OSI PHARMACEUTICALS INC, 424B4, 2000-11-01

OSI PHARMACEUTICALS INC
424B4, 2000-11-01
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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<PAGE> 1

FILED PURSUANT TO RULE 424(B)(4)
REGISTRATION NO. 333-47060
AND A RELATED RULE 462(B)
REGISTRATION STATEMENT NO. 333-49062

[OSI PHARMACEUTICALS LOGO]

5,350,000 SHARES

COMMON STOCK
OSI Pharmaceuticals, Inc. is offering 5,350,000 shares of common stock. Our
common stock is traded on the Nasdaq National Market under the symbol "OSIP."
The last reported sale price of our common stock on the Nasdaq National Market
on October 31, 2000 was $72.00 per share.

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

INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.

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<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ 70.00 $374,500,000
Underwriting Discounts and Commissions...................... $ 4.20 $ 22,470,000
Proceeds, Before Expenses, to OSI........................... $ 65.80 $352,030,000
</TABLE>

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

OSI Pharmaceuticals has granted the underwriters a 30-day option to
purchase up to an additional 802,500 shares of common stock to cover
over-allotments.
JOINT BOOKRUNNING MANAGERS

ROBERTSON STEPHENS LEHMAN BROTHERS

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

PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL
SECURITIES

LAZARD
ADAMS, HARKNESS & HILL, INC.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 2000
<PAGE> 2
[A graphical depiction of the mechanism of action of OSI-774.

Below the graphical depiction, the text reads:

EGFR is over-expressed in approximately 30% of the major human cancers. This
results in aberrant signaling to the cell nucleus and the uncontrolled
stimulation of cell growth. OSI-774 is a potent small molecule inhibitor
of the receptor tyrosine kinase activity of EGFR and thereby blocks the
aberrant signaling mechnism]
<PAGE> 3

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR
INCORPORATED BY REFERENCE. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION DIFFERENT FROM THAT CONTAINED IN THE PROSPECTUS. WE ARE OFFERING TO
SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS
WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE
TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. IN THIS
PROSPECTUS, "OSI," "WE," "US," "OUR" AND THE "COMPANY" REFER TO OSI
PHARMACEUTICALS, INC., A DELAWARE CORPORATION.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 5
Special Note Regarding Forward Looking Statements........... 12
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Price Range of Common Stock................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 25
Management and Key Employees................................ 40
Underwriting................................................ 45
Legal Matters............................................... 47
Experts..................................................... 47
Where You Can Find More Information......................... 47
Incorporation of Certain Documents by Reference............. 48
Consolidated Financial Statements........................... F-1
</TABLE>

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

OSI and its logo are trademarks of the Company. This prospectus also
contains trademarks and trade names of other companies.

i
<PAGE> 4

SUMMARY

This summary highlights information contained elsewhere in this prospectus.
It is not complete and is qualified in its entirety by, and should be read in
conjunction with, the more detailed information (including "Risk Factors" and
financial information) appearing elsewhere in this prospectus, as well as in the
documents incorporated by reference in this prospectus.

OSI PHARMACEUTICALS, INC.

We are a leading biopharmaceutical company focused on the discovery and
development of gene-targeted, small molecule drugs, in the areas of cancer,
diabetes, respiratory diseases and cosmeceuticals. Independently and with our
corporate partners, we have built a pipeline of discovery programs and drug
candidates for 46 individual gene targets addressing major, unmet clinical needs
and significant commercial opportunities. The most advanced of our product
candidates is OSI-774, which has been shown to be active and well-tolerated as a
monotherapy in three ongoing open-label, Phase II clinical trials for the
treatment of non-small cell lung, ovarian and head and neck cancers. We have an
additional candidate in clinical trials and nine candidates in late stage
pre-clinical development.

OSI-774 (formerly CP-358,774) is an inhibitor of the epidermal growth
factor receptor, or EGFR. The protein product of the EGFR gene is a receptor
tyrosine kinase, or RTK, that is over-expressed in approximately 30% of all
major cancers. We believe EGFR inhibitors represent an exciting new class of
relatively safe and well tolerated anti-cancer agents that may have utility in
treating a wide range of tumor types. OSI-774 is an oral, once-a-day small
molecule drug designed to specifically block the activity of the EGFR protein.
OSI-774 was originally being developed as part of our long-term partnership in
cancer drug discovery with Pfizer Inc. The importance of this new class of drugs
led to an antitrust finding by the U.S. Federal Trade Commission in June 2000
during its investigation of Pfizer's merger with Warner-Lambert Company and the
return of all rights to OSI-774 to us.

OSI-774 has now been administered to over 300 patients. Phase II enrollment
has been completed for single agent, open-label salvage trials in 56 non-small
cell lung cancer patients, 113 head and neck cancer patients, and 34 ovarian
cancer patients. Patients in these trials have advanced cancer and have
typically failed standard treatment regimens. Patients in our Phase II clinical
trial for non-small cell lung cancer have previously failed platinum-based
chemotherapy regimens. Initial results to date from this trial revealed four
patients with partial responses and four patients with stable disease in the
first 12 evaluable patients. A partial response refers to the reduction in the
size of the tumor mass, by 50% or more, for a sustained period of at least four
weeks. A patient has stable disease if the tumor mass is either reduced by up to
50% or increased by less than 25% of its pre-treatment size. Our Phase II
clinical trial of OSI-774 in advanced head and neck cancer also revealed early
indications of single agent anti-cancer activity. Three confirmed and two
unconfirmed partial responses have been seen to date in the first 24 evaluable
patients, and an additional nine patients have shown evidence of stable disease.
We have also seen evidence of anti-tumor activity in other EGFR-positive tumor
types. Objective responses were observed in earlier Phase I trials in patients
with colorectal and renal cell cancer and in ovarian cancer patients from the
ongoing Phase II trials.

