|Amortization of deferred
    compensation                                             |                                                                                          |              |       |   |            |   |    |          |  |             |             |       |  |               | 320  |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 320      |         
|Purchase of treasury stock                                                            |                                                                                          |              |       |   |            |   |    |          |  |             |             |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   | (19,018 | ) |  |   | (19,018  | )       
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |      
|Balance at September 30,
    2003                                                     |                                                                                          |              | 40,298 |   |            |   | 403 |          |  |             | 747,737      |       |  |               | (216 | ) |               |   | (505,580 | )             |   |   | 1,164  |       |   |   | (25,451 | ) |  |   | 218,057  |         
|Comprehensive income (loss):                                                          |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |       |   |   |         |   |  |   |          |         
|                                                                                      | Net loss                                                                                 |              |        |  |            |   |     |         |  |             |              |      |  |               |      |  |               |   |          | (260,371      | ) |   |        |      |   |   |         |  |  |   |          | (260,371 | )
|                                                                                      | Unrealized holding loss on
    investment securities, net of reclassification adjustment |              |        |  |            |   |     |         |  |             |              |      |  |               |      |  |               |   |          |              |   |   |        | (971  | ) |   |         |  |  |   |          | (971     | )
|                                                                                      | Translation adjustment                                                                   |              |        |  |            |   |     |         |  |             |              |      |  |               |      |  |               |   |          |              |   |   |        | 1,204 |   |   |         |  |  |   |          | 1,204    |  
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |      
|Total comprehensive loss                                                              |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |       |   |   |         |   |  |   | (260,138 | )       
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |      
|Options exercised                                                                     |                                                                                          |              | 1,493  |   |            |   | 15  |          |  |             | 38,673       |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 38,688   |         
|Warrants exercised                                                                    |                                                                                          |              | 6      |   |            |   |    |          |  |             |             |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   |         |         
|Issuance of common stock for
    directors annual retainer                           |                                                                                          |              | 11     |   |            |   |    |          |  |             | 474          |       |  |               | (474 | ) |               |   |         |               |   |   |       |       |   |   |        |   |  |   |         |         
|Issuance of common stock for
    employee purchase plan and other                     |                                                                                          |              | 22     |   |            |   |    |          |  |             | 693          |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 693      |         
|Issuance of common stock in
    connection with conversion of notes                   |                                                                                          |              | 3,200  |   |            |   | 32  |          |  |             | 159,968      |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 160,000  |         
|Balance of unamortized debt
    issuance costs in connection with conversion of notes |                                                                                          |              |       |   |            |   |    |          |  |             | (3,723       | )     |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | (3,723   | )       
|Change in deferred compensation                                                       |                                                                                          |              |       |   |            |   |    |          |  |             | (5           | )     |  |               | 5    |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   |         |         
|Amortization of deferred
    compensation                                             |                                                                                          |              |       |   |            |   |    |          |  |             |             |       |  |               | 479  |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 479      |         
|Acceleration of directors
    options                                                |                                                                                          |              |        |   |            |   |    |          |  |             | 177          |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 177      |         
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |      
|Balance at September 30,
    2004                                                     |                                                                                          |              | 45,030 |   |            |   | 450 |          |  |             | 943,994      |       |  |               | (206 | ) |               |   | (765,951 | )             |   |   | 1,397  |       |   |   | (25,451 | ) |  |   | 154,233  |         
|Comprehensive income (loss):                                                          |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |       |   |   |         |   |  |   |          |         
|                                                                                      | Net loss                                                                                 |              |        |  |            |   |     |         |  |             |              |      |  |               |      |  |               |   |          | (48,395       | ) |   |        |      |   |   |         |  |  |   |          | (48,395  | )
|                                                                                      | Unrealized holding loss on
    investment securities, net of reclassification adjustment |              |        |  |            |   |     |         |  |             |              |      |  |               |      |  |               |   |          |              |   |   |        | (363  | ) |   |         |  |  |   |          | (363     | )
|                                                                                      | Translation adjustment                                                                   |              |        |  |            |   |     |         |  |             |              |      |  |               |      |  |               |   |          |              |   |   |        | 2,224 |   |   |         |  |  |   |          | 2,224    |  
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |      
|Total comprehensive loss                                                              |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |       |   |   |         |   |  |   | (46,534  | )       
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |      
|Options exercised                                                                     |                                                                                          |              | 450    |   |            |   | 5   |          |  |             | 11,189       |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 11,194   |         
|Issuance of common stock for
    employee purchase plan and other                     |                                                                                          |              | 18     |   |            |   |    |          |  |             | 806          |       |  |               |     |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 806      |         
|Issuance of common stock in
    connection with conversion of notes                   |                                                                                          |              | 6,900  |   |            |   | 69  |          |  |             | 419,497      |       |  |               |      |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 419,566  |         
|Amortization of deferred
    compensation                                             |                                                                                          |              |       |   |            |   |    |          |  |             |             |       |  |               | 125  |   |               |   |         |               |   |   |       |       |   |   |        |   |  |   | 125      |         
|                                                                                      |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |      |   |               |   |          |               |   |   |        |      
|Balance at December 31,
    2004                                                      |                                                                                          |              | 52,398 |   |            | $ | 524 |          |  | $           | 1,375,486    |       |  | $             | (81  | ) |               | $ | (814,346 | )             |   | $ | 3,258  |       |   | $ | (25,451 | ) |  | $ | 539,390  |         

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##### Table of Contents

OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY FOR
THE

YEAR ENDED DECEMBER 31, 2005, THE THREE MONTHS ENDED

DECEMBER 31, 2004 AND THE YEARS ENDED SEPTEMBER 30,
2004 AND 2003  (Continued)

(In thousands)

|                                                                                           |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |               |   |   |        |        |   |   |         |   |  |   |          |          |  
|------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------ | ------ | - | ---------- | - | --- | -------- |  | ----------- | ------------ | ----- |  | ------------- | ------ | - | ------------- | - | -------- | ------------- | - | - | ------ | ------ | - | - | ------- | - |  | - | -------- | -------- | -
|                                                                                           |                                                                                          |              |        |   |            |   |     |          |  | Accumulated |              |       |  |               |       
|                                                                                           |                                                                                          | Common Stock |        |   | Additional |   |     |          |  |             |              | Other |  |               |        |   | Total         |  
|                                                                                           |                                                                                          |              |        |   | Paid-In    |   |     | Deferred |  |             | Accumulated  |       |  | Comprehensive |        |   | Treasury      |   |          | Stockholders |  
|                                                                                           |                                                                                          | Shares       |        |   | Amount     |   |     | Capital  |  |             | Compensation |       |  | Deficit       |        |   | Income (Loss) |   |          | Stock         |   |   | Equity |       
|                                                                                           |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |               |   |   |        |       
|Comprehensive income (loss):                                                               |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |               |   |   |        |        |   |   |         |   |  |   |          |         
|                                                                                           | Net loss                                                                                 |              |        |  |            |   |     |         |  |             |              |      |  |               |        |  |               |   |          | (157,123      | ) |   |        |       |   |   |         |  |  |   |          | (157,123 | )
|                                                                                           | Unrealized holding gain on
    investment securities, net of reclassification adjustment |              |        |  |            |   |     |         |  |             |              |      |  |               |        |  |               |   |          |              |   |   |        | 928    |   |   |         |  |  |   |          | 928      |  
|                                                                                           | Translation adjustment                                                                   |              |        |  |            |   |     |         |  |             |              |      |  |               |        |  |               |   |          |              |   |   |        | (2,431 | ) |   |         |  |  |   |          | (2,431   | )
|                                                                                           |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |               |   |   |        |       
|Total comprehensive loss                                                                   |                                                                                          |              |       |   |            |   |    |          |  |             |             |       |  |               |       |   |               |   |         |               |   |   |       |        |   |   |        |   |  |   | (158,626 | )       
|                                                                                           |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |               |   |   |        |       
|Options exercised                                                                          |                                                                                          |              | 469    |   |            |   | 5   |          |  |             | 10,221       |       |  |               |       |   |               |   |         |               |   |   |       |        |   |   |        |   |  |   | 10,226   |         
|Issuance of common stock for
    employee purchase plan and other                          |                                                                                          |              | 94     |   |            |   |    |          |  |             | 2,068        |       |  |               |       |   |               |   |         |               |   |   |       |        |   |   |        |   |  |   | 2,068    |         
|Issuance of common stock in
    connection with buyout of Prosidion minority interest      |                                                                                          |              | 85     |   |            |   | 1   |          |  |             | 4,157        |       |  |               |       |   |               |   |         |               |   |   |       |        |   |   |        |   |  |   | 4,158    |         
|Issuance of common stock for
    directors annual retainer                                |                                                                                          |              | 12     |   |            |   |    |          |  |             | 527          |       |  |               | (527   | ) |               |   |         |               |   |   |       |        |   |   |        |   |  |   |         |         
|Amortization of deferred
    compensation                                                  |                                                                                          |              |       |   |            |   |    |          |  |             |             |       |  |               | 1,739  |   |               |   |         |               |   |   |       |        |   |   |        |   |  |   | 1,739    |         
|Issuance of restricted stock to
    employees                                              |                                                                                          |              | 16     |   |            |   |    |          |  |             | 613          |       |  |               | (613   | ) |               |   |         |               |   |   |       |        |   |   |        |   |  |   |         |         
|Acceleration of stock options                                                              |                                                                                          |              |       |   |            |   |    |          |  |             | 816          |       |  |               |       |   |               |   |         |               |   |   |       |        |   |   |        |   |  |   | 816      |         
|Call spread purchased in connection
    with private offering                              |                                                                                          |              |       |   |            |   |    |          |  |             | (12,179      | )     |  |               |       |   |               |   |         |               |   |   |       |        |   |   |        |   |  |   | (12,179  | )       
|Issuance of common stock in
    connection with acquisition of Eyetech                     |                                                                                          |              | 5,654  |   |            |   | 57  |          |  |             | 205,336      |       |  |               |       |   |               |   |         |               |   |   |       |        |   |   |        |   |  |   | 205,393  |         
|Issuance of stock options and
    restricted rights in connection with Eyetech acquisition |                                                                                          |              |       |   |            |   |    |          |  |             | 5,110        |       |  |               | (7,859 | ) |               |   |         |               |   |   |       |        |   |   |        |   |  |   | (2,749   | )       
|Purchase of treasury stock,
    500,000 shares                                             |                                                                                          |              |       |   |            |   |    |          |  |             |             |       |  |               |       |   |               |   |         |               |   |   |       |        |   |   | (11,770 | ) |  |   | (11,770  | )       
|                                                                                           |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |               |   |   |        |       
|Balance at December 31,
    2005                                                           |                                                                                          |              | 58,728 |   |            | $ | 587 |          |  | $           | 1,592,155    |       |  | $             | (7,341 | ) |               | $ | (971,469 | )             |   | $ | 1,755  |        |   | $ | (37,221 | ) |  | $ | 578,466  |         
|                                                                                           |                                                                                          |              |        |   |            |   |     |          |  |             |              |       |  |               |        |   |               |   |          |               |   |   |        |       



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##### Table of Contents

OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE

YEAR ENDED DECEMBER 31, 2005, THE THREE MONTHS ENDED

DECEMBER 31, 2004 AND THE YEARS ENDED SEPTEMBER 30,
2004 AND 2003

(In thousands)

|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |          |        |        |          |          |        |        |  
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------- | ------------ | ------------ | ------- | ----------- | ------------- | ------ | ------ | -------- | -------- | ------ | ------ | -------- | -------- | ------ | ------ | -
|                                                                 |                                                                                                    |                                                                            |                                               | Three Months |              |         | Years Ended |              
|                                                                 |                                                                                                    | Year Ended                                                                 |                                               |              | Ended        |         |             | September 30, |       
|                                                                 |                                                                                                    | December 31,                                                               |                                               |              | December 31, |         |             |               |       
|                                                                 |                                                                                                    | 2005                                                                       |                                               |              | 2004         |         |             | 2004          |        |        | 2003     |         
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|Cash flow from operating activities:                             |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |          |        |        |          |         
|                                                                 | Net loss                                                                                           |                                                                            | $                                             | (157,123     | )            |         | $           | (48,395       | )      |        | $        | (260,371 | )      |        | $        | (181,357 | )     
|                                                                 | Adjustments to reconcile net loss
    to net cash used in operating activities:                    |                                                                            |                                               |              |              |         |             |               |        |        |          |          |        |        |          |          |       
|                                                                 |                                                                                                    | Loss (gain) on sale of
    investments                                     |                                               |              | 2,188        |         |             |               | 4      |        |          |          | (41    | )      |          |          | (347   | )     
|                                                                 |                                                                                                    | Loss on sale and disposals of
    equipment                                |                                               |              | 809          |         |             |               |       |        |          |          | 2      |        |          |          | 86     |       
|                                                                 |                                                                                                    | Depreciation and amortization                                              |                                               |              | 28,712       |         |             |               | 10,159 |        |          |          | 34,914 |        |          |          | 21,434 |       
|                                                                 |                                                                                                    | Impairment of intangible asset                                             |                                               |              |             |         |             |               |       |        |          |          | 24,599 |        |          |          |       |       
|                                                                 |                                                                                                    | Provision for excess
    inventory  net                                   |                                               |              |             |         |             |               | (3,368 | )      |          |          | 8,565  |        |          |          |       |       
|                                                                 |                                                                                                    | In-process research and development
    charge                             |                                               |              | 64,442       |         |             |               |       |        |          |          | 32,785 |        |          |          | 31,451 |       
|                                                                 |                                                                                                    | Non-cash compensation charges                                              |                                               |              | 1,211        |         |             |               | 679    |        |          |          | 723    |        |          |          | 862    |       
|                                                                 |                                                                                                    | Other non-cash charges 
    net                                           |                                               |              | 816          |         |             |               | (72    | )      |          |          | 493    |        |          |          |       |       
|                                                                 |                                                                                                    | Changes in assets and liabilities,
    net of the effects of acquisitions: |                                               |              |              |         |             |               |        |        |          |          |        |        |          |          |        |       
|                                                                 |                                                                                                    |                                                                            | Receivables                                   |              |              | (45,062 | )           |               |        | (3,602 | )        |          |        | (459   | )        |          |        | (4,634 | )
|                                                                 |                                                                                                    |                                                                            | Inventory                                     |              |              | (8,932  | )           |               |        | 2,684  |          |          |        | (6,386 | )        |          |        | (514   | )
|                                                                 |                                                                                                    |                                                                            | Prepaid expenses and other current
    assets |              |              | 386     |             |               |        | 3,628  |          |          |        | 594    |          |          |        | (5,505 | )
|                                                                 |                                                                                                    |                                                                            | Other assets                                  |              |              | 147     |             |               |        | 2      |          |          |        | 47     |          |          |        | 1,077  |  
|                                                                 |                                                                                                    |                                                                            | Accounts payable and accrued
    expenses     |              |              | (34,271 | )           |               |        | (4,014 | )        |          |        | 16,037 |          |          |        | (2,034 | )
|                                                                 |                                                                                                    |                                                                            | Collaboration profit share payable            |              |              | 949     |             |               |        |       |          |          |        |       |          |          |        |       |  
|                                                                 |                                                                                                    |                                                                            | Unearned revenue                              |              |              | 29,760  |             |               |        | 10,203 |          |          |        | 2,795  |          |          |        | (8,941 | )
|                                                                 |                                                                                                    |                                                                            | Accrued postretirement benefit cost           |              |              | 1,149   |             |               |        | 299    |          |          |        | 795    |          |          |        | 638    |  
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|Net cash used in operating
    activities                        |                                                                                                    |                                                                            | (114,819                                      | )            |              |         | (31,793     | )             |        |        | (144,908 | )        |        |        | (147,784 | )       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|Cash flows from investing
    activities:                        |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |          |        |        |          |         
|                                                                 | Payments for acquisitions, net of
    cash acquired                                                |                                                                            |                                               | (430,986     | )            |         |             |              |        |        |          | (36,393  | )      |        |          | (193     | )     
|                                                                 | Payments for acquisition of
    Novantrone marketing rights                                        |                                                                            |                                               |             |              |         |             |              |        |        |          |         |        |        |          | (46,009  | )     
|                                                                 | Purchases of investments
    (restricted and unrestricted)                                         |                                                                            |                                               | (447,443     | )            |         |             | (192,104      | )      |        |          | (250,714 | )      |        |          | (412,944 | )     
|                                                                 | Maturities and sales of investments
    (restricted and unrestricted)                              |                                                                            |                                               | 757,325      |              |         |             | 37,716        |        |        |          | 278,748  |        |        |          | 534,332  |       
|                                                                 | Net additions to property,
    equipment and leasehold improvements                                |                                                                            |                                               | (26,718      | )            |         |             | (1,787        | )      |        |          | (3,287   | )      |        |          | (8,486   | )     
|                                                                 | Other                                                                                              |                                                                            |                                               | (920         | )            |         |             | 214           |        |        |          | (341     | )      |        |          | (1,538   | )     
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|Net cash provided by (used in)
    investing activities          |                                                                                                    |                                                                            | (148,742                                      | )            |              |         | (155,961    | )             |        |        | (11,987  | )        |        |        | 65,162   |         
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|Cash flows from financing
    activities:                        |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |          |        |        |          |         
|                                                                 | Net proceeds from issuance of stock                                                                |                                                                            |                                               |             |              |         |             | 419,566       |        |        |          |         |        |        |          |         |       
|                                                                 | Proceeds from the exercise of stock
    options, stock warrants, employee purchase plan, and other |                                                                            |                                               | 12,471       |              |         |             | 11,445        |        |        |          | 39,315   |        |        |          | 7,327    |       
|                                                                 | Proceeds from the issuance of
    convertible senior subordinated notes                            |                                                                            |                                               | 115,000      |              |         |             |              |        |        |          |         |        |        |          | 150,000  |       
|                                                                 | Call spread premium                                                                                |                                                                            |                                               | (12,179      | )            |         |             |              |        |        |          |         |        |        |          |         |       
|                                                                 | Debt issuance costs                                                                                |                                                                            |                                               | (3,902       | )            |         |             |              |        |        |          | (118     | )      |        |          | (5,177   | )     
|                                                                 | Payments on loans and capital
    leases payable                                                   |                                                                            |                                               | (180         | )            |         |             | (4            | )      |        |          | (63      | )      |        |          | (546     | )     
|                                                                 | Purchase of treasury stock                                                                         |                                                                            |                                               | (11,770      | )            |         |             |              |        |        |          |         |        |        |          | (19,018  | )     
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|Net cash provided by financing
    activities                    |                                                                                                    |                                                                            | 99,440                                        |              |              |         | 431,007     |               |        |        | 39,134   |          |        |        | 132,586  |         
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|Net (decrease) increase in cash and
    cash equivalents         |                                                                                                    |                                                                            | (164,121                                      | )            |              |         | 243,253     |               |        |        | (117,761 | )        |        |        | 49,964   |         
|Effect of exchange rate changes on
    cash and cash equivalents |                                                                                                    |                                                                            | (1,351                                        | )            |              |         | 1,705       |               |        |        | (160     | )        |        |        | (23      | )       
|Cash and cash equivalents at
    beginning of year               |                                                                                                    |                                                                            | 329,556                                       |              |              |         | 84,598      |               |        |        | 202,519  |          |        |        | 152,578  |         
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|Cash and cash equivalents at end of
    year                     |                                                                                                    | $                                                                          | 164,084                                       |              |              | $       | 329,556     |               |        | $      | 84,598   |          |        | $      | 202,519  |         
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|Non-cash activities:                                             |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |          |        |        |          |         
|                                                                 | Conversion of notes                                                                                |                                                                            | $                                             |             |              |         | $           |              |        |        | $        | 160,000  |        |        | $        |         |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Reclassification of debt issuance
    costs in connection with notes                               |                                                                            | $                                             |             |              |         | $           |              |        |        | $        | 3,723    |        |        | $        |         |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Issuance of common stock to
    employees                                                          |                                                                            | $                                             | 613          |              |         | $           | 556           |        |        | $        | 65       |        |        | $        | 92       |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Issuance of common stock to
    directors                                                          |                                                                            | $                                             | 527          |              |         | $           |              |        |        | $        | 475      |        |        | $        | 488      |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Issuance of common stock to acquire
    minority interest in Prosidion                             |                                                                            | $                                             | 4,157        |              |         | $           |              |        |        | $        |         |        |        | $        |         |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Issuance of Prosidion preferred
    stock to minority shareholders                                 |                                                                            | $                                             |             |              |         | $           |              |        |        | $        | 1,400    |        |        | $        |         |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Issuance of common stock to
    consultant                                                         |                                                                            | $                                             |             |              |         | $           |              |        |        | $        |         |        |        | $        | 286      |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Acceleration of directors and
    employees stock options                                         |                                                                            | $                                             | 816          |              |         | $           |              |        |        | $        | 177      |        |        | $        | 164      |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Issuance of equity securities in
    connection with Eyetech acquisition costs                     |                                                                            | $                                             | 210,446      |              |         | $           |              |        |        | $        |         |        |        | $        |         |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Liabilities assumed in connection
    with acquisitions                                            |                                                                            | $                                             | 124,000      |              |         | $           |              |        |        | $        |         |        |        | $        | 12,118   |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Issuance of common stock in
    connection with acquisition                                        |                                                                            | $                                             |             |              |         | $           |              |        |        | $        |         |        |        | $        | 31,245   |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Issuance of contingent value rights
    in connection with acquisition                             |                                                                            | $                                             |             |              |         | $           |              |        |        | $        |         |        |        | $        | 22,047   |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Assumption of warrants in
    connection with acquisition                                          |                                                                            | $                                             |             |              |         | $           |              |        |        | $        |         |        |        | $        | 146      |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         
|                                                                 | Cash paid for interest                                                                             |                                                                            | $                                             | 4,869        |              |         | $           |              |        |        | $        | 14,502   |        |        | $        | 6,418    |       
|                                                                 |                                                                                                    |                                                                            |                                               |              |              |         |             |               |        |        |          |         



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##### Table of Contents

OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In this Annual Report on
Form 10-K,
OSI, our company, we,
us, and our refer to OSI
Pharmaceuticals, Inc. and subsidiaries.