We intend to advance the development of OSI-774 through a comprehensive
clinical trial program. Our goal is to seek rapid regulatory approval of
OSI-774, broaden its application to additional cancers, assess its utility in
combination with existing chemotherapy and biological agents and demonstrate a
survival benefit for earlier stage cancer patients enabling its front-line use
in major cancers. At the appropriate time, we intend to enter into a
co-development and marketing partnership with a major pharmaceutical company to
maximize the healthcare benefit of OSI-774 while maintaining a significant
economic interest in the product.

In addition to OSI-774, we have discovered and are developing additional
anti-cancer compounds independently and through our collaboration with Pfizer.
CP-609,754, an orally active inhibitor of an enzyme called farnesyl transferase,
advanced to Phase I clinical trials in the U.S. in December 1999. Another
farnesyl transferase inhibitor is in advanced pre-clinical development. These
compounds target a number of signaling proteins including the ras oncogene, an
important target in many tumor types such as colon and bladder

1
<PAGE> 5

cancer. Additionally, potent, selective and orally active inhibitors of the
RTK's vascular endothelial growth factor receptor, or VEGFR, and
platelet-derived growth factor receptor, or PDGFR, are in advanced pre-clinical
development. Both RTKs are implicated in tumor-induced angiogenesis, or blood
vessel growth, an essential process to the survival of cancerous growths. An
additional RTK, insulin-like growth factor receptor, or IGF-1R, is believed to
be a key regulatory protein in the control of apoptosis, or programmed cell
death. IGF-1R is the subject of an OSI-owned cancer discovery program.

More recently, as we have generated the financial resources to invest more
fully in our own programs, we have begun a transition away from a partner-funded
alliance model in favor of OSI-owned and sponsored drug candidates. We intend to
develop our own drug candidates through the early stages of clinical development
prior to entering into co-development and commercialization agreements with
leading pharmaceutical companies in return for a significant share of the
revenues derived from product sales.

We have built a fully-integrated drug discovery platform in order to
accelerate the process of identifying and optimizing high-quality, small
molecule drug candidates. Our core discovery technologies and capabilities
include: (i) yeast-based functional genomics systems for characterizing orphan
G-protein coupled receptor, or GPCR, drug discovery targets, (ii) gene
transcription, signal transduction, protein kinases and other assay systems,
(iii) automated high throughput screening, (iv) a library of over 350,000 small
molecule compounds and over 125,000 natural product extracts, (v) medicinal and
automated combinatorial chemistry, (vi) in vivo pharmacology, pharmacokinetics
and pharmaceutical development capabilities and (vii) a core clinical project
management and regulatory affairs unit.

Our objective is to be the leading biopharmaceutical company focused on
developing and commercializing gene-targeted, small molecule drugs to address
major markets with unmet clinical needs. The key elements of our strategy are:

- Develop and commercialize OSI-774;

- Further the development of existing small molecule candidates to maximize
their economic value;

- Leverage our advanced drug discovery technologies and capabilities to
generate novel, clinical candidates; and

- Support our existing portfolio of partnered drug candidates.

We were incorporated in Delaware in March 1983. Our corporate headquarters
and principal research facilities are located at 106 Charles Lindbergh
Boulevard, Uniondale, New York 11553 and our telephone number is (516) 222-0023.

2
<PAGE> 6

THE OFFERING

Unless otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option to purchase up to 802,500
shares of common stock.

Common stock offered by OSI......... 5,350,000 shares

Common stock to be outstanding after
this offering....................... 32,677,098 shares

Use of proceeds..................... To fund research and development and to
provide working capital for general
corporate purposes. See "Use of
Proceeds."

Nasdaq National Market symbol....... OSIP

The number of shares of our common stock that will be outstanding after
this offering is based on the number outstanding on September 27, 2000 and does
not include 3,055,098 shares of common stock issuable upon exercise of
outstanding options and warrants.

3
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED SEPTEMBER 30, ENDED JUNE 30,
---------------------------------------------------------------------- -------------------------
1999 1998 1997 1996 1995 2000 1999
----------- ------------- ----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenues............... $22,652,303 $ 19,468,337 $14,777,323 $ 9,718,437 $15,864,999 $22,232,929 $16,500,966
Operating expenses........... 36,897,589 30,842,929 26,417,398 21,820,949 23,612,802 32,727,556 23,464,625
Net loss..................... (9,798,437) (10,184,468) (9,586,237) (9,942,135) (4,258,670) (4,491,735) (6,360,408)
Basic and diluted net loss
per weighted average share
of common stock
outstanding................ $ (0.46) $ (0.48) $ (0.44) $ (0.50) $ (0.25) $ (0.19) $ (0.30)
Weighted average number of
shares of common stock
outstanding................ 21,450,812 21,372,655 21,604,344 19,712,274 16,757,370 23,801,264 21,430,958
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
---------------------------
ACTUAL AS ADJUSTED
----------- ------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investment securities............ $82,731,932 $434,146,846
Working capital............................................. 79,941,378 431,356,292
Total assets................................................ 97,372,240 448,787,154
Long-term liabilities....................................... 2,575,436 2,575,436
Total stockholders' equity.................................. 90,339,540 441,754,454
</TABLE>

The "as adjusted" column in the table above reflects the sale of 5,350,000
shares of common stock by us in this offering and the estimated net proceeds of
approximately $351 million based on a public offering price of $70.00 per share
and after deducting the underwriting discount and commissions and estimated
offering expenses we must pay.

4
<PAGE> 8

RISK FACTORS

This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties that we describe below and the other information in
this prospectus before deciding whether to invest in shares of our common stock.

ALTHOUGH WE HAVE POTENTIAL PRODUCTS THAT APPEAR TO BE PROMISING AT EARLY STAGES
OF DEVELOPMENT AND IN CLINICAL TRIALS, NONE OF OUR POTENTIAL PRODUCTS MAY REACH
THE MARKET FOR A NUMBER OF REASONS.