(1) Summary of Significant Accounting Policies

(a) Principles of Consolidation

Our consolidated financial statements include the accounts of
OSI Pharmaceuticals, Inc., and our wholly-owned subsidiaries,
OSI Eyetech, Inc., Prosidion Limited (Prosidion) and OSI
Pharmaceuticals (UK) Limited (OSI-UK). During fiscal 2003,
we created Prosidion, into which we transferred our diabetes and
obesity research programs. On April 14, 2005, we completed
the acquisition of the minority interest shares of Prosidion and
as a result, Prosidion became our wholly-owned subsidiary (see
note 2(c)). On November 14, 2005, we acquired all
outstanding shares of Eyetech Pharmaceuticals Inc., (Eyetech or
OSI Eyetech) a biotech company with a focus on eye disease. The
accompanying financial statements include Eyetechs assets
and liabilities as of December 31, 2005 and results of
operations for the period from November 14, 2005 through
December 31, 2005 (see note 2(a)). In December 2004,
we changed our fiscal year end from September 30 to
December 31. The first fiscal year (which shall henceforth
be the calendar year) affected by this change ended on
December 31, 2005. This report on
Form 10-K includes
the statement of operations, statement of cash flows and
statement of stockholders equity for the year ended
December 31, 2005, the three month transition period ended
December 31, 2004, and for the twelve months ended
September 30, 2004 and 2003. All intercompany balances and
transactions have been eliminated in consolidation. We operate
in one segment which is the business of development,
manufacturing and commercialization of novel therapeutics for
human health care.

(b) Revenue Recognition



Net revenue (expenses) from unconsolidated joint businessNet revenue from unconsolidated joint business is related to our
co-promotion and
manufacturing agreements with Genentech, Inc., our
U.S. partner for Tarceva (erlotinib). It consists of our
share of the pretax
co-promotion profit
(loss) generated from our
co-promotion
arrangement with Genentech for Tarceva, the partial
reimbursement from Genentech of our sales and marketing costs
related to Tarceva, and the reimbursement from Genentech of our
manufacturing costs related to Tarceva. Under the
co-promotion
arrangement, all U.S. sales of Tarceva and associated costs
and expenses, except for a portion of our sales related costs,
are recognized by Genentech. For the year ended
December 31, 2005 and the three months ended
December 31, 2004, Genentech recorded $275.0 million
and $13.0 million, respectively in net sales of Tarceva in
the United States and its territories. We record our 50% share
of the co-promotion
pretax profit on a quarterly basis, as set forth in our
agreement with Genentech. Pretax
co-promotion profit
(loss) under the
co-promotion
arrangement is derived by calculating U.S. net sales of
Tarceva to third-party customers and deducting costs of sales,
distribution, selling and marketing expenses, and certain joint
development expenses incurred by Genentech and us. The costs
incurred during the respective periods represent estimated costs
of both parties and are subject to further adjustment based on
each partys final review. Based on past experience, we do
not believe that these adjustments, if any, will be significant
to our consolidated financial statements. The partial
reimbursement of our sales and marketing costs related to
Tarceva is recognized as revenue as the related costs are
incurred. We defer the recognition of the reimbursement of our
manufacturing costs related to Tarceva until the time Genentech
ships the product to third-party customers at which time our
risk of inventory loss no longer exists. The unearned revenue
related to shipments by our third party manufacturers of Tarceva
to Genentech that have not been shipped to third-party customers
was $7.0 million and $878,000 as of December 31, 2005
and 2004, respectively, and is included in unearned
revenue-current in the accompanying consolidated balance sheets.

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                                            |  |              |        |  |                    |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------ | ------ |  | ------------------ | - | ------ | -
|                                                                                            |  | Year Ended   |        |  | Three Months Ended |  
|                                                                                            |  | December 31, |        |  | December 31,       |  
|                                                                                            |  |              |        |  |                    |  
|                                                                                            |  | 2005         |        |  | 2004               |  
|                                                                                            |  |              |        |  |                    |  
|Co-promotion profit (loss) and
    reimbursement of sales force and marketing related costs |  | $            | 73,715 |  |                    | $ | (8,075 | )
|Reimbursement of manufacturing costs                                                        |  |              | 11,012 |  |                    |   | 414    |  
|                                                                                            |  |              |        |  |                    |  
|Net revenue (expense) from
    unconsolidated joint business                                |  | $            | 84,727 |  |                    | $ | (7,661 | )
|                                                                                            |  |              |        |  |                    |  



| |              
| | -------------
| | Product Sales









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our distributors have a limited right of return for unopened
    product during a specified time period based on the
    products labeled expiration date. As a result, in
    calculating the allowance for product returns, we estimate the
    likelihood that product sold to distributors might be returned
    within a specific timeframe. We determine our estimates using
    actual product data from distributors, industry data on products
    with similar characteristics and the expiration dates of product
    sold.
|
| |  | Certain government buying groups that purchase our product from
    wholesalers have the right to receive a discounted price from
    us. As a result, we estimate the amount of product which will
    ultimately be sold to these buying groups. We determine our
    estimates using actual product data from distributors and
    historical industry trends.                                                                                                                                                                      



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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Gelclair Bioadherent Oral Gel was sold in accordance with an
exclusive distribution agreement with Helsinn Healthcare S.A.,
which allowed us to market and distribute Gelclair in North
America. In late October 2004, we exercised our right to
terminate the agreement with Helsinn, while continuing to
exercise our right to sell off inventory. In accordance with
Statements of Financial Accounting Standards, or
SFAS No. 48, Revenue Recognition When Right of
Return Exists, given the limited sales history of
Gelclair, we defer the recognition of revenue on product
shipments of Gelclair to wholesale customers until such time as
the product is sold from the wholesale customer to the retail
and non-retail outlets. 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 1(l)).

Royalties on Product Sales

We estimate royalty revenue and royalty receivables in the
periods these royalties are earned, in advance of collection.
Our estimate of royalty revenue and receivables is based upon
communication with our collaborative partners. Differences
between actual revenues and estimated royalty revenue are
adjusted for in the period which they become known, typically
the following quarter. Historically, such adjustments have not
been material to our consolidated financial condition or results
of operations.

Sales Commissions

Sales commissions represent commissions earned on the sales of
the drug, Novantrone, in the United States for oncology
indications pursuant to a co-promotion agreement dated
March 11, 2003 with Ares Trading S.A., an affiliate of
Serono, S.A. (see note 4(c)). Serono markets Novantrone in
multiple sclerosis indications and records all U.S. sales
for all indications including oncology indications. Sales
commissions from Novantrone on net oncology sales are recognized
in the period the sales occur based on the estimated split
between oncology sales and multiple sclerosis sales, as
determined by an external third party. The split between
oncology and multiple sclerosis sales is subject to further
adjustment based upon the parties final review, in the
subsequent quarter. Based on past experience, we do not believe
these adjustments, if any, will be significant to the
consolidated financial condition or results of operations.

Licenses, Milestones and Other Revenues

Our revenue recognition policies for all nonrefundable upfront
license fees and milestone arrangements are in accordance with
the guidance provided in the Securities and Exchange
Commissions Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, as
amended by SEC Staff Accounting Bulletin No. 104,
Revenue Recognition. In addition, in fiscal 2004 we
adopted the provisions of Emerging Issues Task Force
Issue 00-21,
Revenue Arrangements with Multiple Deliverables, or
EITF 00-21, for
multiple element revenue arrangements entered into or materially
amended after June 30, 2003.

We received a total of $25.0 million in upfront fees from
Genentech and Roche in January 2001, which was being recognized
on a straight-line basis over the expected term of our required
research and development efforts under the terms of a tripartite
agreement with Genentech and Roche. As a result of an amendment
to our collaboration agreement with Genentech in June 2004, the
remaining unearned upfront fee from Genentech of
$1.8 million is being recognized in accordance with
EITF 00-21, as
discussed further below. The upfront fee from Roche was fully
recognized as of December 31, 2004.

Since September 2004, we have received $34.0 million in
milestone payments from Genentech based upon certain
U.S. Food and Drug Administration, or FDA, filings and
approvals of Tarceva in accordance with

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

our agreement with Genentech. As a result of the amendment to
our collaboration agreement with Genentech in June 2004, these
payments are, and any future milestone payments will be,
recognized in accordance with
EITF 00-21.
Milestones which have been received from Genentech after June
2004 and the remaining unearned upfront fee as of June 2004 are
being recognized over the term of our Manufacturing and Supply
Agreement with Genentech, under which the last items of
performance to be delivered to Genentech are set forth, or on a
straight line basis, which approximates the expected level of
performance under the Manufacturing and Supply Agreement. The
unrecognized unearned revenue related to the milestones and
upfront payment received from Genentech is $34.2 million as
of December 31, 2005 of which $2.3 million is
classified as short-term and the balance of $31.9 million
is classified as long-term in the accompanying consolidated
balance sheet. The unrecognized unearned revenue related to the
milestones and upfront payment received from Genentech is
$18.7 million as of December 31, 2004 of which
$1.2 million is classified as short-term and the balance of
$17.5 million was classified as long-term in the
accompanying consolidated balance sheet.

In March 2005, the Tarceva alliance partners, OSI/ Genentech/
Roche, agreed to a further global development plan and budget
for the continued development of Tarceva in earlier stage lung
cancer, other cancer indications and in a variety of
combinations, including Tarceva/
Avastin®
(bevacizumab). The cost of the development plan will continue to
be shared equally by the three partners. For purposes of
EITF 00-21, the
revised development plan and budget for Tarceva was deemed a
material amendment to our Roche agreement, and therefore, future
milestones received from Roche will be recognized in accordance
with EITF 00-21.
Accordingly, future milestone payments received from Roche will
be initially recorded as unearned revenue and recognized over
the expected term of the research collaboration on a
straight-line basis, which approximates the expected level of
performance under the development plan. In September 2005, we
recorded a $4.0 million milestone payment from Roche upon
approval of Tarceva by the European Commission for sale in the
European Union. In November 2005, we recorded a
$4.0 million milestone payment from Roche upon acceptance
for review by the EMEA for the application of Tarceva in
combination with gemcitabine chemotherapy for the treatment of
advanced pancreatic cancer in patients who have not received
previous chemotherapy. Both of the payments have been included
in deferred revenue. The unearned revenue related to the
milestones earned from Roche was $7.8 million as of
December 31, 2005 of which $868,000 is classified as
short-term and the balance of $6.9 million was classified
as long-term in the accompanying consolidated balance sheet.

During the year ended December 31, 2005, we entered into
worldwide non-exclusive license agreements with four
pharmaceuticals companies, under our dipeptidyl peptidase IV, or
DPIV, patent portfolio covering the use of DPIV inhibitors for
the treatment of type 2 diabetes and related indications. In
addition to upfront fees received from these agreements, we will
receive milestone payments upon the achievement of certain
events and royalty payments on net sales. Under the terms of the
agreements, we recognized upfront license revenue of
$9.2 million for the year ended December 31, 2005. In
December 2005, we recognized $5.0 million of milestone
payments in connection with the NDA filing in the United States
by a licensee pursuant to a worldwide non-exclusive license
under our DPIV patent portfolio. All of the payments mentioned
above, are included in license and milestone revenues on the
accompanying consolidated statement of operations for the year
ended December 31, 2005. We recognize revenue from license
agreements where we have no future obligations upon the
effective date of the agreements and the collection of payments
is reasonably assured.

Collaborative Program Revenues

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

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Based on the terms of our collaboration agreement with Pfizer
revenues derived from reimbursements of costs associated with
the development of Macugen are recorded in compliance with EITF
Issue 99-19, Reporting Revenue Gross as a Principal Versus
Net as an Agent (EITF 99-19), and EITF
Issue 01-14,
Income Statement Characterization of Reimbursements
Received For
Out-of-Pocket
Expenses Incurred
(EITF 01-14).
According to the criteria established by these EITF Issues, in
transactions where we act as a principal, with discretion to
choose suppliers, bear credit risk and perform part of the
services required in the transaction, we have met the criteria
to record revenue for the gross amount of the reimbursements.

(c) Research and Development Costs

Research and development, or R&D, costs are charged to
operations as incurred and include direct costs of R&D
scientists and equipment, contracted costs, and an allocation of
laboratory facility and other core scientific services. Included
in R&D is our proportionate share of development expenses
related to the Tripartite Agreement with Genentech and Roche
(see note 4(a)).

(d) Acquired In-Process Research and Development

Costs to acquire in-process research and development projects
and technologies which have no alternative future use and which
have not reached technological feasibility at the date of
acquisition are expensed as incurred (see note 2).

(e) Accounting for Stock-Based Compensation

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 (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 Opinion No. 25 in accounting for stock options
issued to employees. In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally
provided by SFAS No. 123. Additionally,
SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure in both
the annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the
method used on reported results.

Stock option grants are generally set at the closing price of
our common stock on the date of grant and the related number of
shares granted are fixed at that point in time. Therefore, under
the principles of APB Opinion No. 25, we do not recognize
compensation expense associated with the grant of stock options.
Pro forma information regarding net loss and 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.

On November 30, 2005, the compensation committee of our
Board of Directors approved the forward vesting of all unvested
out-of-the-money stock
options with an exercise price greater than $30 per share
for all of our employees, other than executive officers. Options
to purchase approximately 1.6 million shares of common
stock were accelerated. Options held by executive officers and
non-employee directors were not accelerated. The accelerated
options, which are considered fully vested as of
November 30, 2005, have grant prices ranging from $30.09 to
$82.40 per share and a weighted average grant price of
$45.44 per share. The primary purpose of the accelerated
vesting is to

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

enable us to reduce the future compensation expense associated
with our
out-of-the-money stock
options upon adoption of SFAS No. 123(R) in fiscal
2006.

Commencing in fiscal 2005, the fair value of the options was
estimated at the date of grant using a Black-Scholes option
pricing model with the expected option term determined using a
Monte Carlo simulation model that incorporates historical
employee exercise behavior and post-vesting employee termination
rates. The fair value of the options was estimated at the date
of grant using a Black-Scholes option pricing model with the
following assumptions:

|                                                           |  |              |       |              |              |   |            |               |  |   |       |   |  |   |       |  
|---------------------------------------------------------- |  | ------------ | ----- | ------------ | ------------ | - | ---------- | ------------- |  | - | ----- | - |  | - | ----- | -
|                                                           |  |              |       | Three Months |              |   | Year Ended |              
|                                                           |  | Year Ended   |       |              | Ended        |   |            | September 30, | 
|                                                           |  | December 31, |       |              | December 31, |   |            |               | 
|                                                           |  | 2005         |       |              | 2004         |   |            | 2004          |  |   | 2003  |  
|                                                           |  |              |       |              |              |   |            |               |  |   |       |  
|Risk-free interest rate                                    |  |              | 4.23  | %            |              |   | 3.22       | %             |  |   | 2.97  | % |  |   | 1.76  | %
|Dividend yield                                             |  |              | 0.00  | %            |              |   | 0.00       | %             |  |   | 0.00  | % |  |   | 0.00  | %
|Volatility                                                 |  |              | 60.95 | %            |              |   | 80.16      | %             |  |   | 78.91 | % |  |   | 81.63 | %
|Weighted-average expected life of
    option (years)       |  |              | 4.49  |              |              |   | 3.00       |               |  |   | 3.00  |   |  |   | 3.00  |  
|Weighted-average exercise price of
    stock option grants |  | $            | 32.52 |              |              | $ | 56.30      |               |  | $ | 61.40 |   |  | $ | 28.10 |  
|Weighted-average fair value of
    stock option grants     |  | $            | 17.26 |              |              | $ | 29.95      |               |  | $ | 32.25 |   |  | $ | 14.82 |  



|                                                         |                        |              |          |              |              |   |         |                          |   |   |          |       |   |   |          |       |  
|-------------------------------------------------------- | ---------------------- | ------------ | -------- | ------------ | ------------ | - | ------- | ------------------------ | - | - | -------- | ----- | - | - | -------- | ----- | -
|                                                         |                        |              |          | Three Months |              |   |        
|                                                         |                        | Year Ended   |          |              | Ended        |   |         | Year Ended September 30, |  
|                                                         |                        | December 31, |          |              | December 31, |   |         |                          |  
|                                                         |                        | 2005         |          |              | 2004         |   |         | 2004                     |   |   | 2003     |      
|                                                         |                        |              |          |              |              |   |         |                          |   |   |          |      
|Net loss                                                 |                        | $            | (157,123 | )            |              | $ | (48,395 | )                        |   | $ | (260,371 | )     |   | $ | (181,357 | )    
|Add: stock-based compensation
    included in net loss   |                        |              | 3,406    |              |              |   | 679     |                          |   |   | 723      |       |   |   | 862      |      
|Compensation cost determined under
    fair value method |                        |              | (61,714  | )            |              |   | (7,395  | )                        |   |   | (25,854  | )     |   |   | (20,690  | )    
|                                                         |                        |              |          |              |              |   |         |                          |   |   |          |      
|Pro forma net loss                                       |                        | $            | (215,431 | )            |              | $ | (55,111 | )                        |   | $ | (285,502 | )     |   | $ | (201,185 | )    
|                                                         |                        |              |          |              |              |   |         |                          |   |   |          |      
|Basic and diluted loss per common
    share:             |                        |              |          |              |              |   |         |                          |   |   |          |       |   |   |          |      
|                                                         | Net loss  as reported |              | $        | (3.02        | )            |   | $       | (1.02                    | ) |   | $        | (6.50 | ) |   | $        | (4.87 | )
|                                                         |                        |              |          |              |              |   |         |                          |   |   |          |      
|                                                         | Net loss  pro forma   |              | $        | (4.14        | )            |   | $       | (1.16                    | ) |   | $        | (7.12 | ) |   | $        | (5.40 | )
|                                                         |                        |              |          |              |              |   |         |                          |   |   |          |      

out-of




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the approach described in SFAS No. 123(R). However,
SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure will no longer be permitted.

SFAS No. 123(R) must be adopted no later than
January 1, 2006. We will adopt the modified
prospective method in which compensation cost is
recognized beginning with the effective date (a) based on
the requirements of SFAS No. 123(R) for all
share-based payments granted after the effective date and
(b) based on the requirements of SFAS No. 123 for
all awards granted to employees prior to the effective date of
SFAS No. 123(R) that remain unvested on the effective
date.

As permitted by SFAS No. 123, we currently account for
share-based payments to employees using APB No. 25s
intrinsic value method and, as such, generally recognize no
compensation cost for employee stock options. Accordingly, the
adoption of SFAS No. 123(R)s fair value method
will have a significant impact on our results of operations,
although it will have no impact on our overall financial
position. The impact of adoption of SFAS No. 123(R)
cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. At
December 31, 2005, the total unamortized compensation
expense related to the 2.6 million unvested options that
were outstanding, as determined in accordance with
SFAS No. 123(R), was approximately $34.0 million.
This amount will be amortized over the remaining vesting
periods. Based on the total number of outstanding options
(through December 31, 2005), we expect to record
amortization of stock compensation expense in calendar 2006 of
at approximately $11.4 million for these outstanding
options only, of which $3.2 million is expected to be
recognized during the first quarter of fiscal 2006.

(f) Net Loss Per 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
twelve months ended December 31, 2005, September 30,
2004, September 30, 2003 and the three months ended
December 31, 2004, amounted to (in thousands):

|                         |  |              |       |              |              |  |            |               |  |  |       |  |  |  |       | 
|------------------------ |  | ------------ | ----- | ------------ | ------------ |  | ---------- | ------------- |  |  | ----- |  |  |  | ----- | 
|                         |  |              |       | Three Months |              |  | Year Ended |              
|                         |  | Year Ended   |       |              | Ended        |  |            | September 30, | 
|                         |  | December 31, |       |              | December 31, |  |            |               | 
|                         |  | 2005         |       |              | 2004         |  |            | 2004          |  |  | 2003  | 
|                         |  |              |       |              |              |  |            |               |  |  |       | 
|Common share equivalents |  |              | 4,948 |              |              |  | 4,752      |               |  |  | 7,152 |  |  |  | 5,016 | 
|                         |  |              |       |              |              |  |            |               |  |  |       | 
|Contingent shares        |  |              | 1,585 |              |              |  | 1,585      |               |  |  | 1,585 |  |  |  | 1,585 | 
|                         |  |              |       |              |              |  |            |               |  |  |       | 



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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

diluted earnings per share. The related interest expense of
these notes for the years ended September 30, 2004 and 2003
totaled $13.4 million and $6.7 million, respectively.
As discussed in note 10(a), the convertible notes due in
2025 were issued in December 2005. As discussed in
note 10(b), the convertible senior subordinated notes due
in 2023 were issued in September 2003. As discussed in
note 10(c), the convertible senior subordinated notes due
2009 were fully converted into shares of our common stock in the
fourth quarter of fiscal 2004.