Our success depends on the discovery of new drugs which we can
commercialize and take to market. None of our potential products, however,
including OSI-774, may ever reach the market for a number of reasons. They may
be found ineffective or cause harmful side-effects during pre-clinical testing
or clinical trials or fail to receive necessary regulatory approvals. We may
find that the products cannot be manufactured on a large scale basis, 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 have a number of product candidates in very early stages of development,
and we do not expect them to be commercially available for several years, if at
all. All but two of our product candidates are in the pre-clinical development
phase. The two candidates that are in clinical trials will still require
significant research and development and regulatory approvals before we or our
collaborative partner will be able to market them.

IF WE HAVE A SETBACK IN OUR OSI-774 PROGRAM, OUR STOCK PRICE WOULD ALMOST
CERTAINLY DECLINE.

We are currently in Phase II clinical trials for OSI-774. If the results of
the trials are not satisfactory, we would need to conduct additional clinical
trials or abandon our OSI-774 program. Since OSI-774 is our most advanced
product candidate, a setback of this nature would almost certainly cause a
decline in our stock price.

IF WE ARE UNABLE TO DEMONSTRATE ACCEPTABLE SAFETY AND EFFICACY OF OSI-774 DURING
CLINICAL TRIALS, WE WILL NOT BE ABLE TO OBTAIN REGULATORY APPROVAL AND THUS WILL
NOT BE ABLE TO COMMERCIALIZE AND GENERATE REVENUES FROM OSI-774.

We must continue to demonstrate, through pre-clinical testing and clinical
trials, that OSI-774 is safe and effective. The results from pre-clinical
testing and early clinical trials may not be predictive of results obtained in
subsequent clinical trials, and we cannot be sure that our clinical trials will
demonstrate the safety and efficacy necessary to obtain regulatory approval for
OSI-774. A number of companies in the biotechnology and pharmaceutical
industries have suffered significant setbacks in advanced clinical trials, even
after obtaining promising results in earlier trials. In addition, certain
clinical trials are conducted with patients having the most advanced stages of
disease. During the course of treatment, these patients often die or suffer
other adverse medical effects for reasons that may not be related to the
pharmaceutical agent being tested. These events can cause our statistical
analysis of clinical trial results to be incorrect.

The completion of clinical trials of OSI-774 may be delayed by many
factors. One such factor is the rate of enrollment of patients. We cannot
control the rate at which patients present themselves for enrollment, and we
cannot be sure that the rate of patient enrollment will be consistent with our
expectations or be sufficient to enable clinical trials of our product
candidates to be completed in a timely manner. Any significant delays in, or
termination of, clinical trials of our product candidates may hinder our ability
to obtain regulatory approval of OSI-774.

We cannot be sure that regulatory authorities will permit us to undertake
additional clinical trials for OSI-774. Any delays in obtaining or failure to
obtain regulatory approval will hinder us from commercializing and generating
revenues from OSI-774.

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<PAGE> 9

IF WE ARE UNABLE TO ENTER INTO AND MAINTAIN ARRANGEMENTS WITH THIRD PARTIES FOR
THE CO-DEVELOPMENT AND COMMERCIALIZATION OF OUR POTENTIAL PRODUCTS, INCLUDING
OSI-774, OUR ABILITY TO PROCEED WITH THE TIMELY AND PROFITABLE MANUFACTURING AND
SALE OF OUR PRODUCT CANDIDATES MAY BE LIMITED.

Our strategy is to develop our own drug candidates through the early stages
of clinical development prior to entering into co-development and
commercialization agreements with leading pharmaceutical companies in return for
a greater share of the revenues derived from product sales. If we fail to enter
into and maintain successful collaborative partnerships, we may not be able to
obtain the resources needed to commercialize potential products in certain drug
discovery efforts.

Successful commercialization of our product candidates is dependent upon
our ability to:

- manufacture our products in commercial quantities at reasonable costs;

- obtain reimbursement coverage for our products;

- compete favorably against other products; and

- market our products successfully.

For our most advanced drug candidate, OSI-774, we intend to seek a
co-development and marketing partnership with a major pharmaceutical company. We
do not have, and do not currently plan to develop, our own marketing capability.
The failure to build a co-development and marketing partnership on reasonable
terms could delay our development of OSI-774 and would require us to expend
greater financial resources because we would have to focus our efforts
internally. As our internal costs increase, we may have difficulty recovering
these costs.

IF OUR COMPETITORS SUCCEED IN DEVELOPING TECHNOLOGIES AND PRODUCTS THAT ARE MORE
EFFECTIVE THAN OUR OWN, OUR TECHNOLOGIES AND PRODUCTS MAY BE RENDERED LESS
COMPETITIVE. IN PARTICULAR, WE FACE SIGNIFICANT COMPETITION FROM OTHER
BIOTECHNOLOGY AND PHARMACEUTICAL COMPANIES WHICH ARE CURRENTLY DEVELOPING DRUGS
SIMILAR TO OSI-774 THAT COULD DECREASE OUR POTENTIAL SALES OF THE PRODUCT.

We face significant competition from industry participants that are
pursuing the same technologies as we are, and from organizations that are
developing pharmaceutical products that are competitive with our potential
products. Where we are developing products independently, many of the
organizations competing with us have greater capital resources, larger research
and development staffs and facilities, and more extensive experience in drug
discovery and development, obtaining regulatory approval and pharmaceutical
product manufacturing and marketing. 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 may result in our compounds, products or processes becoming obsolete
before we recover any expenses incurred to develop them.

We are aware of four companies, two of which have resources substantially
greater than we do, which are currently developing drugs similar to OSI-774.
AstraZeneca PLC is developing a small molecule with a close structural
relationship to OSI-774, called Iressa(TM), that is currently in Phase III
trials. Pfizer/Warner-Lambert has a compound, CI-1033, now in Phase I trials,
which is structurally similar to Iressa and OSI-774. ImClone Systems
Incorporated and Abgenix Inc. are developing a different kind of product,
humanized antibodies, against the EGFR target. The ImClone product is currently
in Phase III trials and the Abgenix product is in Phase I trials. AstraZeneca
and ImClone may both enter the market ahead of us. If our competitors succeed in
developing drugs similar to OSI-774 that are more effective than our own, or if
they enter the market with their products before we do, our product may not gain
widespread market acceptance.