(g) Comprehensive Income (Loss)

Comprehensive income includes foreign currency translation
adjustments and unrealized gains or losses on our
available-for-sale securities and derivative instruments (in
thousands).

|                                   |                                                                               |              |          |              |              |   |             |               |   |   |          |       |   |   |          |       |  
|---------------------------------- | ----------------------------------------------------------------------------- | ------------ | -------- | ------------ | ------------ | - | ----------- | ------------- | - | - | -------- | ----- | - | - | -------- | ----- | -
|                                   |                                                                               |              |          | Three Months |              |   | Years Ended |              
|                                   |                                                                               | Year Ended   |          |              | Ended        |   |             | September 30, |  
|                                   |                                                                               | December 31, |          |              | December 31, |   |             |               |  
|                                   |                                                                               | 2005         |          |              | 2004         |   |             | 2004          |   |   | 2003     |      
|                                   |                                                                               |              |          |              |              |   |             |               |   |   |          |      
|Net loss                           |                                                                               | $            | (157,123 | )            |              | $ | (48,395     | )             |   | $ | (260,371 | )     |   | $ | (181,357 | )    
|Other comprehensive income (loss): |                                                                               |              |          |              |              |   |             |               |   |   |          |       |   |   |          |      
|                                   | Foreign currency translation
    adjustments                                  |              |          | (2,431       | )            |   |             | 2,224         |   |   |          | 1,204 |   |   |          | 1,150 |  
|                                   | Unrealized gains (losses) on
    derivative instruments arising during period |              |          |             |              |   |             |              |   |   |          | 131   |   |   |          |      |  
|                                   | Unrealized holding gains (losses)
    arising during period                   |              |          | (1,245       | )            |   |             | (341          | ) |   |          | (995  | ) |   |          | (641  | )
|                                   | Less: Reclassification adjustment
    for losses (gains) realized in net loss |              |          | 2,173        |              |   |             | (22           | ) |   |          | (107  | ) |   |          | (350  | )
|                                   |                                                                               |              |          |              |              |   |             |               |   |   |          |      
|                                   |                                                                               |              | (1,503   | )            |              |   | 1,861       |               |   |   | 233      |       |   |   | 159      |      
|                                   |                                                                               |              |          |              |              |   |             |               |   |   |          |      
|Total comprehensive loss           |                                                                               | $            | (158,626 | )            |              | $ | (46,534     | )             |   | $ | (260,138 | )     |   | $ | (181,198 | )    
|                                   |                                                                               |              |          |              |              |   |             |               |   |   |          |      



|                                                               |  |                    |       |   |      |   |        |  
|-------------------------------------------------------------- |  | ------------------ | ----- | - | ---- | - | ------ | -
|                                                               |  | As of December 31, |      
|                                                               |  |                    |      
|                                                               |  | 2005               |       |   | 2004 |  
|                                                               |  |                    |       |   |      |  
|Cumulative foreign currency
    translation adjustment         |  | $                  | 1,828 |   |      | $ | 4,259  |  
|Unrealized gains (losses) on
    available-for-sale securities |  |                    | (73   | ) |      |   | (1,001 | )
|                                                               |  |                    |       |   |      |  
|Accumulated other comprehensive
    income                     |  | $                  | 1,755 |   |      | $ | 3,258  |  
|                                                               |  |                    |       |   |      |  

(h) Cash and Cash Equivalents




(i) Investments




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

strong credit ratings. We classify our investments as
available-for-sale securities, as defined by
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. These securities are
recorded at their fair value. Unrealized holding gains and
losses, net of the related tax effect, if any, on
available-for-sale securities are excluded from earnings and are
reported in accumulated other comprehensive income (loss), a
separate component of stockholders equity, until realized.
The specific identification basis is utilized to calculate the
cost to determine realized gains and losses from the sale of
available-for-sale securities. A decline in the market value of
any available-for-sale security below cost that is deemed to be
other than temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a new
cost basis for the security is established. Dividend and
interest income are recognized when earned.

In September 2003, in connection with the issuance of our
3.25% convertible senior subordinated notes (see
note 10(b)), we pledged $14.2 million of
U.S. government securities, or Restricted Investment
Securities, with maturities at various dates through August
2006. 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. 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
December 31, 2005 was $4.9 million, which was
classified as short-term. The aggregate fair value and amortized
costs of the Restricted Investment Securities at
December 31, 2004 was $9.5 million, of which
$4.8 million was classified as short-term and the balance
of $4.7 million as long-term.

With respect to our facility leases for Horsham, PA and Oxford,
England, we have outstanding letters of credit issued by a
commercial bank. The irrevocable letter of credit for our
Horsham, PA facility expires annually with a final expiration
date of September 22, 2008. This letter of credit is for
$400,000, of which the full amount was available at
December 31, 2005. The irrevocable letter of credit for our
Oxford, England facility expires annually with a final
expiration date of September 27, 2007. This letter of
credit is for $2.5 million, of which the full amount was
available on December 31, 2005. 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 December 31, 2005 is $14,000 and
$3.6 million, respectively, relating to restricted cash and
investments to secure these letters of credit. Included in cash
and cash equivalents and investment securities as of
December 31, 2004 is $144,000 and $3.3 million,
respectively, relating to restricted cash and investments to
secure these letters of credit.

In connection with our acquisition of Eyetech, we assumed
$5.6 million of letters of credit associated with the
leases of office and laboratory facilities in New York, NY,
Cedar Knolls, NJ, Lexington, MA and Woburn, MA. These
irrevocable letters of credit for our acquired facilities expire
annually with a final expiration date of 2012. These letters of
credit are collateralized by $5.6 million of cash invested
in high quality certificates of deposit, which is reflected as
restricted investments on our balance sheet at December 31,
2005.

We have certain investments in privately-owned companies that
are carried on the cost method of accounting. Other than
temporary losses are recorded against earnings in the period the
decrease in value of the investment is deemed to have occurred.

(j) Goodwill and Intangible Assets

We account for goodwill and other intangible assets in
accordance with SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill
and Other Intangible Assets, which we adopted in fiscal
2003. SFAS No. 141 requires that the purchase method
of accounting be used for all business combinations. It
specifies the criteria which intangible assets acquired in a
business combination must

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STATEMENTS  (Continued)

meet in order to be recognized and reported apart from goodwill.
SFAS No. 142 requires that goodwill and intangible
assets determined to have indefinite lives no longer be
amortized but instead be tested for impairment at least annually
and whenever events or circumstances occur that indicate
impairment might have occurred. SFAS No. 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives and
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may
not be recoverable (see note 7).

As a result of our R&D programs, including programs funded
pursuant to R&D funding agreements (see note 4), we
have applied for a number of patents in the United States and
abroad. Costs incurred in connection with patent applications
for our R&D programs have been expensed as incurred.

(k) Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of

In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, we review
long-lived assets to determine whether an event or change in
circumstances indicates the carrying value of the asset may not
be recoverable. We base our evaluation on such impairment
indicators as the nature of the assets, the future economic
benefit of the assets and any historical or future profitability
measurements, as well as other external market conditions or
factors that may be present. If such impairment indicators are
present or other factors exist that indicate that the carrying
amount of the asset may not be recoverable, we determine whether
an impairment has occurred through the use of an undiscounted
cash flows analysis at the lowest level for which identifiable
cash flows exist. If impairment has occurred, we recognize a
loss for the difference between the carrying amount and the fair
value of the asset. Fair value is the amount at which the asset
could be bought or sold in a current transaction between a
willing buyer and seller other than in a forced or liquidation
sale and can be measured at the assets quoted market price
in an active market or, where an active market for the asset
does not exist, our best estimate of fair value based on
discounted cash flow analysis. Assets to be disposed of by sale
are measured at the lower of carrying amount or fair value less
estimated costs to sell. In the fourth quarter of fiscal 2004,
we determined it was necessary to record an impairment charge
related to our intangible asset for exclusive distribution
rights to the marketed product, Gelclair, in North America (see
note 7).

(l) Inventory

Tarceva is stated at the lower of cost or market, with cost
being determined using the weighted average method. Included in
inventory are raw materials and work in process for Tarceva that
may be used in the production of pre-clinical and clinical
product, which will be expensed to research and development cost
when consumed for these uses. Prior to receipt of FDA approval
of Tarceva for commercial sale on November 18, 2004, we had
expensed all costs associated with the production of Tarceva to
research and development expense in our consolidated statements
of operations. Effective November 18, 2004, we began to
capitalize the costs of manufacturing Tarceva as inventory,
including the costs to label, package and ship previously
manufactured bulk inventory which costs had already been
expensed as research and development. Inventory is comprised of
three components: raw materials, which are purchased directly by
us, work in process, which is primarily active pharmaceutical
ingredient (API) where title has transferred from our
contract manufacturer to us, and finished goods, which is
packaged product ready for commercial sale.

At December 31, 2005 and 2004, the cost reflected in a
portion of the finished goods inventory for Tarceva consisted
solely of cost incurred to package and label
work-in-process
inventory that had been previously expensed. As we continue to
process the inventory that was partially produced and ex-

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STATEMENTS  (Continued)

pensed prior to November 18, 2004, we will continue to
reflect in inventory only those incremental costs incurred to
complete such inventory into finished goods.

As part of the acquisition of Eyetech, acquired finished goods
and work-in-process was
valued at fair value. Included in the finished goods and work in
progress at December 31, 2005 is $15.3 million and
$33.1 million, respectively of step up in value assigned to
Eyetech inventory as part of the acquisition. The carrying value
of raw materials acquired on the date of the acquisition and
post acquisition Macugen inventory is stated at the lower of
cost or market, and our inventory costs are determined by
weighted average method. Inventory is comprised of three
components: raw materials, which are purchased directly by us,
work in process, which is primarily active pharmaceutical
ingredient (API) where title has transferred from our
contract manufacturer to us, and finished goods, which is
packaged product ready for commercial sale.

Gelclair inventory is stated at the lower of cost or market, as
determined using the
first-in, first-out
method. During the year ended September 30, 2004, we
recorded a provision of $8.6 million for purchase
commitments and excess inventory that we considered to be in
excess of forecasted future demand based on the expiration date
of the product on hand. In late October 2004, we exercised our
right to terminate the agreement with Helsinn. During the three
months ended December 31, 2004, we recorded an adjustment
of $1.4 million to reduce the previously recorded provision
for Gelclair inventory based on terms at a settlement with
Helsinn.

Inventory, net of the reserve for excess inventory, at
December 31, 2005 and 2004, consisted of the following (in
thousands):

|                            |  |                   |        |  |                   |   |       | 
|--------------------------- |  | ----------------- | ------ |  | ----------------- | - | ----- | 
|                            |  | December 31, 2005 |        |  | December 31, 2004 |  
|                            |  |                   |        |  |                   |  
|Raw materials               |  |                   | 5,905  |  |                   |   | 1,130 | 
|Work in progress            |  |                   | 44,961 |  |                   |   |      | 
|Finished goods on hand, net |  |                   | 19,533 |  |                   |   | 836   | 
|Inventory subject to return |  |                   | 5,316  |  |                   |   | 156   | 
|                            |  |                   |        |  |                   |  
|Total inventory             |  | $                 | 75,715 |  |                   | $ | 2,122 | 
|                            |  |                   |        |  |                   |  



(m) Depreciation and Amortization






(n) Computer Software Costs




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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(o) Accrual for Clinical Research Organization and
Clinical Site Costs

We record accruals for estimated clinical study costs. Clinical
study costs represent costs incurred by clinical research
organizations, or CROs, and clinical sites. These costs are
recorded as a component of R&D expenses. We analyze the
progress of the clinical trials, including levels of patient
enrollment, invoices received and contracted costs when
evaluating the adequacy of the accrued liabilities. Significant
judgments and estimates must be made and used in determining the
accrued balance in any accounting period. Actual costs incurred
may or may not match the estimated costs for a given accounting
period. Actual results could differ from those estimates under
different assumptions.

(p) Foreign Currency Translation

The assets and liabilities of our
non-U.S.subsidiaries,
OSI-UK and Prosidion,
which operate in their local currency, are translated to
U.S. dollars at exchange rates in effect at the balance
sheet date with resulting translation adjustments directly
recorded as a separate component of accumulated other
comprehensive income (loss). Income and expense accounts are
translated at the average exchange rates during the year.

(q) Accounting for Derivatives

We 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.
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. There were no foreign exchange contracts as of
December 31, 2005 and 2004.

(r) Income Taxes

Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.

(s) Debt Issuance Costs

Costs incurred in issuing the 2.0% convertible senior
subordinated notes and the 3.25% convertible senior
subordinated notes are amortized using the straight-line method
over a five-year term, which represents the earliest date that
we may redeem such notes. Costs incurred in issuing the
4.0% convertible senior subordinated notes were amortized
using the straight-line method over a seven-year term. Upon
conversion of the 4.0% convertible senior subordinated
notes, in July 2004, the remaining

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

unamortized costs of $3.7 million were reclassified to
additional paid in capital (see note 10(c)). The
amortization of the debt issuance costs is included in other
expense in the accompanying consolidated statements of
operations.

(t) Use of Estimates

We have made a number of estimates and assumptions related to
the reported amounts in our financial statements and
accompanying notes to prepare these consolidated financial
statements in conformity with U.S. generally accepted
accounting principles. Actual results could differ from those
estimates and assumptions.

(u) Reclassifications

We have made certain reclassifications to the prior consolidated
financial statements to conform them to the current performance.



(2)
    ACQUISITIONS(a) Eyetech Pharmaceuticals, Inc.

On November 14, 2005, we completed our acquisition of
Eyetech, pursuant to the terms of an Agreement and Plan of
Merger dated August 21, 2005, or the merger agreement. The
acquisition was structured as a merger of a wholly-owned
subsidiary of OSI with and into Eyetech, and Eyetech was renamed
(OSI) Eyetech, Inc.

The assets purchased and liabilities assumed by us included:
(a) one marketed product, Macugen, and the related
technology platform and patent estate; (b) rights to
Eyetechs leased facilities in New York, New York, Cedar
Knolls, NJ, Woburn and Lexington, MA and Boulder, Colorado, as
well as leasehold improvements and certain equipment;
(c) inventory; and (d) certain other assets and
liabilities.

As consideration for the merger, each share of Eyetech common
stock was purchase for $15 cash and 0.12275 shares of our
common stock. The aggregate consideration related to the
acquisition totaled $909.3 million, including the cash
consideration, value of OSI common stock issued, value of
converted stock options issued, and deal related costs. We
issued a total of approximately 5.65 million shares valued
at $205.4 million, which was based on the average four-day
closing price of our common stock around the date of the
announcement of the acquisition, which occurred on
August 21, 2005. In addition, each outstanding option to
purchase shares of Eyetech common stock, other than options
granted under Eyetechs 2001 Stock Plan, accelerated in
full and became vested and exercisable prior to the closing date
of November 14, 2005. Any of these options that remained
unexercised as of the effective time of the merger were
terminated or cancelled in accordance with their terms. Each
outstanding option granted under Eyetechs 2001 Stock Plan
was assumed by OSI at the effective time and became an option to
purchase shares of OSI stock. The portion of the valued assigned
to options assumed and included in the purchase price was
$1.9 million. Options issued to Eyetech employees that were
in the money, but not yet vested, were converted into options
for our common stock at a ratio of 0.491 OSI shares for each
option to purchase Eyetech common. Based on this ratio, we
assumed approximately 153,000 options. The valued assigned to
options was $4.1 million of which $1.9 million was
included in the purchase price and the remainder recognized as
deferred compensation. Outstanding unvested restricted shares
and options to acquire restricted shares as of the acquisition
date are to be converted into cash and shares of OSI common
stock (restricted to the same extent as the restricted stock
converted) on the same basis as the outstanding stock of
Eyetech. The value assigned as of the acquisition date to these
rights was $6.1 million and recognized as deferred

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

compensation in the accompanying financial statements. The
deferred compensation related to the stock options and the
restricted stock is being amortized over the remaining vesting
period.

The acquisition was accounted for under the purchase method of
accounting. The results of operations of Eyetech have been
included in the consolidated statements of operations commencing
as of November 14, 2005. The purchase price was allocated
to the acquired assets and assumed liabilities based on the
preliminary fair values as of the date of the acquisition. In
connection with the merger, we committed to and approved an exit
plan for consolidation of certain Eyetech facilities. As of
December 31, 2005 the final determination for the
disposition of equipment and other costs have not been
finalized. Once completed, these adjustments could impact the
carrying value of property plant and equipment and we may incur
additional exit costs. Any adjustment, if necessary, is expected
to be recorded as an adjustment to the goodwill. As a result of
the exit plan, we have recognized a liability of
$5.4 million for rent obligations based upon the present
value of the remaining lease payments, after exiting the
facilities, offset by the potential sublease rental income. In
addition, we recognized $6.1 million of liabilities
associated with personnel reductions and relocation costs.

The preliminary purchase price allocation is as follows (in
thousands):

|                                             |  |   |           | 
|-------------------------------------------- |  | - | --------- | 
|Cash and Investments                         |  | $ | 271,934   | 
|Accounts receivable                          |  |   | 92,165    | 
|Inventory                                    |  |   | 64,660    | 
|Fixed assets                                 |  |   | 14,688    | 
|Prepaid expenses and other assets            |  |   | 7,641     | 
|Amortizable intangibles                      |  |   | 201,400   | 
|Goodwill                                     |  |   | 320,005   | 
|In-process R&D                               |  |   | 60,900    | 
|                                             |  |   |          
|Total assets and in-process R&D
    acquired |  |   | 1,033,393 | 
|Less liabilities assumed                     |  |   | 124,000   | 
|                                             |  |   |          
|Purchase price                               |  | $ | 909,393   | 
|                                             |  |   |          



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STATEMENTS  (Continued)

sales cycles; the estimated life of a products underlying
technology; future operating expenses; probability adjustments
to reflect the risk of developing the acquired technology into
commercially viable products; and a discount rate of 16% to
reflect present value.

The following unaudited pro forma financial information for the
year ended September 30, 2004, the three-month transition
period ended December 31, 2004 and the year ended
December 31, 2005 combine the historical financial
information of OSI and Eyetech giving effect to the merger as if
it occurred on October 1, 2003, November 1, 2004 and
January 1, 2005, reflecting only pro forma adjustments
expected to have a continuing impact on the combined results.
The unaudited pro forma financial information for the year
ended September 30, 2004 combines the historical financial
information of OSI for the year ended September 30, 2004
and Eyetech for the year ended December 31, 2004. In
December 2004, OSI changed its fiscal year end to
December 31 and filed a transition report on
Form 10-QT for the
three-month period ended December 31, 2004. The unaudited
pro forma financial information for the three-month period ended
December 31, 2004 combines the historical financial
information of OSI and Eyetech for the three-month period ended
December 31, 2004. Accordingly, the historical financial
information for Eyetech for the three months ended
December 31, 2004 are included in the condensed pro forma
financial information for both the year ended September 30,
2004 and the three months ended December 31, 2004. The
unaudited pro forma financial information for the year ended
December 31, 2005 combines the historical financial
information of OSI and Eyetech for the year ended
December 31, 2005 (in thousands, except per share
information):

|                                                                                                |  |             |          |   |                    |   |            |               |  |   |          |  
|----------------------------------------------------------------------------------------------- |  | ----------- | -------- | - | ------------------ | - | ---------- | ------------- |  | - | -------- | -
|                                                                                                |  | Year Ended  |          |   |                    |   | Year Ended |              
|                                                                                                |  | December 31 |          |   | Three Months Ended |   |            | September 30, | 
|                                                                                                |  | 2005        |          |   | December 31 2004   |   |            | 2004          | 
|                                                                                                |  |             |          |   |                    |   |            |               | 
|Revenues                                                                                        |  | $           | 355,799  |   |                    | $ | 22,209     |               |  | $ | 86,466   |  
|Net loss before non-recurring
    charge related to the acquisition                             |  | $           | (161,267 | ) |                    | $ | (92,715    | )             |  | $ | (406,900 | )
|Basic and diluted net loss per
    share before non-recurring charge related to the acquisition |  | $           | (2.83    | ) |                    | $ | (1.75      | )             |  | $ | (8.90    | )



(b) Probiodrug Assets




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STATEMENTS  (Continued)

metformin, that have been non-exclusively licensed to other
companies for future milestones and royalty payments. Upon the
closing of the acquisition, we paid $36.4 million in cash,
including professional fees. The purchase price was allocated to
the assets acquired based on the fair values as of the date of
the acquisition. Of the $36.4 million purchase price,
$32.8 million was assigned to the drug candidate in
clinical development, PSN9301, and was expensed at the date of
the acquisition and is included in acquired in-process research
and development expenses in the accompanying consolidated
statement of operations for the year ended September 30,
2004. The non-exclusive licenses issued to other companies as
well as the patent estate were valued at $3.6 million and
are included in other intangible assets-net on the accompanying
consolidated balance sheets as of December 31, 2005 and
2004, and are being amortized on a straight-line basis through
the earliest expiration of the related patents in April 2017. We
will also be required to pay additional contingent milestone
payments upon the achievement of certain milestones related to
the development of PSN9301.

The value assigned to the acquired in-process R&D was
determined by identifying the acquired in-process research
projects for which: (a) technological feasibility had not
been established at the acquisition date, (b) there was no
alternative future use, and (c) the fair value was
estimable based on reasonable assumptions. The acquired
in-process R&D was valued at $32.8 million and was
assigned entirely to PSN9301. The value of the acquired
in-process R&D and the other identifiable intangible assets
was determined by estimating the projected net cash flows, based
upon the future revenues to be earned upon commercialization. In
determining the value of the in-process R&D, the assumed
commercialization date for the product was 2010. Given the risks
associated with the development of new drugs, the revenue and
expense forecast was probability-adjusted to reflect the risk of
advancement through the approval process. The risk adjustments
applied were based on the compounds stage of development
at the time of assessment and the historical probability of
successful advancement for compounds at that stage. The modeled
cash flow was discounted back to the net present value. The
projected net cash flows from such project were based on
managements estimates of revenues and operating profits
related to such project. The value of the in-process R&D was
based on the income approach that focuses on the
income-producing capability of the asset. The underlying premise
of this approach is that the value of an asset can be measured
by the present worth of the net economic benefit (cash receipts
less cash outlays) to be received over the life of the asset.
Significant assumptions and estimates used in the valuation of
in-process R&D included: the stage of development for the
project; future revenues; growth rates; product sales cycles;
the estimated life of a products underlying technology;
future operating expenses; probability adjustments to reflect
the risk of developing the acquired technology into commercially
viable products; and a discount rate of 26% to reflect present
value.

Prosidion also entered into a research agreement with Probiodrug
whereby Probiodrug would provide services directed to the
research and development of new lead molecules in the area of
glucose-dependent insulinotropic peptide receptor, agonism and
antagonism and DP-IV modulation and/or inhibition. Prosidion
agreed to fund the research and development services to be
performed, up to $5.0 million dollars and would also be
required to pay Probiodrug milestones on certain events and
royalties on the net sales of products that arise from the
research and development.

(c) Minority Interest in Prosidion

On April 14, 2005, we completed the acquisition of the
minority interest shares in Prosidion. We issued a total of
84,940 shares of our common stock in exchange for
286,200 shares in Prosidion, representing approximately
2.8% of the Prosidion shares outstanding. In addition, we paid
$176,000 in cash to one of the minority shareholders of
Prosidion, who is a director of our company, in exchange for
11,000 shares of Prosidion. The 84,940 common shares of our
common stock were valued at $4.2 million, which was based
on the average five-day closing price of our common stock around
the date of

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the announcement of the proposed acquisition, which occurred on
March 10, 2005. The acquisition of the minority interest
resulted in Prosidion becoming our wholly-owned subsidiary. The
acquisition of the minority interest was accounted for under the
purchase method of accounting. The purchase price was allocated
to the assets acquired and assumed liabilities based on the fair
value as of the acquisition date. We incurred direct costs of
$650,000 in connection with the acquisition, resulting in a
total acquisition cost of approximately $5.0 million.

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

|                                                 |  |   |       | 
|------------------------------------------------ |  | - | ----- | 
|License agreements                               |  | $ | 615   | 
|Patent estate                                    |  |   | 203   | 
|Acquired in-process research and
    development |  |   | 3,694 | 
|Minority interest                                |  |   | 322   | 
|Goodwill                                         |  |   | 149   | 
|                                                 |  |   |      
|Common stock and cash paid                       |  | $ | 4,983 | 
|                                                 |  |   |      

in-the




(d) Cell Pathways




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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

wholly-owned subsidiary of OSI with and into Cell Pathways. The
resulting subsidiary was merged with and into OSI on
July 14, 2003.

The assets purchased and liabilities assumed by us included:
(a) two drug candidates in clinical development,
Aptosyn®
(exisulind) and OSI-461, and the related technology
platform and patent estate; (b) exclusive distribution
rights to the marketed product, Gelclair, in North America;
(c) rights to Cell Pathways leased facility in
Horsham, PA, as well as leasehold improvements and certain
equipment; (d) inventory; and (e) certain other assets
and liabilities. We entered into consulting agreements with
former Cell Pathways employees and officers engaged to assist us
with the transition. Certain of these agreements also provided
for the forgiveness of certain loans to these former officers.
As of September 30, 2003, the full amount of these loans
were forgiven as a result of such officers efforts with
the transition.

Gelclair 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. As part of the Cell Pathways transaction,
we assumed the rights and obligations under an exclusive
distribution agreement with Helsinn that allowed us to market
and distribute Gelclair in North America (United States, Canada
and Mexico) through January 2012. Cell Pathways previously had
entered into a three-year agreement with Celgene Corporation for
the promotion of Gelclair, primarily in the U.S. oncology
market. On June 12, 2003, we entered into an agreement with
Celgene whereby we recovered full rights to market and
distribute Gelclair in the oncology setting in North America.
Our payment to Celgene under this agreement for the full return
of the rights was expensed in the quarter ended
September 30, 2003, upon the return of certain sales and
marketing data. We were also required to make a payment to
Celgene on the first anniversary of the effective date provided
the transition services, as defined in the agreement, had been
provided to us. The transition services were expensed ratably
over the transition period from July 2003 through December 2003,
and the payment was made in June 2004. The agreement also
provides for a milestone payment to Celgene upon the achievement
of a specified amount of net sales of Gelclair. We previously
had a marketing agreement with John O. Butler Company, under
which Butler marketed Gelclair to the dental market. In April
2004, we agreed with Butler to terminate this agreement. In the
quarter ended September 30, 2004, we recorded an impairment
charge related to our intangible asset for the exclusive
distribution rights to Gelclair (see note 7). In late
October 2004, we exercised our right to terminate the agreement
with Helsinn while continuing to exercise our right to sell off
inventory.

As consideration for the merger, each share of Cell Pathways
common stock was exchanged for (i) 0.0567 shares of
our common stock and (ii) a contingent value right to
receive 0.04 shares of our common stock in the event a new
drug application is filed with the FDA by June 12, 2008 for
either of the two newly acquired clinical candidates, Aptosyn or
OSI-461. Based on the exchange ratio of 0.0567, approximately
2.2 million shares of our common stock were issued to Cell
Pathways stockholders in connection with the merger. The
2.2 million common shares were valued at $31.2 million
which was based on the average five-day closing price of our
common stock around the date of the announcement of the merger
which occurred on February 10, 2003. Any outstanding
options that were not exercised prior to the effective date of
the merger were, in accordance with their terms, terminated. We
assumed approximately 44,000 outstanding and unexercised
warrants to purchase shares of Cell Pathways common stock under
the same terms and conditions as the original Cell
Pathways warrants except that the exercise price of the
warrants and the number of shares of our common stock for which
the warrants are exercisable were adjusted based on the exchange
ratio described above.

The acquisition was accounted for under the purchase method of
accounting. The results of operations of Cell Pathways have been
included in the consolidated statements of operations commencing
as of June 12, 2003. The purchase price was allocated to
the acquired assets and assumed

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STATEMENTS  (Continued)

liabilities based on the fair values as of the date of the
acquisition. The excess of the fair value of the net
identifiable assets acquired over the purchase price paid
represented negative goodwill of approximately
$49.2 million. Since a portion of the negative goodwill was
a result of not recognizing contingent consideration (i.e., the
contingent value rights), the maximum value of the contingent
value rights at the date of the acquisition was recorded as if
it were a liability, thereby reducing the negative goodwill. The
value of the contingent value rights of $22.0 million was
based on the average five day closing price of our common stock
around the date of the announcement of the merger which occurred
on February 10, 2003. The remaining negative goodwill of
$27.0 million was allocated proportionately to reduce the
value of the non-current assets acquired and the in-process
research and development which was charged to operations.

|                                                                |  |   |        | 
|--------------------------------------------------------------- |  | - | ------ | 
|The purchase price was allocated as
    follows (in thousands): |  |   |        | 
|Acquired in-process R&D                                         |  | $ | 31,451 | 
|Gelclair rights                                                 |  |   | 28,957 | 
|Inventory                                                       |  |   | 3,102  | 
|Fixed assets                                                    |  |   | 402    | 
|Cash                                                            |  |   | 1,791  | 
|Prepaid expenses and other assets                               |  |   | 1,420  | 
|                                                                |  |   |       
|Total assets and acquired
    in-process R&D                    |  |   | 67,123 | 
|Less liabilities assumed                                        |  |   | 12,118 | 
|                                                                |  |   |       
|Purchase price                                                  |  | $ | 55,005 | 
|                                                                |  |   |       

®




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STATEMENTS  (Continued)

operating expenses; probability adjustments to reflect the risk
of developing the acquired technology into commercially viable
products; and a discount rate of 25% to reflect present value.



(3)
    Investments(a)     Investment Securities

We invest our excess cash in U.S. government securities,
municipal obligations and debt and equity instruments of
financial institutions and corporations with strong credit
ratings. We have established guidelines relative to
diversification of our investments and their maturities with the
objective of maintaining safety and liquidity. These guidelines
are periodically reviewed and modified to take advantage of
trends in yields and interest rates.

The following is a summary of available-for-sale securities as
of December 31, 2005 and 2004 (in thousands):

|                                                                    |       |      |       |            |        |   |     |            |   |   |       |       | 
|------------------------------------------------------------------- | ----- | ---- | ----- | ---------- | ------ | - | --- | ---------- | - | - | ----- | ----- | 
|                                                                    |       |      |       | Gross      |        |   |    
|                                                                    |       |      |       | Unrealized |        |   |    
|                                                                    |       | Cost |       |            | Losses |   |     | Fair Value |  
|                                                                    |       |      |       |            |        |   |     |            |  
|2005                                                                |       |      |       |            |        |   |     |            |   |   |       |      
|U.S. government securities                                          |       | $    | 3,632 |            |        | $ | (77 | )          |   | $ | 3,555 |      
|Corporate and financial
    institutions debt and equity securities |       |      | 1,514 |            |        |   | (8  | )          |   |   | 1,506 |      
|                                                                    |       |      |       |            |        |   |     |            |  
|                                                                    | Total |      | $     | 5,146      |        |   | $   | (85        | ) |   | $     | 5,061 | 
|                                                                    |       |      |       |            |        |   |     |            |  

|                                                                    |       |      |         |            |        |   |      |            |   |   |         |         | 
|------------------------------------------------------------------- | ----- | ---- | ------- | ---------- | ------ | - | ---- | ---------- | - | - | ------- | ------- | 
|                                                                    |       |      |         | Gross      |        |   |     
|                                                                    |       |      |         | Unrealized |        |   |     
|                                                                    |       | Cost |         |            | Losses |   |      | Fair Value |  
|                                                                    |       |      |         |            |        |   |      |            |  
|2004                                                                |       |      |         |            |        |   |      |            |   |   |         |        
|U.S. government securities                                          |       | $    | 264,343 |            |        | $ | (829 | )          |   | $ | 263,514 |        
|Corporate and financial
    institutions debt and equity securities |       |      | 53,756  |            |        |   | (167 | )          |   |   | 53,589  |        
|                                                                    |       |      |         |            |        |   |      |            |  
|                                                                    | Total |      | $       | 318,099    |        |   | $    | (996       | ) |   | $       | 317,103 | 
|                                                                    |       |      |         |            |        |   |      |            |  





|                    |  |      |       |  |            |   |       | 
|------------------- |  | ---- | ----- |  | ---------- | - | ----- | 
|                    |  | Cost |       |  | Fair Value |  
|                    |  |      |       |  |            |  
|2006                |  | $    | 3,215 |  |            | $ | 3,203 | 
|2007                |  |      | 681   |  |            |   | 655   | 
|2008                |  |      |      |  |            |   |      | 
|2009                |  |      |      |  |            |   |      | 
|2010                |  |      |      |  |            |   |      | 
|2011 and thereafter |  |      | 1,250 |  |            |   | 1,203 | 
|                    |  |      |       |  |            |  
|                    |  | $    | 5,146 |  |            | $ | 5,061 | 
|                    |  |      |       |  |            |  

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STATEMENTS  (Continued)



(4)
    Product Development/Commercialization Agreements

(a)
    Roche and GenentechOn January 8, 2001, we entered into an alliance with
Genentech and Roche for the global co-development and
commercialization of Tarceva. We received upfront fees of
$25 million related to this alliance, and Genentech and
Roche each purchased $35 million of our common stock at
$75.66 per share. We are also entitled to up to
$92 million upon the achievement of certain milestones
under the terms of the alliance of which $42 million was
received as of December 31, 2005. We have entered into
separate agreements with both Genentech and Roche with respect
to the alliance, as well as a Tripartite Agreement.

Under the Tripartite Agreement, we agreed with Genentech and
Roche to optimize the use of each partys resources to
develop Tarceva in certain countries around the world and share
certain global development costs on an equal basis; to share
information generated under a global development plan; to
facilitate attainment of necessary regulatory approval of
Tarceva for commercial marketing and sale in the world; and to
work together on such matters as the parties agree from time to
time during the development of Tarceva. We, as well as Genentech
and Roche, may conduct clinical and pre-clinical activities for
additional indications for Tarceva not called for under the
global development plan, subject to certain conditions. The
Tripartite Agreement will terminate when either the OSI/
Genentech collaboration agreement or the OSI/ Roche agreement
terminates. Any reimbursement from or additional payments to
Genentech or Roche for R&D costs under the cost sharing
arrangement of the Tripartite Agreement are recorded as an
increase or decrease to R&D expenses in the accompanying
consolidated statements of operations.

Under the OSI/ Genentech collaboration agreement, we agreed to
collaborate in the product development of Tarceva with the goals
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 the product. Consistent with the
development plan and with the approval of a joint steering
committee, we agree with Genentech as to who will own and be
responsible for the filing of drug approval applications with
the FDA other than the first NDA, which we owned and filed, and
the first supplemental NDA, which we owned and which we filed.
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.

We have certain co-promotion rights under the OSI/ Genentech
collaboration agreement, which are defined in an amendment to
the agreement effective as of June 4, 2004. Pursuant to
this amendment, we co-promote Tarceva using a sales force equal
to or greater than 25% of the combined OSI/ Genentech sales
force. We share equally in the operating profits or losses on
products resulting from the collaboration. Under the OSI/
Genentech collaboration agreement, we granted to Genentech a
royalty-free non-transferable (except under certain
circumstances), non-sublicensable (except under certain
circumstances), co-exclusive license under our patents and
know-how related to Tarceva to use, sell, offer for sale and
import products resulting from the collaboration in the United
States, its territories and Puerto Rico. In addition, Genentech
granted to us a royalty-free non-transferable (except under
certain circumstances), non-sublicensable (except under certain
circumstances), co-exclusive license to certain patents and
know-how held by Genentech to use, make, have made, sell, offer
for sale and import products resulting from the collaboration in
the United States, its territories and Puerto Rico. We have
primary responsibility for patent filings for the base patents
protecting Tarceva and, in addition, we have the right, but not
the obligation, to institute, prosecute and control patent
infringement claims relating to the base patents.

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STATEMENTS  (Continued)

In connection with our collaboration with Genentech, Genentech
recognizes all U.S. sales of Tarceva. We recognize revenues
and losses from our alliance with Genentech, which consists of
our 50% share of the pretax profits (loss) generated from the
sales of Tarceva in the United States. We also recognize
manufacturing revenue from the sale of inventory to Genentech
for commercial sales of Tarceva in the United States and partial
reimbursement from Genentech of our Tarceva-related commercial
expenses. We receive royalties on sales of Tarceva outside of
the United States by Roche.

The OSI/ Genentech collaboration agreement continues until the
date on which neither we nor Genentech are entitled to receive a
share of the operating profits or losses on any products
resulting from the collaboration, that is, until the date that
we and Genentech mutually agree to terminate the collaboration
or until either party exercises its early termination rights.
The OSI/ Genentech collaboration agreement is subject to early
termination in the event of certain customary defaults, such as
material breach of the agreement and bankruptcy. The provisions
of the amendment allowing us to co-promote are also subject to
termination by Genentech upon a material breach by us of the
amendment, which remains uncured, or upon a pattern of
nonmaterial breaches which remains uncured. In addition, since
January 8, 2003, Genentech has had the right to terminate
the OSI/ Genentech collaboration agreement with six months
prior written notice.

Effective June 4, 2004, we entered into a Manufacturing and
Supply Agreement with Genentech that defined each partys
responsibilities with respect to the manufacture and supply of
clinical and commercial quantities of Tarceva. Under certain
circumstances, if we fail to supply such clinical and commercial
quantities, Genentech has the right, but not the obligation, to
assume responsibility for such supply. The Manufacturing and
Supply Agreement will terminate upon the termination of the OSI/
Genentech collaboration agreement.

Under the OSI/ Roche agreement, we granted to Roche a license to
our intellectual property rights with respect to Tarceva. Roche
is collaborating with us and Genentech in the continued
development of Tarceva and is responsible for marketing and
commercialization of Tarceva outside of the United States in
certain territories as defined in the agreement. The grant is a
royalty-bearing, non-transferable (except under certain
circumstances), non-sublicensable (except under certain
circumstances), sole and exclusive license to use, sell, offer
for sale and import products resulting from the development of
Tarceva worldwide, other than the territories covered by the
OSI/ Genentech collaboration agreement. In addition, Roche has
the right, which it has exercised, to manufacture commercial
supplies of Tarceva for its territory, subject to certain
exceptions. Roche will pay us certain milestone payments and
royalty payments on sales of products resulting from the
collaboration. We have primary responsibility for patent filings
for the base patents protecting Tarceva and, in addition, we
have the right, but not the obligation, to institute, prosecute
and control patent infringement claims relating to the base
patents. The OSI/ Roche agreement continues until the date on
which we are no longer entitled to receive a royalty on products
resulting from the development of Tarceva, that is, until the
date of expiration or revocation or complete rejection of the
last to expire patent covering Tarceva or, in countries where
there is no valid patent covering Tarceva, on the tenth
anniversary of the first commercial sale of Tarceva in that
country, or until either party exercises early termination
rights. The OSI/ Roche agreement is subject to early termination
in the event of certain customary defaults, such as material
breach of the agreement and bankruptcy. In addition, since
July 31, 2003, Roche has had the right to terminate the
agreement on a country-by-country basis with six months
prior written notice. Since such time, we also have had the
right to terminate the agreement on a country-by-country basis
if Roche has not launched or marketed a product in such country
under certain circumstances.

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STATEMENTS  (Continued)

(b)     Pfizer

In December 2002, Pfizer and Eyetech entered into several
concurrent agreements to jointly develop and commercialize
Macugen. The agreement became effective February 3, 2003
when government approval of the transaction was obtained. Pfizer
has funded, and is obligated to continue to fund, a majority of
the ongoing development costs incurred pursuant to an agreed
upon development plan covering the development of Macugen for
age-related macular degeneration, or AMD, diabetic macular
edema, or DME, central retinal vein occlusion or CRVO and other
agreed upon ophthalmic indications. In the United States, we are
co-promoting Macugen with Pfizer, we and Pfizer share in profits
and losses from the sale of Macugen. Outside the United States,
Pfizer markets the product under an exclusive license, for which
we receive royalty payments based on net sales.

Under the agreement, the parties sharing of profits and
losses from the commercialization of Macugen in the United
States extends until the later of 15 years after commercial
launch in the United States or the expiration of the United
States patent rights licensed to Pfizer. The payment of
royalties to us by Pfizer based on net sales of Macugen outside
the United States extends, on a country-by-country basis, until
the later of 15 years after commercial launch and the
expiration of the patent rights licensed to Pfizer in each
particular country. The royalty rate on net sales of Macugen
outside the United States is reduced on a country-by-country
basis to the extent that the patent rights in a particular
country expire or a generic form of Macugen is marketed in that
country. We commercially launched Macugen in January 2005. The
United States patent rights licensed by us to Pfizer expire
between 2010 and 2017. The corresponding foreign rights include
patents that expire between 2011 and 2017 and patent
applications which, if issued as patents, are expected to expire
between 2011 and 2020. Pfizer may terminate the collaboration
relationship without cause upon six to twelve months prior
notice, depending on when such notice is given. Either party may
terminate the collaboration relationship based upon material
uncured breaches by the other party. In addition, we may
terminate the collaboration relationship if, during specified
periods, net sales of Macugen do not reach specified levels. If
we elect to terminate the collaboration in this situation, we
would be required to pay royalties to Pfizer based on net sales
of Macugen following such termination.

The collaboration is governed by a joint operating committee,
consisting of an equal number of representatives of us and
Pfizer. There are also subcommittees with equal representation
from both parties that have responsibility over development and
regulatory, manufacturing and commercialization matters. In the
case of unresolved disagreement, ultimate decision-making
authority is vested in us as to some matters and in Pfizer as to
other matters. A third category of decisions requires the
approval of both us and Pfizer. Outside the United States,
ultimate decision-making authority as to most matters is vested
in Pfizer.

Based on the achievement of certain specified worldwide
regulatory submission and approvals, we would be eligible to
receive up to an additional $90 million in license
payments. We also have the potential to receive up to an
additional $450 million in milestone payments, which are
contingent upon successful commercialization of Macugen and
which are based on attainment of agreed-upon sales levels.