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<PAGE> 10

IF GOVERNMENT AGENCIES DO NOT GRANT US OR OUR COLLABORATIVE PARTNERS REQUIRED
APPROVALS FOR ANY OF OUR POTENTIAL PRODUCTS, THEN WE OR OUR COLLABORATIVE
PARTNERS WILL NOT BE ABLE TO MANUFACTURE OR SELL OUR PRODUCTS.

All of our newly discovered potential products must undergo an extensive
regulatory approval process in the United States and other countries. This
regulatory process, which includes pre-clinical testing and clinical trials of
each compound to establish its safety and efficacy, can take many years and
requires the expenditure of substantial resources. Moreover, data obtained from
pre-clinical and clinical activities are susceptible to varying interpretations
that could delay, limit or prevent regulatory approval. The Food and Drug
Administration, or FDA, and other regulatory agencies may delay or deny the
approval of our proposed products. None of our products has yet received
governmental approval and none may ever do so.

Even if we obtain regulatory approval, a marketed product and its
manufacturer are subject to continuing review, including post-marketing
surveillance. We may be required to withdraw our product from the market if
previously unknown problems are discovered. Violations of regulatory
requirements at any stage may result in various unfavorable consequences to us,
including the FDA's imposition of criminal penalties against the manufacturer
and the holder of the new drug application.

WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, AND WE EXPECT TO INCUR LOSSES OVER
THE NEXT SEVERAL YEARS WHICH MAY CAUSE THE VALUE OF OUR COMMON STOCK TO
DECREASE.

We have had net operating losses since our inception in 1983. At June 30,
2000, our accumulated deficit was approximately $70.1 million. Our losses have
resulted principally from costs incurred in research and development and from
general and administrative costs associated with our operations. These costs
have exceeded our revenues, which to date have been generated principally from
collaborative research agreements.

We expect to incur substantial additional operating expenses over the next
several years as a result of increases in our expenses for the development of
OSI-774 and our other research and development programs. These expenses include
enhancements in our drug discovery technologies and increases in the resources
we will devote to our internally funded proprietary projects, which are
undertaken without collaborative partners. We do not expect to generate revenues
from the sale of our potential products for a number of years and we expect to
continue to incur operating losses during this period.

IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY TO DEVELOP
AND COMMERCIALIZE OUR PRODUCTS WILL BE SEVERELY LIMITED.

We currently own 13 U.S. patents and 38 foreign patents. In addition, we
currently own 23 pending applications for U.S. patents, three of which have been
allowed, and 16 applications for foreign patents, one of which has been allowed.
We intend to continue to aggressively seek patent protection for all of the
product candidates that we have discovered or developed.

Our success depends, in part, on our ability and our collaborative
partners' ability to obtain patent protection for new product candidates,
maintain trade secret protection, and operate without infringing the 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 substantially identical products for sale without
incurring the sizable 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. 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. We can never
be certain that we were the first to develop the technology or that we were the
first to file a patent application for the particular technology because U.S.
patent applications are confidential until a patent issues, and publications in
the scientific or patent literature lag behind actual discoveries.

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<PAGE> 11

The degree of future protection for our proprietary rights will remain
uncertain if our pending patent applications are not approved for any reason or
if we are unable to develop additional proprietary technologies that are
patentable. Furthermore, third parties may independently develop similar or
alternative technologies, duplicate some or all of our technologies, design
around our patented technologies and challenge issued patents.

IF WE CANNOT OBTAIN ADEQUATE FUNDING FOR OUR RESEARCH AND DEVELOPMENT EFFORTS,
WE MAY HAVE TO LIMIT THE SCOPE OF OUR PROPRIETARY PRODUCT DEVELOPMENT OR ENTER
INTO MORE RESTRICTIVE ARRANGEMENTS WITH COLLABORATIVE PARTNERS.

Our future capital requirements will depend on many factors, including the
size and complexity of our research and development programs, the progress of
pre-clinical testing and early stage clinical trials, the time and costs
involved in obtaining regulatory approvals for our product candidates, the costs
of manufacturing arrangements and the costs of commercialization activities.

We intend to raise funds through public or private sales of our securities,
including equity securities, as well as from collaborative partners. We may not
be able to obtain adequate funding from equity financings on reasonable or
acceptable terms, if at all. Furthermore, any additional equity financings may
dilute the value of the common stock held by our stockholders. If adequate funds
are not available, we may be required to significantly curtail one or more of
our research and development programs or obtain funds through arrangements with
collaborative partners or others that may require us to relinquish certain of
our rights to a number of our technologies or product candidates.

IF OUR COLLABORATIVE PARTNERS GIVE OTHER PRODUCTS GREATER PRIORITY THAN OUR
PRODUCTS, THEN OUR PRODUCTS MAY BE SUBJECT TO DELAYS IN RESEARCH AND DEVELOPMENT
AND MANUFACTURE THAT MAY IMPEDE OUR ABILITY TO TAKE THEM TO MARKET BEFORE OUR
COMPETITORS. THIS MAY RENDER OUR PRODUCTS OBSOLETE OR MAY RESULT IN LOWER THAN
ANTICIPATED REVENUES FOR US.

We rely on some of our collaborative partners to assist with research and
development as well as the manufacture of our potential products in their
FDA-approved manufacturing facilities. Our collaborative agreements allow our
partners significant discretion in electing whether or not to pursue the
activities that they have agreed to pursue for us. We cannot control the amount
and timing of resources our collaborative partners devote to our programs or
potential products. Our potential products may be in competition with other
products for priority of access to our collaborative partners' research and
development and manufacturing facilities. If our collaborative partners do not
give significant priority to the research and development or manufacture of our
potential products in an effective or timely manner, the clinical development of
our product candidates or their submission for regulatory approval could be
delayed, and our ability to deliver products to the market on a timely basis
could be impaired. Furthermore, we may not be able to enter into any necessary
third-party research and development or manufacturing arrangements on acceptable
terms, if at all.