(c)     Serono

On March 11, 2003, we entered into a co-promotion agreement
with Ares Trading, an affiliate of Serono, to market and promote
Novantrone for approved oncology indications in the United
States through December 2017. In consideration for these
exclusive rights, we paid $46.0 million in cash, including
professional fees. The purchase price and related professional
fees, net of related amortization, are included in other
intangible assets-net in the accompanying consolidated balance
sheets as of December 31, 2005 and 2004, and were initially
amortized on a straight-line basis through expiration of

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STATEMENTS  (Continued)

the Novantrone patent in April 2006. At December 31, 2005,
we revised the future recoverability period of Novantrone
intangible asset through the end of 2008 based upon revised
estimates of future cash flows subsequent to the expiration of
that patent. In consideration for certain transition services
required to be provided by Serono, we also paid a fee of
$10.0 million, which was recognized over the four-month
transition period from the effective date of the agreement and
is included in selling, general and administrative expense in
the accompanying consolidated statement of operations for the
year ended September 30, 2003. Under the terms of the
agreement, we are also 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.
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 $29.7 million and
$11.4 million for the year ended December 31, 2005 and
the three months ended December 31, 2004, respectively.
Sales commissions totaled $34.3 million and
$16.3 million for the years ended September 30, 2004
and 2003, respectively.

(d)     Anaderm

In connection with our former research agreement with Pfizer and
New York University for the discovery and development of novel
compounds to treat conditions such as baldness, wrinkles and
pigmentation disorders, which was eventually terminated, we
received $6.2 million of wind-down fees and collaborative
revenues in consideration for transferring all research being
performed by us for the year ended September 30, 2003.

(e)     Tanabe

Effective as of October 1, 1999, we entered into the
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 Prosidion. The contract period under this agreement
expired on October 1, 2003 and was not renewed. We
recognized $3.4 million of collaborative program revenues
from Tanabe in the year ended September 30, 2003. 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 million of
Prosidion preferred stock. This expense of $2.0 million is
included in R&D expenses on the accompanying statement of
operations for September 30, 2004. Prosidion is also
required to make certain payments to Tanabe upon the achievement
of certain milestones.

(f)     Other

Under the terms of the aforementioned and other collaborative
research agreements, with terms similar to the aforementioned
agreements, certain collaborative partners will pay us royalties
on net sales of products resulting from these research programs
in addition to the research revenues described below. We or our
collaborative partners may terminate each of the collaborative
research programs upon the occurrence of certain events.

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STATEMENTS  (Continued)



(5)
    License AgreementsWe have entered into various license agreements with third
parties to grant the use of our proprietary assets. These
licenses include the use of our patented gene transcription
estate as well as the use of our DPIV patent estate acquired
from Probiodrug. Licensees may be obligated to pay us license
fees, annual fees, and milestones and royalties based on the
development and sale of products derived from the licensed
patents. Generally, the duration of each license is to be
coextensive with the life of the last to expire of the
underlying patents. License and milestone payments recognized as
revenue for the year ended December 31, 2005 for license of
our DPIV patent estate was $14.2 million.



(6)
    Property, Equipment and Leasehold ImprovementsProperty, equipment and leasehold improvements are recorded at
cost and consist of the following (in thousands):

|                                                          |  |                |               |              |      |   |         |      |  |   |         |  
|--------------------------------------------------------- |  | -------------- | ------------- | ------------ | ---- | - | ------- | ---- |  | - | ------- | -
|                                                          |  |                |               | December 31, |     
|                                                          |  | Estimated Life |               |              |      |  
|                                                          |  | (years)        |               |              | 2005 |   |         | 2004 | 
|                                                          |  |                |               |              |      |   |         |      | 
|Land                                                      |  |                |              |              |      | $ | 3,600   |      |  |   |        |  
|Building and improvements                                 |  |                | 10-35         |              |      |   | 17,447  |      |  |   |        |  
|Laboratory equipment                                      |  |                | 5-15          |              |      |   | 25,872  |      |  |   | 29,927  |  
|Office furniture and equipment and
    computer equipment |  |                | 3- 10         |              |      |   | 14,004  |      |  |   | 14,355  |  
|Capitalized software                                      |  |                | 3             |              |      |   | 6,274   |      |  |   | 4,631   |  
|Manufacturing equipment                                   |  |                | 7             |              |      |   | 4,400   |      |  |   | 97      |  
|Leasehold improvements                                    |  |                | Life of lease |              |      |   | 33,262  |      |  |   | 33,681  |  
|                                                          |  |                |               |              |      |   |         |      | 
|Total                                                     |  |                |               |              |      |   | 104,859 |      |  |   | 82,691  |  
|Less: accumulated depreciation and
    amortization       |  |                |               |              |      |   | (42,912 | )    |  |   | (50,929 | )
|                                                          |  |                |               |              |      |   |         |      | 
|Property, equipment and leasehold
    improvements, net   |  |                |               |              |      | $ | 61,947  |      |  | $ | 31,762  |  
|                                                          |  |                |               |              |      |   |         |      | 





|    |                                     
|--- | ------------------------------------
|(7) | Goodwill and Other Intangible Assets



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                |  |              |         |     |              |   |         |       |  |   |          |  |  |              |        |  |       |   |         |   |  |   |        | 
|----------------------------------------------- |  | ------------ | ------- | --- | ------------ | - | ------- | ----- |  | - | -------- |  |  | ------------ | ------ |  | ----- | - | ------- | - |  | - | ------ | 
|                                                |  | December 31, |        
|                                                |  |              |        
|                                                |  | 2005         |         |     | 2004         |  
|                                                |  |              |         |     |              |  
|                                                |  |              |         | Net |              |   |         |       |  |   | Net      |  |  |             
|                                                |  | Carrying     |         |     | Accumulated  |   |         | Book  |  |   | Carrying |  |  | Accumulated  |        |  | Book  |  
|                                                |  | Amount       |         |     | Amortization |   |         | Value |  |   | Amount   |  |  | Amortization |        |  | Value |  
|                                                |  |              |         |     |              |   |         |       |  |   |          |  |  |              |        |  |       |  
|Novantrone technology                           |  | $            | 46,009  |     |              | $ | (41,657 | )     |  | $ | 4,352    |  |  | $            | 46,009 |  |       | $ | (26,735 | ) |  | $ | 19,274 | 
|Macugen                                         |  |              | 201,400 |     |              |   | (2,263  | )     |  |   | 199,137  |  |  |              |       |  |       |   |        |   |  |   |       | 
|Acquired patent estate                          |  |              | 668     |     |              |   | (65     | )     |  |   | 603      |  |  |              | 537    |  |       |   | (18     | ) |  |   | 519    | 
|Acquired licenses issued to other
    companies |  |              | 3,458   |     |              |   | (356    | )     |  |   | 3,102    |  |  |              | 3,223  |  |       |   | (105    | ) |  |   | 3,118  | 
|                                                |  |              |         |     |              |   |         |       |  |   |          |  |  |              |        |  |       |  
|Total                                           |  | $            | 251,535 |     |              | $ | (44,341 | )     |  | $ | 207,194  |  |  | $            | 49,769 |  |       | $ | (26,858 | ) |  | $ | 22,911 | 
|                                                |  |              |         |     |              |   |         |       |  |   |          |  |  |              |        |  |       |  









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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



(8)
    Accounts Payable and Accrued ExpensesAccounts payable and accrued expenses at December 31, 2005
and 2004 are comprised of (in thousands):

|                                             |  |              |        |  |      |   |        | 
|-------------------------------------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                                             |  | December 31, |       
|                                             |  |              |       
|                                             |  | 2005         |        |  | 2004 |  
|                                             |  |              |        |  |      |  
|Accounts payable                             |  | $            | 9,473  |  |      | $ | 2,531  | 
|Accrued payroll and employee
    benefits    |  |              | 3,538  |  |      |   | 7,038  | 
|Accrued incentive compensation               |  |              | 3,963  |  |      |   | 1,142  | 
|Accrued exit costs (see
    note 17)         |  |              | 10,241 |  |      |   | 4,302  | 
|Accrued interest                             |  |              | 1,580  |  |      |   | 1,516  | 
|Accrued CRO and site costs                   |  |              | 5,248  |  |      |   | 1,193  | 
|Accrued commercial and development
    costs |  |              | 5,467  |  |      |   | 11,663 | 
|Accrued royalties                            |  |              | 9,060  |  |      |   |       | 
|Accrued deferred compensation                |  |              | 3,910  |  |      |   |       | 
|Other accrued expenses                       |  |              | 27,987 |  |      |   | 12,974 | 
|                                             |  |              |        |  |      |  
|                                             |  | $            | 80,467 |  |      | $ | 42,359 | 
|                                             |  |              |        |  |      |  





|    |                                   
|--- | ----------------------------------
|(9) | Collaborative Profit Share Payable





|     |                                      
|---- | -------------------------------------
|(10) | Convertible Senior Subordinated Notes

(a)     2.0% Convertible Senior
Subordinated Notes




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

note measurement period; (iii) upon the occurrence of
specified corporate transactions, as described in the indenture
for the 2025 notes; (iv) if we call the notes for
redemption; or (v) any time on or after December 15,
2020. Upon conversion, we will have the right to deliver, in
lieu of shares of common stock, cash or a combination of cash
and shares of common stock. At any time before the maturity
date, we may irrevocably elect, in our sole discretion, to
satisfy our conversion obligation in cash up to 100% of the
principal amount of the notes converted, with any remaining
amount to be satisfied in shares of our common stock. If certain
fundamental changes occur before December 15, 2010, the
conversion rate may increase, or under certain circumstances, we
may elect to change our conversion obligations to provide for
conversion of the notes into the acquiring companys common
stock. We may redeem the 2025 Notes, in whole or in part, for
cash, at any time on or after December 15, 2010 for a price
equal to 100% of the principal amount of the 2025 Notes to be
redeemed, plus any accrued and unpaid interest. The holders of
the 2025 Notes have the right to require us to purchase, for
cash, all of the 2025 Notes, or a portion thereof, on
December 15, 2010, December 15, 2015, on
December 15, 2020 and under certain other circumstances as
set out in the indenture, for a price equal to 100% of the
principal amount of the 2025 Notes plus any accrued and unpaid
interest. The related debt issuance costs of $3.9 million
were deferred and are being amortized on a straight-line basis
over a five-year term, which represents the earliest date that
we may redeem the 2025 Notes. Concurrent with the sale of the
2025 Notes, we used $11.8 million of the net proceeds for
the purchase of 500,000 shares of our common stock (see
note 11(g)) and we purchased a call spread overlay
transaction from UBS, AG at a cost of $12.2 million. The
call spread is a European type option with a lower strike price
of $29.425 and an upper strike price of $40.00 and involves an
aggregate of 3.4 million shares of our common stock and
expires on December 15, 2010. The call spread overlay
agreement has the effect of increasing the effective conversion
price of the 2025 Notes from our perspective to $40.00 per
share. The agreement calls for settlement using net shares.
Under the agreement, UBS will deliver to us the aggregate number
of shares we are required to deliver to a holder of 2025 Notes
that presents such notes for conversion. If the market price per
share of our common stock is above $40.00 per share, we
will be required to deliver shares of our common stock
representing the value in excess of the strike price. In
accordance with Emerging Issues Task Force Issue
(EITF)
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled In, a Companys Own Stock
(EITF
No. 00-19)
and SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity, we recorded the purchase of the call spread
overlay option agreement as a reduction in additional paid in
capital, and will not recognize subsequent changes in fair value
of the agreement. At December 31, 2005 the fair value of
the outstanding 2025 Notes, was approximately
$129.6 million, based on their quoted market value.

(b)     3.25% Convertible
Senior Subordinated Notes

On September 8, 2003, we issued $135.0 million
aggregate principal amount of convertible senior subordinated
notes, or the 2023 Notes, in a private placement for net
proceeds to us of $130.3 million. On September 17,
2003, the bankers associated with this convertible debt offering
exercised an option to purchase an additional $15.0 million
of the 2023 Notes, for additional net proceeds to us of
$14.5 million. The 2023 Notes bear interest at
3.25% per annum, payable semi-annually, and mature on
September 8, 2023. The 2023 Notes are convertible into
shares of our common stock at a conversion price of
$50.02 per share, subject to normal and customary
adjustments such as stock dividends or other dilutive
transactions. We may redeem the 2023 Notes, in whole or in part,
for cash, at any time after September 8, 2008 for a price
equal to 100% of the principal amount of the 2023 Notes to be
redeemed, plus any accrued and unpaid interest. The holders of
the 2023 Notes have the right to require us to purchase all of
the 2023 Notes, or a portion thereof, on September 8, 2008,
September 8, 2013 and September 8, 2018 for a price
equal to 100% of the principal amount of the 2023 Notes plus any
accrued and unpaid interest. Upon a change in control, as
defined in the indenture governing the

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2023 Notes, the holders of the 2023 Notes will have the right to
require us to purchase all of the 2023 Notes, or a portion
thereof, not previously called for redemption at a purchase
price equal to 100% of the principal amount of the 2023 Notes
purchased, plus accrued and unpaid interest. Upon the election
by the holders of the right to require us to purchase the 2023
Notes or upon a change of control, we may elect to pay the
purchase price in common stock instead of cash. The number of
shares of common stock a holder will receive will equal the
purchase price divided by 95% of the average of the closing
prices of our common stock for the five-trading day period
ending on the third business day prior to the purchase date. The
related debt issuance costs of $5.2 million were deferred
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 (see
note 11(g)). At December 31, 2005 and 2004, the fair
value of the outstanding 2023 Notes, was approximately
$144.3 million and $257.8 million, respectively, based
on their quoted market value.

(c)     4.00% Convertible
Senior Subordinated Notes

On February 1, 2002, we issued $200.0 million
aggregate principal amount of convertible senior subordinated
notes, or 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 $50.0 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 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. The difference between the
purchase price and the principal amount of the 2009 Notes
retired and accrued interest, resulted in a net gain on the
early retirement of the 2009 Notes in the fourth quarter of
fiscal 2002 of $12.6 million, including the write off of
approximately $1.3 million of the related debt issuance
costs. 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, we issued
3.2 million shares of our common stock and paid the
remaining portion of the guaranteed interest of
$6.4 million which is included in interest expense on the
accompanying consolidated statement of operations for fiscal
2004. 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. Upon conversion of the 2009
Notes, the remaining balance of the unamortized debt issuance
costs of $3.7 million was reclassified to additional paid
in capital.



(11)
    Stockholders Equity(a)     Stock Option Plans

We have established 10 stock option plans for our employees,
officers, directors and consultants, including our Amended and
Restated Stock Incentive Plan (formerly, the 2001 Incentive and
Non-Qualified Stock Option Plan). The plans are administered by
the Compensation Committee of the Board of Directors, which may
grant either non-qualified or incentive stock options. The
Committee determines the exercise price and vesting schedule at
the time the option is granted. Options vest over various
periods and expire no later than 10 years from date of
grant. The total authorized shares under these plans are
16,359,749.

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Our Board of Directors adopted the 2001 Incentive and
Non-Qualified Stock Option Plan, or the 2001 Stock Option Plan,
effective June 13, 2001, which was approved by the
stockholders on March 13, 2002. The 2001 Stock Option Plan
permitted the grant of stock options to purchase up to
4.0 million shares as well as continuing automatic,
formula-based grants of non-qualified stock options to directors
who are not are employees. On December 11, 2002, our Board
of Directors approved an amendment to the 2001 Stock Option Plan
that only affected the automatic, formula-based grants of
non-qualified stock options to directors who are not our
employees. On March 17, 2004, at the 2004 Annual Meeting of
Stockholders, our stockholders approved an amendment and
restatement of the 2001 Stock Option Plan in the form of the
Amended and Restated Stock Incentive Plan, or the Plan, which
was adopted by the Board of Directors on January 23, 2004.
On March 16, 2005 at the 2005 Annual Meeting of
Stockholders, our stockholders approved an amendment to the
Plan, which amendment was adopted by the Board of Directors on
January 21, 2005 to increase the number of equity awards
issuable under the Plan from 4.0 million shares to
6.8 million. Participation in the Plan is limited to our
directors, officers, employees and consultants of our parent or
subsidiaries. The Plan permits the issuance of stock options,
and the grant of restricted stock, stock appreciation rights and
stock bonus awards upon such terms and conditions as the
Compensation Committee appointed by the Board of Directors
determines. The Plan also provides for automatic, formula-based
grants to our directors.

On November 12, 2005, our Board of Directors adopted the
OSI Pharmaceuticals, Inc. Stock Incentive Plan for Pre-Merger
Employees of Eyetech Pharmaceuticals, Inc., or the Eyetech Plan.
The Eyetech Plan permits the issuance of stock options, and the
grant of restricted stock, stock appreciation rights and stock
bonus awards upon such terms and conditions as the Compensation
Committee appointed by the Board of Directors determines.
Persons eligible to receive grants under the Eyetech Plan
consist of directors, officers, employees and consultants of OSI
or a subsidiary of OSI who were employees of Eyetech immediately
prior to the effective date of the acquisition of Eyetech. Under
the Eyetech Plan, we may grant incentive stock options and
non-qualified stock options to purchase up to
800,000 shares of common stock.

Pursuant to the Merger Agreement, we assumed Eyetechs 2001
Stock Plan and, to facilitate such assumption, adopted the OSI
Pharmaceuticals, Inc. Stock Plan for Assumed Options of
Pre-Merger Employees of Eyetech Pharmaceuticals, Inc., or the
Assumed Plan. Pursuant to the terms of the Assumed Plan and the
Merger Agreement, we assumed all options and other awards
granted to employees, outside directors and consultants
outstanding under the Plan. The number of shares of OSI common
stock subject to each assumed option was determined by
multiplying the number of shares of the Eyetech common stock
that were subject to each option prior to the effective time of
the Eyetech Acquisition by a conversion ratio of 0.491, and
rounding that result down to the nearest whole number of shares
of OSI common stock. The per share exercise price for the
assumed options was determined by dividing the per share
exercise price of the Eyetech common stock subject to each
option as in effect immediately prior to the effective time by
the conversion ratio of 0.491 and rounding that result up to the
nearest whole cent. Under the Plan, we granted incentive stock
options and non-qualified stock options to purchase up to
153,000 shares in connection with the Acquisition.

As discussed in Note 1(e), on November 30, 2005, the
Compensation Committee of the Board of Directors approved the
forward vesting of all unvested
out-of-the-money stock
options with an exercise price greater than $30 per share
for all of our employees, other than executive officers. Options
to purchase approximately 1.6 million shares of common
stock were accelerated. Options held by executive officers and
non-employee directors were not accelerated. The accelerated
options, which are considered fully vested as of
November 30, 2005, have grant prices ranging from $30.09 to
$82.40 per share and a weighted average grant price of
$45.44 per share.

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes changes in the number of common
shares subject to options in the 10 stock option plans, options
established for certain outside consultants, options granted to
employees of OSI-UK, and options granted to outside directors
for the year ended December 31, 2005, the three months
ended December 31, 2004, and the years ended
September 30, 2004 and 2003, respectively:

|                                    |             |                |  |                |     |  |          |       |  |  |         |       |  |  |   |       | 
|----------------------------------- | ----------- | -------------- |  | -------------- | --- |  | -------- | ----- |  |  | ------- | ----- |  |  | - | ----- | 
|                                    |             |                |  | Exercise Price |    
|                                    |             |                |  |                |    
|                                    |             | Shares         |  |                |     |  | Weighted |      
|                                    |             | (In thousands) |  |                | Low |  |          | High  |  |  | Average |      
|                                    |             |                |  |                |     |  |          |       |  |  |         |      
|Balance at September 30,
    2002  |             |                |  |                |     |  |          |       |  |  |         |       |  |  |   |      
|                                    | Unexercised |                |  | 4,610          |     |  | $        | 3.25  |  |  | $       | 60.06 |  |  | $ | 26.00 | 
|                                    | Granted     |                |  | 1,665          |     |  |          | 15.02 |  |  |         | 37.16 |  |  |   | 28.10 | 
|                                    | Exercised   |                |  | (642           | )   |  |          | 3.25  |  |  |         | 31.85 |  |  |   | 10.60 | 
|                                    | Forfeited   |                |  | (341           | )   |  |          | 21.55 |  |  |         | 51.80 |  |  |   | 33.57 | 
|                                    |             |                |  |                |     |  |          |       |  |  |         |      
|Balance at September 30,
    2003  |             |                |  |                |     |  |          |       |  |  |         |       |  |  |   |      
|                                    | Unexercised |                |  | 5,292          |     |  | $        | 3.25  |  |  | $       | 60.06 |  |  | $ | 28.01 | 
|                                    | Granted     |                |  | 1,206          |     |  |          | 25.21 |  |  |         | 82.88 |  |  |   | 61.40 | 
|                                    | Exercised   |                |  | (1,489         | )   |  |          | 3.25  |  |  |         | 60.06 |  |  |   | 26.21 | 
|                                    | Forfeited   |                |  | (121           | )   |  |          | 13.09 |  |  |         | 67.63 |  |  |   | 36.97 | 
|                                    |             |                |  |                |     |  |          |       |  |  |         |      
|Balance at September 30,
    2004  |             |                |  |                |     |  |          |       |  |  |         |       |  |  |   |      
|                                    | Unexercised |                |  | 4,888          |     |  | $        | 3.63  |  |  | $       | 82.88 |  |  | $ | 36.61 | 
|                                    | Granted     |                |  | 32             |     |  |          | 47.73 |  |  |         | 63.97 |  |  |   | 55.06 | 
|                                    | Exercised   |                |  | (454           | )   |  |          | 4.25  |  |  |         | 60.06 |  |  |   | 25.60 | 
|                                    | Forfeited   |                |  | (220           | )   |  |          | 14.20 |  |  |         | 67.63 |  |  |   | 49.68 | 
|                                    |             |                |  |                |     |  |          |       |  |  |         |      
|Balance at December 31,
    2004   |             |                |  |                |     |  |          |       |  |  |         |       |  |  |   |      
|                                    | Unexercised |                |  | 4,246          |     |  | $        | 3.63  |  |  | $       | 82.88 |  |  | $ | 37.46 | 
|                                    | Granted     |                |  | 3,573          |     |  |          | 22.28 |  |  |         | 72.30 |  |  |   | 32.22 | 
|                                    | Exercised   |                |  | (463           | )   |  |          | 4.12  |  |  |         | 51.80 |  |  |   | 21.76 | 
|                                    | Forfeited   |                |  | (435           | )   |  |          | 18.18 |  |  |         | 78.53 |  |  |   | 45.93 | 
|                                    |             |                |  |                |     |  |          |       |  |  |         |      
|Balance at December 31,
    2005   |             |                |  |                |     |  |          |       |  |  |         |       |  |  |   |      
|                                    | Unexercised |                |  | 6,921          |     |  | $        | 3.63  |  |  | $       | 82.88 |  |  | $ | 35.26 | 



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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information regarding stock options outstanding as of
December 31, 2005, is as follows:

|                |  |                |       |                     |          |          |                     |             |  |  |                |          |  |          |       |  |  |   |       | 
|--------------- |  | -------------- | ----- | ------------------- | -------- | -------- | ------------------- | ----------- |  |  | -------------- | -------- |  | -------- | ----- |  |  | - | ----- | 
|                |  |                |       | Options Outstanding |          |          | Options Exercisable |            
|                |  |                |       |                     |          |          |                     |            
|                |  |                |       |                     |          | Weighted |                     |             | 
|                |  |                |       | Weighted            |          |          | Average             |             |  |  |                | Weighted | 
|                |  |                |       | Average             |          |          | Remaining           |             |  |  |                | Average  | 
|                |  | Shares         |       |                     | Exercise |          |                     | Contractual |  |  | Shares         |          |  | Exercise |      
|                |  | (In thousands) |       |                     | Price    |          |                     | Life        |  |  | (In thousands) |          |  | Price    |      
|Price Range     |  |                |       |                     |          |          |                     |             |  |  |                |          |  |          |      
|$ 0.00 - $10.00 |  |                | 247   |                     |          | $        | 6.62                |             |  |  | 1.7            |          |  |          | 247   |  |  | $ | 6.62  | 
|$10.01 - $20.00 |  |                | 244   |                     |          |          | 16.04               |             |  |  | 6.6            |          |  |          | 237   |  |  |   | 16.06 | 
|$20.01 - $30.00 |  |                | 2,466 |                     |          |          | 23.66               |             |  |  | 6.6            |          |  |          | 583   |  |  |   | 22.57 | 
|$30.01 - $40.00 |  |                | 2,068 |                     |          |          | 35.51               |             |  |  | 7.0            |          |  |          | 1,672 |  |  |   | 35.12 | 
|$40.01 - $50.00 |  |                | 824   |                     |          |          | 45.70               |             |  |  | 8.0            |          |  |          | 630   |  |  |   | 45.38 | 
|$50.01 - $60.00 |  |                | 235   |                     |          |          | 52.86               |             |  |  | 6.2            |          |  |          | 235   |  |  |   | 52.86 | 
|$60.01 - $70.00 |  |                | 770   |                     |          |          | 66.44               |             |  |  | 7.9            |          |  |          | 709   |  |  |   | 66.34 | 
|$70.01 - $80.00 |  |                | 12    |                     |          |          | 76.71               |             |  |  | 3.6            |          |  |          | 12    |  |  |   | 76.71 | 
|$80.01 - $90.00 |  |                | 55    |                     |          |          | 82.84               |             |  |  | 8.4            |          |  |          | 32    |  |  |   | 82.80 | 
|                |  |                |       |                     |          |          |                     |             |  |  |                |          |  |          |      
|                |  |                | 6,921 |                     |          | $        | 35.26               |             |  |  | 6.9            |          |  |          | 4,357 |  |  | $ | 38.78 | 
|                |  |                |       |                     |          |          |                     |             |  |  |                |          |  |          |      

(b)     Shareholder Rights Plan








(c)     Authorized Common and
Preferred Stock




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(d)     Employee Stock Purchase
Plan

We have an Employee Stock Purchase Plan under which eligible
employees may contribute up to 10% of their base earnings toward
the quarterly purchase of our common stock. The employees
purchase price is derived from a formula based on the fair
market value of the common stock. No compensation expense is
recorded in connection with the plan. During the year ended
December 31, 2005, the quarter ended December 31, 2005
and the fiscal years ended September 30, 2004 and 2003,
approximately 22,000, 3,000, 16,000, and 26,000 shares,
respectively, were issued with approximately 161, 148, 136, and
118 employees participating in the plan, respectively. At
December 31, 2005, we had 542,000 shares of our
authorized common stock reserved in connection with this plan.

We sponsor a stock purchase plan for our UK-based employees.
Under the terms of the plan, eligible employees may contribute
between £5 and £250 of their base earnings, in
36 monthly installments towards the purchase of our common
stock. The employees purchase price is determined at the
beginning of the
36-month period and
compensation expense is recorded over the
36-month period. As a
result of our decision in the fourth quarter of fiscal 2004 to
consolidate all of our U.K.-based oncology research and
development activities into our New York locations (see
note 17(b)), we did not offer this plan to UK employees for
fiscal 2004. As a result of the minority interest buyout of
Prosidion in the second quarter of 2005, we offered this plan to
our UK employees in 2005. During fiscal 2003, the maximum shares
that could be issued under this plan were increased from
100,000 shares to 200,000 shares. As of
December 31, 2005 there were 57 employees and 16 employees
in the 2005 and 2003 stock purchase plans, respectively. At
December 31, 2005, we had 116,000 shares of our common
stock reserved in connection with this plan.

(e)     Stock Purchase Plan for the
Non-Employee Directors

Our Board of Directors approved the adoption of a stock purchase
plan for non-employee directors on June 21, 1995 subject to
the stockholders approval. On March 25, 1996 at the
1996 Annual Meeting of Stockholders, the stockholders approved
the Stock Purchase Plan for Non-Employee Directors, or the
Directors Stock Purchase Plan.

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

(f)     Issuance of Common Stock for
Acquisitions

On November 14, 2005, in connection with the acquisition of
Eyetech, we issued a total of 5.65 million shares of our
common stock valued at $205.4 million (see note 2(a)).

On April 14, 2005, in connection with the acquisition of
the minority interest in Prosidion, we issued 84,940 shares
of our common stock valued at $4.2 million (see
note 2(c)).

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On June 12, 2003, in connection with the acquisition of
Cell Pathways, we issued approximately 2.2 million shares
of our common stock valued at $31.2 million (see
note 2(d)).

(g)     Convertible Notes

On December 21, 2005, we issued $100.0 million
aggregate principal amount of the 2025 Notes in a private
placement for net proceeds to us of $96.5 million. On
December 28, 2005, the bankers associated with this
convertible debt offering exercised an option to purchase an
additional $15.0 million of the 2025 Notes, for an
additional net proceeds to us of $14.6 million. The 2025
Notes bear interest at 2.0% per annum, payable
semi-annually, and mature on December 15, 2025. The 2025
Notes are convertible into cash, shares of our common stock or a
combination of cash and shares of our common stock based on an
initial conversion rate, subject to adjustment, of
33.9847 shares per $1,000 principal amount of notes (which
represents an initial conversion price of $29.43 per share)
(see note 10(a)). In connection with the issuance of the
2025 Notes, we used $11.8 million of the net proceeds for
the purchase of 500,000 shares of our common stock.

Concurrent with the private placement of the 2025 Notes, we
purchased a call spread overlay transaction from UBS AG at a
cost of $12.2 million. The call spread is a European type
option with a lower strike price of $29.425 and an upper strike
price of $40.00 and involves an aggregate of 3.4 million
shares of our common stock and expires on December 15,
2010. The call spread overlay agreement has the effect of
increasing the effective conversion price of the 2025 Notes from
our perspective to $40.00 per share. The agreement calls
for settlement using net shares. Under the agreement, UBS will
deliver to us the aggregate number of shares we are required to
deliver to a holder of 2025 Notes that presents such notes for
conversion. If the market price per share of our common stock is
above $40.00 per share, we will be required to deliver
shares of our common stock representing the value in excess of
the strike price. In accordance with EITF
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled In, a Companys Own Stock
and SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity, we recorded the convertible note hedge in
additional paid in capital, and will not recognize subsequent
changes in fair value.

On September 8, 2003, we issued $135.0 million
aggregate principal amount of 2023 Notes in a private placement
for net proceeds to us of $130.3 million. On
September 17, 2003, the bankers associated with this
convertible debt offering exercised an option to purchase an
additional $15.0 million of 2023 Notes, for additional net
proceeds to us of $14.5 million. The 2023 Notes are
convertible into shares of our common stock at a conversion
price of $50.02 per share, subject to normal and customary
adjustments such as stock dividends or other dilutive
transactions (see note 10(b)). 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.

On February 1, 2002, we issued $200.0 million
aggregate principal amount of 2009 Notes in a private placement.
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 approximately $26.2 million.
The 2009 Notes were convertible into shares of our common stock
at a conversion price of $50.0 per share, subject to normal
and customary adjustments such as stock dividends or other
dilutive transactions. 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, we
issued 3.2 million shares of our common stock. Upon
conversion of the 2009 Notes the remaining balance of the
unamortized debt issuance costs of $3.7 million was
reclassified to additional paid in capital (see note 10(c)).

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(h)     Eyetech Merger

On November 14, 2005, we completed our acquisition of
Eyetech pursuant to the terms of an Agreement and Plan of Merger
dated August 21, 2005. As consideration for the merger,
each share of Eyetech common stock was purchased for $15 cash
and 0.12275 shares of our common stock. The aggregate
consideration related to the acquisition totaled
$909.3 million, including the cash consideration, value of
OSI stock issued, value of converted stock options issued, and
deal related costs. We issued a total of 5.65 million
shares valued at $205.4 million, which was based on the
average four-day closing price of our common stock around the
date of the announcement of the acquisition, which occurred on
August 21, 2005. In addition, each outstanding option to
purchase shares of Eyetech common stock, other than options
granted under Eyetechs 2001 Stock Plan, accelerated in
full and became vested and exercisable prior to the closing date
of November 14, 2005. Any of these options that remained
unexercised as of the effective time of the merger were
terminated or cancelled in accordance with their terms. Each
outstanding option granted under Eyetechs 2001 Stock Plan
was assumed by OSI at the effective time and became an option to
purchase shares of OSI stock at a ratio of 0.491. Based on this
ratio, we assumed approximately 153,000 options. The valued
assigned to options was $4.1 million of which
$1.9 million was included in the purchase price and the
remainder recognized as deferred compensation. Outstanding
unvested restricted shares as of the acquisition date were
converted into cash and shares of OSI Common Stock (restricted
to the same extent as the restricted stock being converted) on
the same basis as the outstanding stock of Eyetech. The value
assigned as of the acquisition date was $6.1 million and
recognized as deferred compensation in the accompanying
financial statements. The deferred compensation related to the
stock options and the restricted stock is being amortized over
the remaining vesting period.

(i)     Public Offering

On November 12, 2004, during the transition quarter, we
concluded a public offering of 6.0 million shares of our
common stock at a price of $64.50 per share. Gross proceeds
totaled $387.0 million with net proceeds of approximately
$365.0 million after all related fees. In addition, on
November 17, 2004, underwriters associated with the
offering exercised their over-allotment option to purchase an
additional 900,000 shares of our common stock at a price of
$64.50 per share. Gross proceeds from the exercise of the
over-allotment option totaled $58.1 million with net
proceeds of approximately $54.9 million.



(12)
    Income TaxesThere is no provision (benefit) for federal or state income
taxes, since we have incurred operating losses since inception
and have established a valuation allowance equal to the net
deferred tax assets.

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The tax effect of temporary differences, net operating loss
carry forwards and research and development tax credit carry
forwards as of December 31, 2005 and 2004 are as follows
(in thousands):

|                                                       |  |              |          |   |      |   |          |  
|------------------------------------------------------ |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                       |  | December 31, |         
|                                                       |  |              |         
|                                                       |  | 2005         |          |   | 2004 |  
|                                                       |  |              |          |   |      |  
|Deferred tax assets:                                   |  |              |          |   |      |   |          |  
|Net operating loss carry forwards                      |  | $            | 415,413  |   |      | $ | 339,242  |  
|Research and development tax credit
    carry forwards |  |              | 19,819   |   |      |   | 12,701   |  
|Intangible assets                                      |  |              | 11,092   |   |      |   | 6,155    |  
|Unearned revenue                                       |  |              | 20,822   |   |      |   | 8,412    |  
|Purchased research and experimental
    expenditures   |  |              | 53,444   |   |      |   | 56,449   |  
|Capitalized research and
    experimental expenditures |  |              | 11,742   |   |      |   | 14,017   |  
|Capitalized start-up costs                             |  |              | 3,072    |   |      |   | 6,022    |  
|Other                                                  |  |              | 17,428   |   |      |   | 15,341   |  
|                                                       |  |              |          |   |      |  
|                                                       |  |              | 552,832  |   |      |   | 458,339  |  
|Valuation allowance                                    |  |              | (447,663 | ) |      |   | (456,751 | )
|                                                       |  |              |          |   |      |  
|                                                       |  |              | 105,169  |   |      |   | 1,588    |  
|Deferred tax liability:                                |  |              |          |   |      |   |          |  
|Other                                                  |  |              | (1,186   | ) |      |   | (1,588   | )
|Inventory fair value adjustment                        |  |              | (20,345  | ) |      |   |         |  
|Macugen intangible                                     |  |              | (83,638  | ) |      |   |         |  
|                                                       |  |              |          |   |      |  
|                                                       |  |              | (105,169 | ) |      |   | (1,588   | )
|                                                       |  |              |          |   |      |  
|                                                       |  | $            |         |   |      | $ |         |  
|                                                       |  |              |          |   |      |  







|     |                              
|---- | -----------------------------
|(13) | Commitments and Contingencies

(a)     Lease Commitments




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

facilities in fiscal 2004, and the remaining net lease rental
payments for the Oxford, England facility in fiscal 2005. In
2005, we decided that we may utilize the Uniondale facility and
adjusted the accrual to reflect this decision. In addition,
future lease costs for certain Eyetech facilities which are part
of our exit plan were included in the determination of the
purchase price of Eyetech.

The following is a schedule of future minimum rental payments
for the next five fiscal years and thereafter required as of
December 31, 2005. Also included in the amounts below are
commitments for equipment under various operating leases (in
thousands).

|                    |  |   |         | 
|------------------- |  | - | ------- | 
|2006                |  | $ | 12,960  | 
|2007                |  |   | 12,154  | 
|2008                |  |   | 11,800  | 
|2009                |  |   | 11,573  | 
|2010                |  |   | 9,977   | 
|2011 and thereafter |  |   | 97,266  | 
|                    |  |   |        
|                    |  | $ | 155,730 | 
|                    |  |   |        



(b)     Contingencies






(c)     Borrowings




(d)     Rental obligation and
deferred rent




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(e)     Litigation

On or about December 16, 2004, several purported
shareholder class action lawsuits were filed in the United
States District Court for the Eastern District of New York
against us, certain of our current and former executive
Officers, and the members of our Board of Directors. The
lawsuits were brought on behalf of those who purchased or
otherwise acquired our common stock during certain periods in
2004, which periods differed in the various complaints. The
Court has now appointed a lead plaintiff, and on
February 17, 2006, the lead plaintiff filed a consolidated
amended class action complaint seeking to represent a class of
all persons who purchased or otherwise acquired our common stock
during the period from April 26, 2004 through
November 22, 2004. The consolidated complaint alleges that
defendants made material misstatements and omissions concerning
the survival benefit associated with our product, Tarceva and
the size of the potential market of Tarceva upon FDA approval of
the drug. It alleges violations of Sections 11, and 15 of
the Securities Act of 1933, as amended, and Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5
promulgated thereunder. The consolidated complaint seeks
unspecified compensatory damages and other relief. We intend to
vigorously defend this action. Based on the early stage of this
litigation, the ultimate outcome cannot be determined and
accordingly no provision has been recorded in the consolidated
financial statements.



(14)
    Related Party TransactionsOne member of our Board of Directors is a partner in a law firm
which represents us on our patent and license matters. Fees paid
to this firm during the twelve months ended December 31,
2005, the three months ended December 31, 2004 and the
fiscal years ended September 30, 2004 and 2003 were
approximately $299,000, $152,000, $557,000 and $579,000,
respectively. In addition, we have compensated other directors
for services performed pursuant to consultant arrangements as
follows: During the twelve months ended December 31, 2005,
the three months ended December 31, 2004 and the fiscal
years ended September 30, 2004 and 2003, consulting fees in
the amounts of $154,000, $15,000, $139,000, and $150,000,
respectively, were paid by us pursuant to these arrangements.
One member of our Board of Directors was an officer of Cold
Spring Harbor Laboratory through December 2003. In fiscal 2003,
we entered into a research agreement with Cold Spring Harbor
Laboratory. A director is on the faculty of Vanderbilt with
which we had a collaborative research agreement through
September 30, 2003, and also has a consulting agreement
with our subsidiary, Prosidion. One member of our Board of
Directors is an advisor to Roche, with which we have a
collaboration agreement.

In connection with the acquisition of certain assets from Gilead
on December 21, 2001, we assumed the loans of one of our
officers and one of our vice presidents with an aggregate loan
balance of $200,000. As of December 31, 2004 the carrying
amount of the loans were $82,000. As of December 31, 2005,
the loan balances were satisfied.



(15)
    Employee Savings and Investment PlanWe sponsor an Employee Savings and Investment Plan under
Section 401(k) of the Internal Revenue Code. The plan
allows our U.S. employees to defer from 2% to 20% of their
income on a pre-tax basis through contributions into designated
investment funds. For each dollar the employee invests, up to 6%
of his or her earnings, we will contribute an additional 50
cents into the funds. During the twelve months ended
December 31, 2005, the three months ended December 31,
2004 and the years ended September 30, 2004 and 2003, our
expenses related to the plan were approximately $848,000,
$168,000, $625,000, and $543,000, respectively.

We also sponsor four pension plans covering the employees of
OSI-UK and Prosidion. The Group Personal Pension Plan allows
employees to contribute up to 26% (depending on their age) of
their

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

income on a post-tax basis into designated investment funds. The
tax paid on the contribution is then recovered from the Inland
Revenue. We will contribute from 4% to 9% depending on the
employees contributions. The British Biotech Pension
Scheme covers employees retained from the acquisition of certain
assets from British Biotech, as well as certain former employees
of British Biotech hired by us subsequent to the acquisition.
The plan allows the employees to defer up to 15% of their income
on a pre-tax basis through contributions into designated pension
funds. For each period the employee invests, we will contribute
up to 9% into the funds. For the year ended December 31,
2005, the three months ended December 31, 2004, and the
years ended September 30, 2004 and 2003, respectively, our
expenses related to the plans were $560,000, $218,000, $841,000,
and $714,000, respectively.



(16)
    Employee Postretirement PlanOn November 10, 1992, we adopted a plan which provides
postretirement 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-payment provisions and
other limitations. We follow SFAS No. 106,
Employers Accounting for Postretirement Benefits
Other Than Pensions as amended by
SFAS No. 132(R), Employers Disclosures
About Pensions and Other Postretirement Benefits, to
account for and disclose the benefits to be provided by the
plan. Under SFAS No. 106, the cost of postretirement
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, or FSP, No. FAS 106-2,
Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003. FSP No. FAS 106-2 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 postretirement 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
postretirement benefits obligation or net postretirement
benefits cost in the consolidated financial statements
accompanying notes reflect the effects of the Act on our
postretirement benefit plan.