IF OUR COLLABORATIVE AGREEMENTS WITH TANABE SEIYAKU CO., LTD. FOR DIABETES
RESEARCH AND ANADERM RESEARCH CORPORATION FOR COSMECEUTICALS RESEARCH ARE NOT
RENEWED, OUR ABILITY TO PURSUE THE DRUG DISCOVERY EFFORTS THAT ARE THE SUBJECT
OF THE AGREEMENTS MAY BE LIMITED.

Because our collaborative programs with Tanabe and Anaderm have terms of
four and three years, respectively, which is less than the period required for
the discovery, clinical development and commercialization of most drugs, the
continuation of our drug discovery and development programs in the areas of
diabetes and cosmeceuticals is dependent on the periodic renewal of such
collaborative arrangements. Our collaborative partners can terminate our
collaborative research agreements under various circumstances, sometimes on
short notice without cause. The termination or non-renewal of these
collaborative relationships could delay our research and development efforts
arising from these collaborations because we would have to focus our efforts
internally in these areas and/or search for and engage new collaborative
partners. Our internal costs would inevitably increase as a result, and we could
have difficulty recovering these costs.

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<PAGE> 12

CONSOLIDATIONS AMONG COMPANIES WITH WHICH WE ARE ENGAGED IN PARTNERSHIPS OR
ALLIANCES CAN RESULT IN THE DIMINUTION OR TERMINATION OF, OR DELAYS IN, ONE OR
MORE OF OUR COLLABORATIVE PROGRAMS.

In 1995, the pharmaceutical operations of three companies with which we had
collaborative research agreements, Hoechst AG, Hoechst Roussel Pharmaceuticals,
Inc. and Marion Merrell Dow Inc., were combined into one entity, currently known
as Aventis Pharmaceuticals, Inc. This combination resulted in delays in our
collaborative programs with each of the constituent companies and a reduction in
the aggregate funding received by us. The merger between Pfizer and
Warner-Lambert and other possible consolidations among large pharmaceutical
companies with which we are engaged could produce similar results.

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,
is currently unknown. If we or our collaborative partners must obtain licenses
from third parties, fees must be paid for such licenses. These fees would reduce
the revenues and royalties we may receive on commercialized products.

IF OTHER COMPANIES CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS,
WE MAY BE SUBJECT TO COSTLY AND TIME-CONSUMING LITIGATION AND DELAYS IN PRODUCT
INTRODUCTION.

Our processes and potential products may conflict with patents which have
been or may be granted to competitors, academic institutions or others. As the
biotechnology industry expands and more patents are filed and issued, the risk
increases that our product candidates may give rise to a declaration of
interference by the Patent and Trademark Office, or 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 testing, manufacturing or marketing our products. If
any of these actions were successful, we may also be required to cease the
infringing activity or obtain the requisite licenses or rights to use the
technology which may not be available to us on acceptable terms, if at all. Any
litigation, regardless of the outcome, could be extremely costly to us.

THE USE OF ANY OF OUR POTENTIAL PRODUCTS IN CLINICAL TRIALS AND THE SALE OF ANY
APPROVED PRODUCTS MAY EXPOSE US TO LIABILITY CLAIMS RESULTING FROM THE USE OF
PRODUCTS OR PRODUCT CANDIDATES.

The nature of our business exposes us to potential liability risks inherent
in the testing, manufacturing and marketing of drug discovery candidates and
products. Using our drug candidates in clinical trials may expose us to product
liability claims. These risks will expand with respect to drugs, if any, that
receive regulatory approval for commercial sale. While we currently maintain
product liability insurance that we believe is adequate, such insurance may not
be available at reasonable rates, if at all, in the future. If we do not or
cannot maintain adequate insurance coverage, we may incur significant liability
if a product liability claim arises.

IF OTHER BIOTECHNOLOGY AND PHARMACEUTICAL COMPANIES ARE NOT WILLING TO PAY
APPROPRIATE ROYALTIES FOR THE USE OF OUR PATENTED "GENE TRANSCRIPTION ESTATE,"
THEN WE MAY CHOOSE TO EXPEND SUBSTANTIAL AMOUNTS OF FUNDS AND RESOURCES IN
ENFORCING THE PATENTS.

We are seeking to license to other companies rights to use our patented
"gene transcription estate" which consists of drug discovery assays that provide
a way to identify novel product candidates that can control the activity of
genes. We believe technology and practices covered by these patents are in
widespread use in the pharmaceutical and biotechnology industries. To date, we
have granted five licenses to use our gene transcription patent. If other
pharmaceutical and biotechnology companies which we believe are using our
patented technology are not willing to negotiate license arrangements with us on
reasonable terms, we may have to choose between abandoning our licensing
strategy or initiating legal proceedings against those

9
<PAGE> 13

companies. Legal action, particularly patent infringement litigation, is
extremely costly. Consequently, our strategy to commercialize our gene
transcription patent estate through licensing may not be successful.

A NEW ACCOUNTING POLICY MAY REQUIRE US TO CHANGE OUR REVENUE RECOGNITION
POLICIES, THE RESULT OF WHICH WOULD REQUIRE US TO RECOGNIZE REVENUES OVER A
LONGER PERIOD THAN WE HAVE IN THE PAST.

We are in the process of assessing the financial impact of the Securities
and Exchange Commission's staff accounting bulletin, SAB No. 101, as amended,
"Revenue Recognition in Financial Statements". The staff accounting bulletin
expresses the SEC staff's views on the timing of revenue recognition, including
nonrefundable technology access fees received by biotechnology companies in
connection with research collaborations with third parties. The SEC staff's
position is that in certain circumstances upfront fees, even if nonrefundable,
should be deferred and recognized ratably over the term of the related
agreement.