Net postretirement benefit cost for the year ended December, 31
2005, the three months ended December 31, 2004 and the
years ended September 30, 2004 and 2003 includes the
following components (in thousands):

|                                                                   |  |              |       |        |              |   |     |               |  |   |               |  |  |   |     | 
|------------------------------------------------------------------ |  | ------------ | ----- | ------ | ------------ | - | --- | ------------- |  | - | ------------- |  |  | - | --- | 
|                                                                   |  |              |       | Three  |              |   |     |               | 
|                                                                   |  |              |       | Months |              |   |     |               | 
|                                                                   |  | Year Ended   |       |        | Ended        |   |     | Year Ended    |  |   | Year Ended    | 
|                                                                   |  | December 31, |       |        | December 31, |   |     | September 30, |  |   | September 31, | 
|                                                                   |  | 2005         |       |        | 2004         |   |     | 2004          |  |   | 2003          | 
|                                                                   |  |              |       |        |              |   |     |               |  |   |               | 
|Service cost for benefits earned
    during the period             |  | $            | 839   |        |              | $ | 201 |               |  | $ | 572           |  |  | $ | 430 | 
|Interest cost on accumulated
    postretirement benefit obligation |  |              | 352   |        |              |   | 82  |               |  |   | 262           |  |  |   | 235 | 
|Amortization of initial benefits
    attributed to past service    |  |              | 6     |        |              |   | 1   |               |  |   | 6             |  |  |   | 6   | 
|Amortization of loss                                               |  |              | 64    |        |              |   | 15  |               |  |   | 39            |  |  |   | 29  | 
|                                                                   |  |              |       |        |              |   |     |               |  |   |               | 
|Net postretirement benefit cost                                    |  | $            | 1,261 |        |              | $ | 299 |               |  | $ | 879           |  |  | $ | 700 | 
|                                                                   |  |              |       |        |              |   |     |               |  |   |               | 

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The accrued postretirement benefit cost at December 31,
2005 and 2004 was as follows (in thousands):

|                                                  |  |      |        |   |      |   |        |  
|------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                  |  | 2005 |        |   | 2004 |  
|                                                  |  |      |        |   |      |  
|Accumulated postretirement benefit
    obligation |  | $    | 7,509  |   |      | $ | 6,186  |  
|Unrecognized cumulative net loss                  |  |      | (2,071 | ) |      |   | (1,893 | )
|Unrecognized transition obligation                |  |      | (85    | ) |      |   | (90    | )
|                                                  |  |      |        |   |      |  
|Accrued postretirement benefit cost               |  | $    | 5,353  |   |      | $ | 4,203  |  
|                                                  |  |      |        |   |      |  



|                             |                  |              |       |        |              |   |       |     |  
|---------------------------- | ---------------- | ------------ | ----- | ------ | ------------ | - | ----- | --- | -
|                             |                  |              |       | Three  |             
|                             |                  |              |       | Months |             
|                             |                  | Year Ended   |       |        | Ended        |  
|                             |                  | December 31, |       |        | December 31, |  
|                             |                  | 2005         |       |        | 2004         |  
|                             |                  |              |       |        |              |  
|Balance at beginning of year |                  | $            | 6,186 |        |              | $ | 5,776 |    
|                             | Benefit payments |              |       | (111   | )            |   |       | (21 | )
|                             | Loss experience  |              |       | 243    |              |   |       | 220 |  
|                             | Service cost     |              |       | 839    |              |   |       | 145 |  
|                             | Interest cost    |              |       | 352    |              |   |       | 66  |  
|                             |                  |              |       |        |              |  
|Balance at end of year       |                  | $            | 7,509 |        |              | $ | 6,186 |    
|                             |                  |              |       |        |              |  





|                                                     |  |      |      |   |      |  |      |      |  |  |      |  
|---------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                                     |  | 2005 |      |   | 2004 |  |      | 2003 | 
|                                                     |  |      |      |   |      |  |      |      | 
|Discount rate                                        |  |      | 5.50 | % |      |  | 5.75 | %    |  |  | 6.00 | %
|Expected long-term rate of return
    on plan assets |  |      | N/A  |   |      |  | N/A  |      |  |  | N/A  |  



|     |                            
|---- | ---------------------------
|(17) | Consolidation of Facilities

(a) Uniondale, NY




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ment of operations for year ended September 30, 2004. These
exit costs were comprised of the rental obligations for the
remainder of the lease (through June 2006) of $994,000, offset
by previously accrued rent expense of $180,000, the write down
of equipment and leaseholds of $724,000, and costs to restore
the facility to its original condition of $350,000. In the
quarter ended December 31, 2005 we reevaluated our plans
and have decided to extend the leases and may use the facility
as part of our future operations. As a result, we reversed
$298,000 of the remaining accrual as a credit to selling,
general and administrative expense for the year ended
December 31, 2005. The activity for the year ended
December 31, 2005 and the three months ended
December 31, 2004 was as follows:

|                                     |  |              |       |   |      |   |       |  
|------------------------------------ |  | ------------ | ----- | - | ---- | - | ----- | -
|                                     |  | December 31, |      
|                                     |  |              |      
|                                     |  | 2005         |       |   | 2004 |  
|                                     |  |              |       |   |      |  
|Opening liability                    |  | $            | 1,212 |   |      | $ | 1,344 |  
|Cash paid for rent                   |  |              | (564  | ) |      |   | (132  | )
|Cash paid for facility refurbishment |  |              | (350  | ) |      |   |      |  
|Reversals                            |  |              | (298  | ) |      |   |      |  
|                                     |  |              |       |   |      |  
|Ending liability                     |  | $            |      |   |      | $ | 1,212 |  
|                                     |  |              |       |   |      |  

(b)     Oxford, England




|                                     |  |              |        |   |      |   |        |  
|------------------------------------ |  | ------------ | ------ | - | ---- | - | ------ | -
|                                     |  | December 31, |       
|                                     |  |              |       
|                                     |  | 2005         |        |   | 2004 |  
|                                     |  |              |        |   |      |  
|Opening liability                    |  | $            | 1,380  |   |      | $ | 3,728  |  
|Provision for rental obligations     |  |              | 2,027  |   |      |   |       |  
|Provision for facility refurbishment |  |              | 2,359  |   |      |   |       |  
|Cash paid for severance              |  |              | (1,286 | ) |      |   | (2,513 | )
|Other                                |  |              | (269   | ) |      |   | 165    |  
|                                     |  |              |        |   |      |  
|Ending liability                     |  | $            | 4,211  |   |      | $ | 1,380  |  
|                                     |  |              |        |   |      |  

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(c)     Horsham, PA

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. 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 fiscal 2004. These exit costs are
comprised of the net lease obligations of $2.1 million,
offset by previously accrued rent expense of $338,000. In May
2004, we entered into a sublease agreement for the Horsham
facility. We charge the rental payments less the sublease rental
income received against the accrued liability. The consolidation
activity for the year ended December 31, 2005 and the three
months ended December 31, 2004 was as follows (in
thousands):

|                                                     |  |              |       |   |      |   |       |  
|---------------------------------------------------- |  | ------------ | ----- | - | ---- | - | ----- | -
|                                                     |  | December 31, |      
|                                                     |  |              |      
|                                                     |  | 2005         |       |   | 2004 |  
|                                                     |  |              |       |   |      |  
|Opening liability                                    |  | $            | 1,678 |   |      | $ | 1,808 |  
|Cash paid for rent less sublease
    income received |  |              | (518  | ) |      |   | (130  | )
|                                                     |  |              |       |   |      |  
|Ending liability                                     |  | $            | 1,160 |   |      | $ | 1,678 |  
|                                                     |  |              |       |   |      |  

(d)     Eyetech






|                                                            |  |              |        |  
|----------------------------------------------------------- |  | ------------ | ------ | -
|                                                            |  | December 31, |       
|                                                            |  | 2005         |       
|                                                            |  |              |       
|Opening liability                                           |  | $            |       |  
|Accrual for severance, relocation
    and retention bonuses |  |              | 7,147  |  
|Accrual for rental obligations                              |  |              | 5,391  |  
|Cash paid for severance                                     |  |              | (2,277 | )
|                                                            |  |              |       
|Ending liability                                            |  | $            | 10,261 |  
|                                                            |  |              |       



|     |                          
|---- | -------------------------
|(18) | Accounting Pronouncements



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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

obligation can be reasonably estimated. The provision is
effective for our year ending December 31, 2005. The
adoption of this interpretation did not have a material impact
on our consolidated financial statements.

In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R), which
requires companies to expense the estimated fair value of
employee stock options and similar awards.
SFAS No. 123(R) replaces SFAS No. 123 and
supersedes APB Opinion No. 25. In March 2005, the
Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 107 (SAB 107)
which generally provides the SEC staffs views regarding
SFAS No. 123(R). SAB 107 provides guidance on how
to determine the expected volatility and expected term inputs
into a valuation model used to determine the fair value of
share-based payments. SAB 107 also provides guidance
related to numerous aspects of the adoption of
SFAS No. 123(R) such as income taxes, capitalization
of compensation costs, modification of share-based payments
prior to adoption and the classification of expenses. We will
apply the principles of SAB 107 in conjunction with our
adoption of SFAS No. 123(R).

Beginning with the first quarter of fiscal 2006, we will adopt
the provisions of SFAS No. 123(R) using a modified
prospective application. Under the modified prospective
application, SFAS No. 123(R), which provides certain
changes to the methodology for valuing share-based compensation
among other changes, will apply to new awards and to awards
outstanding on the effective date that are subsequently modified
or cancelled. Compensation expense for outstanding awards for
which the requisite service had not been rendered as of the
effective date will be recognized over the remaining service
period using the compensation cost calculated for pro forma
disclosure purposes under SFAS No. 123.

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

In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Correction, effective
for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
SFAS No. 154 supersedes APB Opinion No. 20,
Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements and requires retrospective application to prior
periods of any voluntary changes to alternatively permitted
accounting principles, unless impracticable.



(19)
    Quarterly Financial Data (unaudited)The tables below summarizes our unaudited quarterly operating
results for the year ended December 31, 2005, the three
months ended December 31, 2004 and the year ended
September 30, 2004.

|                                                                                      |  |                                       |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | -------- | - | ------- | ------------- |  | - | ------------ | - |  | - | ------- | -
|                                                                                      |  | Three Months Ended                    |        
|                                                                                      |  | (In thousands, except per share data) |        
|                                                                                      |  |                                       |        
|                                                                                      |  | March 31,                             |         |   | June 30, |   |         | September 30, |  |   | December 31, |  
|                                                                                      |  | 2005                                  |         |   | 2005     |   |         | 2005          |  |   | 2005         |  
|                                                                                      |  |                                       |         |   |          |   |         |               |  |   |              |  
|Revenues                                                                              |  | $                                     | 19,067  |   |          | $ | 34,629  |               |  | $ | 33,988       |   |  | $ | 86,510  |  
|Net loss                                                                              |  | $                                     | (32,504 | ) |          | $ | (24,538 | )             |  | $ | (20,037      | ) |  | $ | (80,043 | )
|Basic and diluted net loss per
    weighted average share of common stock outstanding |  | $                                     | (.64    | ) |          | $ | (.48    | )             |  | $ | (.39         | ) |  | $ | (1.47   | )

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                       |  |                                       |         |   |           |   |         |          |  |   |               |   |  |              |          |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | --------- | - | ------- | -------- |  | - | ------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                                                       |  | Three Months Ended                    |        
|                                                                                       |  | (In thousands, except per share data) |        
|                                                                                       |  |                                       |        
|                                                                                       |  | December 31,                          |         |   | March 31, |   |         | June 30, |  |   | September 30, |   |  | December 31, |         
|                                                                                       |  | 2003                                  |         |   | 2004      |   |         | 2004     |  |   | 2004          |   |  | 2004         |         
|                                                                                       |  |                                       |         |   |           |   |         |          |  |   |               |   |  |              |         
|Revenues                                                                               |  | $                                     | 11,391  |   |           | $ | 7,216   |          |  | $ | 11,166        |   |  | $            | 13,027   |   |  | $ | 12,347  |  
|Net loss                                                                               |  | $                                     | (40,133 | ) |           | $ | (49,704 | )        |  | $ | (47,345       | ) |  | $            | (123,189 | ) |  | $ | (48,395 | )
|Basic and diluted net loss per
    weighted average share of common stock outstanding: |  | $                                     | (1.03   | ) |           | $ | (1.27   | )        |  | $ | (1.19         | ) |  | $            | (2.88    | ) |  | $ | (1.02   | )



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ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
    AND FINANCIAL DISCLOSURENot Applicable.







ITEM 9A.
    CONTROLS AND PROCEDURESCEO/CFO CERTIFICATIONS

Attached to this Annual Report on Form 10-K as
Exhibits 31.1 and 31.2, there are two certifications, or
the Section 302 Certifications, one by each of our Chief
Executive Officer, or CEO, and our Chief Financial Officer, or
CFO. This Item 9A contains information concerning the
evaluation of our disclosure controls and procedures and
internal control over financial reporting that is referred to in
the Section 302 Certifications and this information should
be read in conjunction with the Section 302 Certifications
for a more complete understanding of the topics presented.

EVALUATION OF DISCLOSURE 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 Annual Report on Form 10-K,
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, as amended, 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 Annual Report on Form 10-K.

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 our disclosure controls and
procedures are at the reasonable assurance level to ensure that
material information relating to OSI and our consolidated
subsidiaries is made known to management, including the CEO and
CFO, on a timely basis and during the period in which this
Annual Report on Form 10-K was being prepared.

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in Rules 13-a-15(f) of the Securities Exchange Act of 1934,
as amended, or the Exchange Act).

Under the supervision of and with the participation of our CEO,
and our CFO, our management conducted an assessment of the
effectiveness of our internal control over financial reporting
based on the framework and criteria established in Internal
Control  Integrated Framework,issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, our management has
concluded that, as of December 31, 2005, our internal
control over financial reporting was effective.

We acquired Eyetech Pharmaceuticals, Inc. or OSI Eyetech, during
2005, and management, as permitted, excluded this entity from
its assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005. This entity
comprises an aggregate total assets of $931 million and
total revenues of $36.0 million which are included in our
consolidated financial statements as of and for the year ended
December 31, 2005.

KPMG LLP, the independent registered public accounting firm that
audits our consolidated financial statements, has issued its
attestation report on managements assessment of internal
control over financial reporting. This attestation report
appears on page 125. KPMG LLPs attestation report
also excludes an evaluation of the internal control over
financial reporting of OSI Eyetech.

123



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CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There were no changes in our internal control over financial
reporting (as defined in Rule 13(a)-15(f) of the Exchange
Act), identified in connection with the evaluation of such
internal control over financial reporting that occurred during
the fourth quarter of fiscal 2005 that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial reporting except for the internal
controls implemented in connection with our acquisition of
Eyetech for which an assessment as of December 31, 2005 was
not made, as permitted.

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##### Table of Contents

Report of Independent Registered Public Accounting Firm

on Internal Control Over Financial Reporting

To the Stockholders and Board of Directors

OSI Pharmaceuticals, Inc.:

We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting,that OSI Pharmaceuticals, Inc.
maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in
Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). OSI Pharmaceuticals, Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that OSI
Pharmaceuticals, Inc. maintained effective internal control over
financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on criteria established
in Internal Control  Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also, in our opinion, OSI Pharmaceuticals,
Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

As described in Managements Report on Internal Control
Over Financial Reporting, OSI Pharmaceuticals, Inc. acquired
Eyetech Pharmaceuticals, Inc. during 2005, and management
excluded from its assessment of the effectiveness of OSI
Pharmaceuticals, Inc.s internal control over financial
reporting as of December 31, 2005, internal control over
financial reporting associated with this entity comprising
aggregate total assets of approximately $931 million and
total revenue of approximately $36 million included in the
OSI Pharmaceuticals, Inc. consolidated financial statement as of
and for the

125



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##### Table of Contents

year ended December 31, 2005. Our audit of internal control
over financial reporting of OSI Pharmaceuticals, Inc. also
excluded an evaluation of the internal control over financial
reporting of Eyetech Pharmaceuticals, Inc.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of OSI Pharmaceuticals, Inc. as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity, and cash
flows for the year ended December 31, 2005, for the three
months ended December 31, 2004 and for each of the two
fiscal years in the period ended September 30, 2004, and
our report dated March 15, 2006 expressed an unqualified
opinion on those consolidated financial statements.



/s/ KPMG LLPMelville, New York

March 15, 2006





ITEM 9B.     OTHER INFORMATION

On March 15, 2006, our Compensation Committee of the Board
of Directors approved an interim retainer fee to cover service
by non-employee directors on the Board (including on any Board
committees) for the interim period from March 16, 2006 to
June 14, 2006. The purpose of such action is to compensate
such board members for service during the interim period between
March 16, 2006 and the 2006 Annual Meeting of Stockholders,
such service of which would otherwise not have been compensated
as a result in the change of our fiscal year end. Details of the
interim retainer fee are set forth at Exhibit 10.59 to this
annual report on
Form 10-K and
incorporated herein by reference.





PART III







ITEM 10.
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTThe information required by this item is incorporated by
reference to the similarly named section of our Proxy Statement
for our 2006 Annual Meeting to be filed with the Securities and
Exchange Commission not later than 120 days after
December 31, 2005.







ITEM 11.
    EXECUTIVE COMPENSATIONThe information required by this item is incorporated by
reference to the similarly named section of our Proxy Statement
for our 2006 Annual Meeting to be filed with the Securities and
Exchange Commission not later than 120 days after
December 31, 2005.







ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENTThe information required by this item is incorporated by
reference to the similarly named section of our Proxy Statement
for our 2006 Annual Meeting to be filed with the Securities and
Exchange Commission not later than 120 days after
December 31, 2005.







ITEM 13.
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSThe information required by this item is incorporated by
reference to the similarly named section of our Proxy Statement
for our 2006 Annual Meeting to be filed with the Securities and
Exchange Commission not later than 120 days after
December 31, 2005.

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ITEM 14.
    PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated by
reference to the similarly named section of our Proxy Statement
for our 2006 Annual Meeting to be filed with the Securities and
Exchange Commission not later than 120 days after
December 31, 2005.





PART IV







ITEM 15.
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) (1) The following consolidated financial
statements are included in Part II, Item 8 of this
report:



Consolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Stockholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial Statements(2) All schedules are omitted as the required information
is inapplicable or the information is presented in the financial
statements or related notes.

(3) The exhibits listed in the Index to Exhibits are
attached and incorporated herein by reference and filed as a
part of this report.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.By: /s/ MICHAEL G.
    ATIEH

Michael G. AtiehExecutive Vice President and Chief Financial OfficerDate: March 23, 2006

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EXHIBIT INDEX

|        |    |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     
|        |    |     
|        | 2  | .1+ |  | Asset Purchase Agreement, dated as
    of June 17, 2004, by and between Probiodrug AG, Halle and
    Prosidion Limited, filed by the Company as an exhibit to the
    Form 8-K filed on July 6, 2004 (file no. 000-15190),
    and incorporated herein by reference.                                                                                                                                                                           
|       
|        | 2  | .2+  |  | Agreement and Plan of Merger, dated
    August 21, 2005, among OSI Pharmaceuticals, Inc., Merger EP
    Corporation and Eyetech Pharmaceuticals, Inc., filed by the
    Company as an exhibit to the Form 8-K filed on
    August 22, 2005 (file no. 000-15190), and incorporated
    herein by reference.                                                                                                                                     
|       
|        | 3  | .1   |  | Certificate of Incorporation, as
    amended, filed by the Company 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 the Company 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.                                                                                                                                                                                                                                           
|       
|        | 4  | .1   |  | Rights Agreement, dated
    September 27, 2000, between OSI Pharmaceuticals, Inc. and
    The Bank of New York as Rights Agent, including Terms of Series
    SRP Junior Participating Preferred Stock, Summary of Rights to
    Purchase Preferred Stock and Form of Right Certificate, filed by
    the Company as an exhibit to the Form 8-A filed on
    September 27, 2000 (file no. 000-15190), and incorporated
    herein by reference.
|       
|        | 4  | .2   |  | Form of Contingent Value Rights
    Agreement by and between OSI Pharmaceuticals, Inc. and the Bank
    of New York, filed by the Company as an exhibit to the
    registration statement on Form S-4 (file no. 333-103644),
    and incorporated herein by reference.                                                                                                                                                                         
|       
|        | 4  | .3   |  | Indenture, dated September 8,
    2003, by and between OSI Pharmaceuticals, Inc. and The Bank of
    New York, filed by the Company as an exhibit to the
    Form 10-K filed on December 2, 2003 (file no.
    000-15190) and incorporated herein by reference.                                                                                                                                                                                
|       
|        | 4  | .4   |  | Form of
    31/4% Convertible
    Senior Subordinated Note Due 2023 (included in
    Exhibit 4.6), filed by the Company as an exhibit to the
    Form 10-K filed on December 2, 2003 (file no.
    000-15190) and incorporated herein by reference.                                                                                                                                                                                            
|       
|        | 4  | .5   |  | Registration Rights Agreements,
    dated September 8, 2003, by and among OSI Pharmaceuticals,
    Inc., Merrill Lynch & Co., Merrill Lynch, Pierce,
    Fenner & Smith, Incorporated, and Morgan
    Stanley & Co., Incorporated, filed by the Company as an
    exhibit to the Form 10-K filed on December 2, 2003
    (file no. 000-15190) and incorporated herein by reference.                                                            
|       
|        | 4  | .6   |  | Indenture, dated December 21,
    2005, by and between OSI Pharmaceuticals, Inc. and The Bank of
    New York, filed by the Company as an exhibit to the
    Form 8-K filed on December 28, 2005 (file no.
    000-15190), and incorporated herein by reference.                                                                                                                                                                               
|       
|        | 4  | .7   |  | Form of 2% Convertible Senior
    Subordinated Note Due 2025 (included in Exhibit 4.9),
    filed by the Company as an exhibit to the Form 8-K filed on
    December 28, 2005 (file no. 000-15190), and incorporated
    herein by reference.                                                                                                                                                                                                  
|       
|        | 4  | .8   |  | Registration Rights Agreement,
    dated December 21, 2005, by and between OSI
    Pharmaceuticals, Inc. and UBS Securities LLC, filed by the
    Company as an exhibit to the Form 8-K filed on
    December 28, 2005 (file no. 000-15190), and incorporated
    herein by reference.                                                                                                                                                         
|       
|        | 10 | .1*  |  | 1989 Incentive and Non-Qualified
    Stock Option Plan, filed by the Company as an exhibit to the
    registration statement on Form S-8 (file no. 33-38443), and
    incorporated herein by reference.                                                                                                                                                                                                                                        
|       
|        | 10 | .2*  |  | 1993 Incentive and Non-Qualified
    Stock Option Plan, as amended, filed by the Company as an
    exhibit to the registration statement on Form S-8 (file no.
    33-64713) and incorporated herein by reference.                                                                                                                                                                                                                             
|       
|        | 10 | .3*  |  | Stock Purchase Plan for
    Non-Employee Directors, filed by the Company as an exhibit to
    the registration statement on Form S-8 (file no.
    333-06861), and incorporated herein by reference.                                                                                                                                                                                                                                           

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|        |    |      |  |                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     
|        |    |     
|       
|        | 10 | .4*  |  | Amended and Restated Stock Purchase
    Plan for Non-Employee Directors, filed by the Company as an
    exhibit to the Form 10-Q for the quarter ended
    December 31, 2002 (file no. 000-15190), and incorporated by
    reference herein.                                                                                                            
|       
|        | 10 | .5*  |  | 1995 Employee Stock Purchase Plan
    filed by the Company as an exhibit to the registration statement
    on Form S-8 (file no. 333-06861), and incorporated herein
    by reference.                                                                                                                                                                  
|       
|        | 10 | .6*  |  | 1997 Incentive and Non-Qualified
    Stock Option Plan, filed by the Company as an exhibit to the
    registration statement on Form S-8 (file no. 333-39509),
    and incorporated herein by reference.                                                                                                                                                
|       
|        | 10 | .7*  |  | 1999 Incentive and Non-Qualified
    Stock Option Plan, filed by the Company as an exhibit to the
    registration statement on Form S-8 (file no. 333-42274),
    and incorporated herein by reference.                                                                                                                                                
|       
|        | 10 | .8*  |  | Amended and Restated Stock
    Incentive Plan (formerly, the 2001 Incentive and Non-Qualified
    Stock Option Plan), filed by the Company as an exhibit to the
    Form 10-K for the year ended December 31, 2005 (file
    no. 000-15190), and incorporated herein by reference.                                                                      
|       
|        | 10 | .9*  |  | Form of Non-Qualified Stock Option
    Agreement issued under the Amended and Restated Stock Incentive
    Plan for employees of OSI Pharmaceuticals, Inc., filed by the
    Company as an exhibit to the Form 10-Q for the quarter
    ended June 30, 2005 (file no. 000-15190), and incorporated
    herein by reference.                             
|       
|        | 10 | .10* |  | Form of Non-Qualified Stock Option
    Agreement issued under the Amended and Restated Stock Incentive
    Plan for employees of Prosidion Limited and OSI Pharmaceuticals
    (UK) Limited filed by the Company as an exhibit to the
    Form 10-Q for the quarter ended March 31, 2005 (file
    no. 000-15190), and incorporated herein by reference.
|       
|        | 10 | .11  |  | OSI Pharmaceuticals, Inc.
    Non-Qualified Stock Option Plan for Former Employees of Cadus
    Pharmaceutical Corporation, filed by the Company as an exhibit
    to the Form 10-Q for the quarter ended June 30, 1999
    (file no. 000-15190), and incorporated herein by reference.                                                                 
|       
|        | 10 | .12  |  | OSI Pharmaceuticals, Inc.
    Non-Qualified Stock Option Plan for Former Employees of Gilead
    Sciences, Inc. filed by the Company as an exhibit to the
    Form 8-K filed on January 7, 2002 (file no.
    000-15190), and incorporated herein by reference.                                                                                         
|       
|        | 10 | .13  |  | OSI Pharmaceuticals, Inc. Stock
    Incentive Plan for Pre-Merger Employees of Eyetech
    Pharmaceuticals, Inc., filed by the Company as an exhibit to the
    Form 8-K filed on November 16, 2005 (file no.
    000-15190), and incorporated herein by reference.                                                                                     
|       
|        | 10 | .14  |  | OSI Pharmaceuticals, Inc. Stock
    Plan for Assumed Options of Pre-Merger Employees of Eyetech
    Pharmaceuticals, Inc. filed by the Company as an exhibit to the
    Form 8-K filed on November 16, 2005 (file no.
    000-15190), and incorporated herein by reference.                                                                             
|       
|        | 10 | .15 |  | Collaborative Research Agreement,
    dated April 1, 1996, between OSI Pharmaceuticals, Inc. and
    Pfizer Inc., filed by the Company as an exhibit to the
    Form 10-Q for the quarter ended March 31, 1996, as
    amended (file no. 000-15190), and incorporated herein by
    reference.                                                          
|       
|        | 10 | .16 |  | License Agreement, dated
    April 1, 1996, between OSI Pharmaceuticals, Inc. and Pfizer
    Inc., filed by the Company as an exhibit to the Form 10-Q
    for the quarter ended March 31, 1996, as amended (file no.
    000-15190), and incorporated herein by reference.                                                                             
|       
|        | 10 | .17* |  | Employment Agreement, dated
    April 30, 1998, between OSI Pharmaceuticals, Inc. and Colin
    Goddard, Ph.D, filed by the Company as an exhibit to the
    Form 10-Q for the quarter ended June 30, 1998 (file
    no. 000-15190), and incorporated herein by reference.                                                                              
|       
|        | 10 | .18  |  | Agreement, dated May 23, 2000,
    by and between OSI Pharmaceuticals, Inc. and Pfizer Inc., filed
    by the Company as an exhibit to the Form 8-K filed on
    June 20, 2000 (file no. 000-15190), and incorporated herein
    by reference.                                                                                                          
|       
|        | 10 | .19 |  | Development and Marketing
    Collaboration Agreement, dated January 8, 2001, between OSI
    Pharmaceuticals, Inc. and Genentech, Inc., filed by the Company
    as an exhibit to the Form 8-K filed on February 14,
    2001 (file no. 000-15190), and incorporated herein by reference.                                                              

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|        |    |      |  |                                                                                                                                                                                                                                                                                                                    
|------- | -- | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     
|        |    |     
|       
|        | 10 | .20 |  | Amendment No. 1 to Development
    and Marketing Collaboration Agreement, dated as of June 4,
    2004, between OSI Pharmaceuticals, Inc. and Genentech, Inc.,
    filed by the Company as an exhibit to the Form 8-K filed on
    June 28, 2004 (file no. 000-15190), and incorporated herein
    by reference.   
|       
|        | 10 | .21 |  | Manufacturing and Supply Agreement,
    dated as of June 4, 2004, by and between OSI
    Pharmaceuticals, Inc. and Genentech, Inc., filed by the Company
    as an exhibit to the Form 8-K filed on June 28, 2004
    (file no. 000-15190), and incorporated herein by reference.                                  
|       
|        | 10 | .22 |  | Development Collaboration and
    Licensing Agreement, dated January 8, 2001, between OSI
    Pharmaceuticals, Inc. and F. Hoffman  La Roche
    Ltd., filed by the Company as an exhibit to the Form 8-K
    filed on February 14, 2001 (file no. 000-15190), and
    incorporated herein by reference.          
|       
|        | 10 | .23 |  | Tripartite Agreement, dated
    January 8, 2001, by and among OSI Pharmaceuticals, Inc.,
    Genentech, Inc., and F. Hoffman  La Roche Ltd.,
    filed by the Company as an exhibit to the Form 8-K filed on
    February 14, 2001 (file no. 000-15190), and incorporated
    herein by reference.                
|       
|        | 10 | .24 |  | Manufacturing Agreement, dated
    December 21, 2001, by and between OSI Pharmaceuticals, Inc.
    and Gilead Sciences, Inc. filed by the Company as an exhibit to
    the Form 8-K filed on January 7, 2002 (file no.
    000-15190), and incorporated herein by reference.                                       
|       
|        | 10 | .25* |  | Employment Agreement, dated
    May 16, 2003, between OSI Pharmaceuticals, Inc. and
    Mr. Gabriel Leung, filed by the Company as an exhibit to
    the Form 10-K for the fiscal year ended September 30,
    2003 (file no. 000-15190), and incorporated herein by reference.                                    
|       
|        | 10 | .26* |  | Addendum to Employment Agreement
    between OSI Pharmaceuticals, Inc. and Mr. Gabriel Leung,
    filed by the Company as an exhibit to the Form 10-QT for
    the transition period ended December 31, 2004 (file no.
    000-15190), and incorporated herein by reference.                                       
|       
|        | 10 | .27 |  | Supply Agreement, dated
    February 2, 2005, by and between Schwarz Pharma
    Manufacturing, Inc. and OSI Pharmaceuticals, Inc. filed by the
    Company as an exhibit to the Form 10-Q for the quarter
    ended March 31, 2005 (file no. 000-15190), and incorporated
    herein by reference.                 
|       
|        | 10 | .28  |  | Agreement of Sale and Purchase,
    dated March 15, 2005, by and between Swissair, Swiss Air
    Transport Co., Ltd. and OSI Pharmaceuticals, Inc. filed by the
    Company as an exhibit to the Form 10-Q for the quarter
    ended March 31, 2005 (file no. 000-15190), and incorporated
    herein by reference.
|       
|        | 10 | .29* |  | Letter of Employment by and between
    OSI Pharmaceuticals, Inc. and Mr. Robert L. Simon filed by
    the Company as an exhibit to the Form 10-Q for the quarter
    ended March 31, 2005 (file no. 000-15190), and incorporated
    herein by reference.                                                         
|       
|        | 10 | .30* |  | Change of Control Arrangement by
    and between OSI Pharmaceuticals, Inc. and Barbara A.
    Wood, Esq. filed by the Company as an exhibit to the
    Form 10-Q for the quarter ended March 31, 2005 (file
    no. 000-15190), and incorporated herein by reference.                                              
|       
|        | 10 | .31* |  | Compensatory Arrangements for
    Non-Employee Directors filed by the Company as an exhibit to the
    Form 10-Q for the quarter ended March 31, 2005 (file
    no. 000-15190), and incorporated herein by reference.                                                                                              
|       
|        | 10 | .32* |  | Compensatory Arrangements of
    Executive Officers, as amended, filed by the Company as an
    exhibit to the Form 10-K for the year ended
    December 31, 2005 (file no. 000-15190), and
    incorporated herein by reference.                                                                                  
|       
|        | 10 | .33* |  | Purchases of Stock by Executive
    Officers and Directors, filed by the Company as Item 1.01
    to the Current Report on Form 8-K filed on October 31,
    2005 (file no. 000-15190) and incorporated herein by reference.                                                                                       
|       
|        | 10 | .34* |  | Consulting Agreement between OSI
    Pharmaceuticals, Inc. and Edwin A. Gee, Ph.D, dated
    January 24, 2005, filed by the Company as an exhibit to the
    Form 8-K filed on January 27, 2005 (file no.
    000-15190), and incorporated herein by reference.                                                    

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##### Table of Contents



|        |    |      |  |                                                                                                                                                                                                                                                                                                             
|------- | -- | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     
|        |    |     
|       
|        | 10 | .35* |  | Employment Agreement, dated
    April 21, 2005, by and between OSI Pharmaceuticals, Inc.
    and Michael G. Atieh, filed by the Company as an exhibit to the
    Form 8-K filed on April 22, 2005 (file no. 000-15190),
    and incorporated by reference herein.                                           
|       
|        | 10 | .36* |  | Letter of Employment, dated
    December 21, 2001, by and between OSI Pharmaceuticals, Inc.
    and Nicole Onetto, MD, filed by the Company as an exhibit to the
    Form 10-QT for the transition period ended
    December 31, 2004 (file no. 000-15190), and incorporated
    herein by reference.       
|       
|        | 10 | .37* |  | Employment Separation Agreement and
    Release of Legal Rights by and between OSI Pharmaceuticals, Inc.
    and Nicole Onetto, MD, dated April 20, 2005, filed by the
    Company as an exhibit to the Form 8-K filed on
    April 22, 2005 (file no. 000-15190), and incorporated
    herein by reference.
|       
|        | 10 | .38* |  | Scientific Advisory Board and
    Consulting Agreement, dated March 8, 2005, between
    Prosidion Limited and Dr. Daryl Granner, filed by the
    Company as an exhibit to the Form 8-K filed on
    March 8, 2005 (file no. 000-15190), and incorporated herein
    by reference.                         
|       
|        | 10 | .39* |  | Scientific Advisory Board and
    Consulting Agreement, dated February 10, 2006, between
    Prosidion Limited and Dr. Daryl Granner, filed by the
    Company as an exhibit to the Form 8-K filed on
    February 13, 2006 (file no. 000-15190), and incorporated
    herein by reference.                 
|       
|        | 10 | .40* |  | Share Purchase Deed relating to
    Shares of Prosidion Limited, dated April 14, 2005, between
    OSI Pharmaceuticals, Inc. and Dr. Daryl Granner, filed by
    the Company as an exhibit to the Form 8-K, filed on
    April 20, 2005 (file no. 000-15190), and incorporated
    herein by reference.     
|       
|        | 10 | .41* |  | Service Contract by and between
    Prosidion Limited and Anker Lundemose, dated May 1, 2004,
    filed by the Company as an exhibit to the Form 10-QT, for
    the transition period ended December 31, 2004 (file no.
    000-15190), and incorporated by reference herein.                               
|       
|        | 10 | .42* |  | Amended and Restated Stock
    Incentive Plan Stock Award Agreement, dated April 14, 2005,
    between OSI Pharmaceuticals, Inc. and Dr. Daryl Granner,
    filed by the Company as an exhibit to the Form 8-K, filed
    on April 20, 2005 (file no. 000-15190), and incorporated
    herein by reference. 
|       
|        | 10 | .43* |  | Restricted Stock Agreement, dated
    May 31, 2005, by and between OSI Pharmaceuticals, Inc. and
    Michael G. Atieh, filed by the Company as an exhibit to the
    Form 10-Q for the quarter ended June 30, 2005 (file
    no. 000-15190), and incorporated herein by reference.                          
|       
|        | 10 | .44* |  | Amended and Restated Employment
    Agreement, dated May 31, 2005, by and between OSI
    Pharmaceuticals, Inc. and Michael G. Atieh, filed by the Company
    as an exhibit to the Form 10-Q for the quarter ended
    June 30, 2005 (file no. 000-15190), and incorporated herein
    by reference.       
|       
|        | 10 | .45* |  | Letter Agreement, dated
    August 21, 2005, by and between OSI Pharmaceuticals, Inc.
    and David R. Guyer, M.D., filed by the Company as an
    exhibit to the Form 8-K, filed on August 22, 2005
    (file no. 000-15190), and incorporated herein by reference.                                        
|       
|        | 10 | .46* |  | Service Contract, dated
    September 20, 2005, by and between OSI Pharmaceuticals,
    Inc. and Dr. Anker Lundemose, filed by the Company as an
    exhibit to the Form 8-K filed on September 26, 2005
    (file no. 000-15190), and incorporated herein by reference.                                    
|       
|        | 10 | .47* |  | Change in Control Agreement, dated
    September 20, 2005, by and between OSI Pharmaceuticals,
    Inc. and Dr. Neil Gibson, filed by the Company as an
    exhibit to the Form 8-K filed on September 26, 2005
    (file no. 000-15190), and incorporated herein by reference.                             
|       
|        | 10 | .48* |  | Amended Letter Agreement, dated
    September 20, 2005, by and between OSI Pharmaceuticals,
    Inc. and Robert L. Simon, filed by the Company as an exhibit to
    the Form 8-K filed on September 26, 2005 (file no.
    000-15190), and incorporated herein by reference.                                
|       
|        | 10 | .49* |  | Amended Change in Control
    Agreement, dated September 20, 2005, by and between OSI
    Pharmaceuticals, Inc. and Barbara A. Wood, Esq. filed by
    the Company as an exhibit to the Form 8-K filed on
    September 26, 2005 (file no. 000-15190), and incorporated
    herein by reference.            

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##### Table of Contents



|        |    |      |  |                                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     
|        |    |     
|       
|        | 10 | .50  |  | Commitment Letter, dated
    December 13, 2005, by and among JP Morgan Chase Bank, N.A.,
    J.P. Morgan Securities Inc. and OSI Pharmaceuticals, Inc.,
    as amended and extended, filed by the Company as an exhibit to
    the Form 10-K for the year ended December 31, 2005
    (file no. 000-15190), and incorporated herein by reference.                  
|       
|        | 10 | .51 |  | License Agreement, dated
    December 17, 2002, by and between Pfizer Inc. and Eyetech
    Pharmaceuticals, Inc., filed by the Company as an exhibit to the
    Form 10-K for the year ended December 31, 2005 (file
    no. 000-15190), and incorporated herein by reference.                                                                                     
|       
|        | 10 | .52 |  | Collaboration Agreement, dated as
    of December 17, 2002, by and between Pfizer Inc. and
    Eyetech Pharmaceuticals, Inc., filed by the Company as an
    exhibit to the Form 10-K for the year ended
    December 31, 2005 (file no. 000-15190), and
    incorporated herein by reference.                                                                     
|       
|        | 10 | .53 |  | Licensing Agreement, effective as
    of March 31, 2000, as amended on May 9, 2000,
    December 4, 2001 and April 12, 2002, between Gilead
    Sciences,. Inc. and Eyetech Pharmaceuticals, Inc., filed by the
    Company as an exhibit to the Form 10-K for the year ended
    December 31, 2005 (file no. 000-15190), and
    incorporated herein by reference.
|       
|        | 10 | .54 |  | License, Manufacturing and Supply
    Agreement, dated February 5, 2002, by and between
    Shearwater Corporation and Eyetech Pharmaceuticals, Inc., filed
    by the Company as an exhibit to the Form 10-K for the year
    ended December 31, 2005 (file no. 000-15190), and
    incorporated herein by reference.                                             
|       
|        | 10 | .55 |  | Letter of Understanding, effective
    as of September 1, 2003, by and between Eyetech
    Pharmaceuticals, Inc. and Raylo Chemicals, Inc., as amended,
    filed by the Company as an exhibit to the Form 10-K for the
    year ended December 31, 2005 (file no. 000-15190), and
    incorporated herein by reference.                                           
|       
|        | 10 | .56 |  | Manufacturing and Supply Agreement,
    dated as of November 11, 2003, by and between Raylo
    Chemicals, Inc. and Eyetech Pharmaceuticals, Inc., filed by the
    Company as an exhibit to the Form 10-K for the year ended
    December 31, 2005 (file no. 000-15190), and
    incorporated herein by reference.                                                
|       
|        | 10 | .57 |  | License Agreement, effective as of
    December 31, 2004, between Isis Pharmaceuticals, Inc. and
    Eyetech Pharmaceuticals, Inc., filed by the Company as an
    exhibit to the Form 10-K for the year ended
    December 31, 2005 (file no. 000-15190), and
    incorporated herein by reference.                                                               
|       
|        | 10 | .58 |  | Manufacturing and Supply (Fill and
    Finish) Agreement, dated as of November 26, 2003, between
    Eyetech Pharmaceuticals, Inc. and Gilead Sciences, Inc., filed
    by the Company as an exhibit to the Form 10-K for the year
    ended December 31, 2005 (file no. 000-15190), and
    incorporated herein by reference.                                     
|       
|        | 10 | .59* |  | Summary of Interim Retainer Fee for
    Non-Employee Directors, filed by the Company as an exhibit to
    the Form 10-K for the year ended December 31, 2005
    (file no. 000-15190), and incorporated herein by reference.                                                                                                                                       
|       
|        | 21 |      |  | Subsidiaries of OSI
    Pharmaceuticals, Inc., filed by the Company as an exhibit to the
    Form 10-K for the year ended December 31, 2005 (file
    no. 000-15190), and incorporated herein by reference.                                                                                                                                                        
|       
|        | 23 |      |  | Consent of KPMG LLP, independent
    registered public accounting firm. (Filed herewith).                                                                                                                                                                                                                                                                          
|       
|        | 31 | .1   |  | Certification of Chief Executive
    Officer pursuant to Rule 13a-14(a) or 15(d)-14(a). (Filed
    herewith).                                                                                                                                                                                                                                                      
|       
|        | 31 | .2   |  | Certification of Chief Financial
    Officer pursuant to Rule 13a-14(a) or 15d-14(a). (Filed
    herewith).                                                                                                                                                                                                                                                        
|       
|        | 32 | .1   |  | Certification of Chief Executive
    Officer pursuant to 18 U.S.C. § 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    (Filed herewith).                                                                                                                                                                                         
|       
|        | 32 | .2   |  | Certification of Chief Financial
    Officer pursuant to 18 U.S.C. § 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    (Filed herewith).                                                                                                                                                                                         






|  |                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------
|* | Indicates a management contract or compensatory plan, contract
    or arrangement in which directors or executive officers
    participates.

133



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##### Table of Contents

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

+
    The schedules to this exhibit have been omitted pursuant to
    Item 601(b)(2) of
    Regulation S-K
    promulgated by the Securities and Exchange Commission. The
    omitted schedules from this filing will be provided upon request.134