We are still studying the requirements of the staff accounting bulletin and
reviewing the research agreements under which we received upfront, nonrefundable
fees to determine if we would be required to recognize revenue for these fees
over the period of the agreements rather than when the fees are received. If we
determine that the staff accounting bulletin applies to some or all of these
agreements, we would be required to recognize revenue over a longer period than
we had in the past. The initial adoption of the staff accounting bulletin may
result in the reversal of a portion of previously recorded revenue which would
then be recorded over the remaining term(s) of the agreement(s). This would
increase the reported loss in the quarter that we adopt the staff accounting
bulletin. We intend to adopt the staff accounting bulletin, if applicable to our
agreements, no later that the fourth quarter of our fiscal year ending September
30, 2001, as required under SAB No. 101, as amended. We will not retroactively
restate prior period financial statements but rather report the effect, if any,
of adopting the provisions of the SAB as a change in accounting principle as of
October 1, 2000 as required.

IF THE MARKET PRICE OF OUR COMMON STOCK, SIMILAR TO OTHER BIOTECHNOLOGY
COMPANIES, REMAINS HIGHLY VOLATILE, THEN YOU MAY NOT BE ABLE TO RESELL YOUR
SHARES AT OR ABOVE THE PRICE YOU PAID WHEN DESIRED, IF AT ALL.

When the stock prices of biotechnology companies fall, our stock price will
most likely fall as well. The market price of the common stock of biotechnology
and pharmaceutical companies and our common stock has been volatile and may
remain volatile for the foreseeable future. If our stock price falls, you may
not be able to resell your shares at or above the price you paid when desired,
if at all.

The following factors, among others, may also cause our stock price to
decline:

- fluctuations in operating results;

- announcements of technological innovations or new therapeutic products by
others;

- negative or neutral clinical trial results;

- developments concerning strategic alliance agreements;

- government regulation;

- developments in patent or other proprietary rights;

- public concern as to the safety of our drugs;

- future sales of substantial amounts of our common stock by existing
stockholders; and

- comments by securities analysts and general market conditions.

OUR CORPORATE GOVERNANCE DOCUMENTS, AND STATE LAW, PROVIDE CERTAIN ANTI-TAKEOVER
MEASURES WHICH WILL DISCOURAGE CERTAIN TYPES OF TRANSACTIONS INVOLVING AN ACTUAL
OR POTENTIAL CHANGE IN CONTROL OF THE COMPANY.

Under our certificate of incorporation, 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. Since January 1999,

10
<PAGE> 14

we have had a shareholders rights plan, which has recently been replaced with a
new plan, commonly referred to as a "poison pill." 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 an interested stockholder.

BECAUSE THE TOTAL PRICE YOU WILL PAY FOR YOUR SHARES IN THIS OFFERING WILL BE
MUCH GREATER THAN THE VALUE OF OUR ASSETS AFTER SUBTRACTING OUR LIABILITIES, THE
VALUE OF YOUR INVESTMENT IN OUR COMMON STOCK WILL BE DILUTED.

If you purchase shares of our common stock in this offering, the price you
will pay for the shares will be much greater than the book value per share of
our outstanding common stock after the offering. In addition, the total amount
of our capital will be less than it would have been had you and all of the
existing stockholders and optionees paid the same amount per share of our common
stock. Accordingly, you will suffer immediate and substantial dilution of your
investment. In the past, we have issued options to buy our common stock at
prices below the offering price. You will experience further dilution to the
extent that additional shares of our common stock are issued upon the exercise
of outstanding options. See "Dilution" for a detailed calculation of the
dilution that will result from this offering.

11
<PAGE> 15

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This prospectus and the documents we have filed with the SEC that are
included or incorporated by reference in this prospectus contain 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,"
"would," "could," "plans," or "anticipate" or the negative of such terms or
other similar terminology. These statements include, but are not limited to
statements regarding: our proposed clinical development of our product
candidates, including OSI-774; our plans regarding commercialization of our
product candidates; use of proceeds from this offering; operating cash burn
rates relating to us as a whole or our investment in OSI-774; sufficiency of our
resources to fund our operating and capital requirements; plans regarding
agreements with third parties including collaborators and manufacturing or
supply partners; and plans with respect to our proposed new headquarters. The
statements involve known and unknown risks and uncertainties and are based on
various assumptions. Investors and prospective investors are cautioned that
these statements are only projections. Any forward-looking statement is intended
to speak only as of the date on which the statement is made.

Forward-looking statements necessarily involve risks and uncertainties, and
our actual results could differ materially from these anticipated in the
forward-looking statements due to a number of factors, including those set forth
under "Risk Factors." The factors set forth under "Risk Factors" and other
cautionary statements made in this prospectus should be read and understood as
being applicable to all related forward-looking statements wherever they appear
in this prospectus. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of accuracy, performance or achievements. Moreover, we do not assume
responsibility for the accuracy and completeness of such statements. We caution
readers not to place undue reliance on such statements. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.

12
<PAGE> 16

USE OF PROCEEDS

The net proceeds to be paid to us from the sale of the 5,350,000 shares of
common stock offered by us in this prospectus are estimated to be $351 million,
based on a public offering price of $70.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters' over-allotment option is exercised in full, our net
proceeds are estimated to be $404 million. We intend to use the net proceeds
from this offering primarily to fund our research and development activities and
for general corporate purposes, including working capital. Although we have not
yet identified any specific uses for these proceeds, we currently anticipate
using the proceeds for the following purposes:

- our development of OSI-774;

- our continued drug discovery and development programs in cancer, GPCR and
diabetes; and

- working capital and general corporate purposes.

In addition, we may use a portion of the net proceeds from this offering to
acquire or invest in businesses, product opportunities, technologies or services
that are complementary to our business. At the present time, we have no specific
plans or agreements with respect to any acquisition and we are not engaged in
any negotiations regarding any acquisition.

We have not yet determined with any certainty the manner in which we will
allocate the net proceeds. Prior to using the proceeds for the purposes
described above, we plan to invest the net proceeds of this offering in
short-term, investment-grade, interest-bearing securities. We will retain broad
discretion as to the allocation of the net proceeds of this offering.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable future.
Payment of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results and current and anticipated cash needs.

13
<PAGE> 17

PRICE RANGE OF COMMON STOCK

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 the first quarter of fiscal 1998 through October 31, 2000 as reported
on the Nasdaq National Market:

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
Fiscal Year Ended September 30, 1998: ------ ------
<S> <C> <C>
First Quarter............................................ $11.50 $ 5.88
Second Quarter........................................... $ 8.00 $ 5.88
Third Quarter............................................ $ 7.88 $ 5.13
Fourth Quarter........................................... $ 6.75 $ 2.91
</TABLE>

<TABLE>
<CAPTION>
HIGH LOW
Fiscal Year Ended September 30, 1999: ------ ------
<S> <C> <C>
First Quarter............................................ $ 5.88 $ 2.25
Second Quarter........................................... $ 5.06 $ 2.69
Third Quarter............................................ $ 7.13 $ 4.00
Fourth Quarter........................................... $ 7.00 $ 3.94
</TABLE>

<TABLE>
<CAPTION>
HIGH LOW
Fiscal Year Ended September 30, 2000: ------ ------
<S> <C> <C>
First Quarter............................................ $ 8.42 $ 4.06
Second Quarter........................................... $30.75 $ 7.00
Third Quarter............................................ $29.00 $ 8.38
Fourth Quarter........................................... $73.94 $27.06
</TABLE>

<TABLE>
<CAPTION>
HIGH LOW
Fiscal Year Ended September 30, 2001: ------ ------
<S> <C> <C>
First Quarter (through October 31, 2000)................. $78.50 $56.38
</TABLE>

As of September 27, 2000, there were approximately 487 holders of record of
the common stock.

14
<PAGE> 18

CAPITALIZATION

The following table shows, as of June 30, 2000, our actual capitalization,
and our capitalization as adjusted to give effect to the sale of the 5,350,000
shares of common stock offered by us in this offering, based on a public
offering price of $70.00 per share and after deducting the underwriting discount
and commissions and estimated offering expenses payable by us. The outstanding
share information does not include 3,877,056 shares of common stock issuable
upon exercise of options and warrants outstanding as of June 30, 2000.

<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------
ACTUAL AS ADJUSTED
------------ ------------
(UNAUDITED)
<S> <C> <C>
Loans payable -- net of current portion..................... $ 188,975 $ 188,975
------------ ------------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, $0.01 par value; 50,000,000 shares
authorized; 27,425,160 shares issued; 32,775,160 shares
issued as adjusted..................................... 274,252 327,752
Additional paid-in capital................................ 167,360,725 518,722,139
Accumulated deficit....................................... (70,132,353) (70,132,353)
Accumulated other comprehensive loss...................... (730,382) (730,382)
Treasury stock, at cost; 939,641 shares................... (6,432,702) (6,432,702)
------------ ------------
Total stockholders' equity............................. 90,339,540 441,754,454
------------ ------------
Total capitalization........................................ $ 90,528,515 $441,943,429
============ ============
</TABLE>

15
<PAGE> 19

DILUTION

Our net tangible book value as of June 30, 2000 was $89.4 million, or $3.37
per share of common stock. Net tangible book value per share is calculated by
subtracting our total liabilities from our total tangible assets, which equals
total assets less intangible assets, and dividing this amount by the number of
shares of common stock outstanding as of June 30, 2000. After giving effect to
the sale by us of 5,350,000 shares of common stock offered in this offering at
an offering price of $70.00 per share and deducting the underwriting discount
and commissions and estimated offering expenses payable by us, our net tangible
book value as of June 30, 2000 would have been $440.8 million, or $13.85 per
share of common stock. Assuming completion of this offering, there will be an
immediate increase in the net tangible book value of $10.48 per share to our
existing stockholders and an immediate and substantial dilution in the net
tangible book value of $56.15 per share to new investors. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Offering price per share.................................... $70.00
Net tangible book value per share as of June 30, 2000..... $ 3.37
Pro forma increase per share attributable to new
investors.............................................. 10.48
------
Pro forma net tangible book value per share after the
offering.................................................. 13.85
------
Pro forma dilution per share to new investors............... $56.15
======
</TABLE>

The table and calculations above assume no exercise of outstanding options
and warrants. At June 30, 2000, there were 3,877,056 shares of common stock
reserved for issuance upon exercise of outstanding options and warrants.

16
<PAGE> 20

SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial information set forth below for each of the years in
the three-year period ended September 30, 1999 has been derived from our
consolidated financial statements and accompanying notes audited by KPMG LLP,
our independent auditors, which are included and incorporated by reference in
our annual report on Form 10-K/A for the year ended September 30, 1999 and are
included in this prospectus. The selected financial information set forth below
as of September 30, 1997, 1996 and 1995 and for the years ended September 30,
1996 and 1995 has been derived from our consolidated financial statements and
accompanying notes, which are included in our annual report on Form 10-K/A for
the years ended September 30, 1997 and 1996, and are not included or
incorporated by reference in this prospectus. The selected financial information
set forth below for the nine months ended June 30, 2000 and 1999 and as of June
30, 2000 has been derived from our unaudited consolidated financial statements
and accompanying notes included in our quarterly report on Form 10-Q for the
period ended June 30, 2000 and are included and incorporated by reference in
this prospectus. The financial information shown below should be read in
conjunction with the consolidated financial statements and accompanying notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
----------------------------------------------------------------------- --------------------------
1999(1) 1998(2) 1997(3) 1996(4) 1995(5) 2000(6) 1999
------------ ------------ ------------ ------------ ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues.............. $ 22,652,303 $ 19,468,337 $ 14,777,323 $ 9,718,437 $15,864,999 $ 22,232,929 $16,500,966
------------ ------------ ------------ ------------ ----------- ------------ -----------
Expenses:
Research and
development....... 24,484,540 19,877,339 16,804,844 14,462,644 13,992,459 25,468,586 15,561,868
Production and
service costs..... 1,753,474 813,464 635,768 134,529 1,252,990 643,876 1,239,443
Selling, general and
administrative.... 9,190,774 8,691,386 7,516,038 5,771,021 6,670,792 5,930,806 5,567,759
Amortization of
intangibles....... 1,468,801 1,460,740 1,460,748 1,452,755 1,696,561 684,288 1,095,555
------------ ------------ ------------ ------------ ----------- ------------ -----------
Loss from
operations.......... $(14,245,286) $(11,374,592) $(11,640,075) $(12,102,512) $(7,747,803) $(10,494,627) $(6,963,659)
------------ ------------ ------------ ------------ ----------- ------------ -----------
Other income -- net... 1,155,834 1,190,124 2,053,838 2,160,377 768,744 2,257,048 603,251
Gain on sale of:
Anaderm common
stock............. 3,291,015 -- -- -- -- -- --
Research products
business.......... -- -- -- -- 2,720,389 -- --
Diagnostics
business.......... -- -- -- -- -- 3,745,844 --
------------ ------------ ------------ ------------ ----------- ------------ -----------
Net loss.............. $ (9,798,437) $(10,184,468) $ (9,586,237) $ (9,942,135) $(4,258,670) $ (4,491,735) $(6,360,408)
============ ============ ============ ============ =========== ============ ===========
Basic and diluted net
loss per share...... $ (0.46) $ (0.48) $ (0.44) $ (0.50) $ (0.25) $ (0.19) $ (0.30)
============ ============ ============ ============ =========== ============ ===========
Weighted average
number of shares of
common stock
outstanding......... 21,450,812 21,372,655 21,604,344 19,712,274 16,757,370 23,801,264 21,430,958
</TABLE>

17
<PAGE> 21

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF JUNE 30,
------------------------------------------------------------------- --------------
1999(1) 1998(2) 1997(3) 1996(4) 1995(5) 2000(6)
----------- ----------- ----------- ----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, and
investment securities............. $18,861,854 $24,418,281 $31,834,669 $47,542,745 $26,786,566 $82,731,932
Receivables......................... 5,193,902 2,410,794 1,871,212 2,843,014 1,798,808 401,755
Working capital..................... 14,562,336 22,268,346 29,612,616 47,181,407 26,127,781 79,941,378
Total assets........................ 47,031,328 50,417,980 59,585,565 73,537,054 44,057,421 97,372,240
Long-term liabilities............... 3,084,644 2,009,509 1,727,281 1,421,916 532,042 2,575,436
Total stockholders' equity.......... 33,364,946 43,059,246 52,944,868 68,286,959 40,549,636 90,339,540
</TABLE>

------------
(1) The fiscal 1999 consolidated financial statements include the acquisition of
Cadus Pharmaceutical Corporation's research business for $2.2 million in
cash, including a $806,000 charge to operations for in-process R&D acquired;
a gain of $3.3 million on the sale of the Company's Anaderm Research
Corporation stock to Pfizer Inc.; and a $535,000 charge to operations for
the estimated costs of closing the Company's facilities in North Carolina.
(See notes 3(a), 5(b) and 15 to the accompanying consolidated financial
statements).

(2) The fiscal 1998 consolidated financial statements include approximately
$702,000 of license revenue received upon execution of a license agreement
with Aurora Biosciences Corporation. (See note 2(a) to the accompanying
consolidated financial statements).

(3) The fiscal 1997 consolidated financial statements include license fee
revenues received upon execution of collaborative research and license
agreements with Sankyo Company, Ltd. and Hoechst Marion Roussel, Inc.
aggregating $1.3 million; and the repurchase of all 1.25 million shares of
the Company's common stock held by Becton, Dickinson and Company for an
aggregate price of $8.8 million. (See notes 5(e), 5(f) and 9(a) to the
accompanying consolidated financial statements).

(4) The fiscal 1996 consolidated financial statements reflect approximately
$30.3 million of net proceeds from a public offering of common stock; the
acquisition of all of the outstanding capital stock of Aston Molecules Ltd.
for stock and rights to shares of stock aggregating approximately $3.6
million, including other direct costs of the acquisition; and the
acquisition of all of the outstanding shares of MYCOsearch, Inc. for cash,
stock and warrants aggregating approximately $5.3 million.

(5) The fiscal 1995 consolidated financial statements include a $2.7 million
gain on the sale of the Company's research products business to
Calbiochem-Novabiochem International, Inc. for $6.0 million in cash; and
approximately $5.0 million in proceeds from the sale of common stock to
Novartis Pharma AG.

(6) The consolidated financial statements as of and for the nine months ended
June 30, 2000, include a charge to operations of $700,000 representing the
cost of a license to use and practice certain of Cadus' technology and
patents; revenue representing a $3.5 million technology access fee received
upon the execution of a collaborative research and license agreement with
Tanabe Seiyaku Co., Ltd.; net proceeds of approximately $53 million from a
private placement of common stock; and a $3.7 million gain resulting from
the sale of the Company's diagnostics business, including the assets of its
wholly-owned subsidiary, OSDI, Inc. (formerly known as Oncogene Science
Diagnostics, Inc.) to The Bayer Corporation. (See notes 2(e), 5(c), 9(f) and
16 to the accompanying consolidated financial statements).

18
<PAGE> 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
prospectus and incorporated by reference. The following discussion contains
forward looking statements. Our actual results may differ significantly from
those projected in the forward looking statements. Factors that might cause
future results to differ materially from those projected in the forward looking
statements include, but are not limited to, those discussed under "Risk
Factors." See also "Special Note Regarding Forward Looking Statements."

OVERVIEW

Since our inception in March 1983, we have devoted our resources to the
development of our technology platform and research and drug discovery programs.
To date, none of our proprietary or collaborative programs have resulted in a
commercial product; and therefore, we have not received any revenues or
royalties from the sale of products by us or by our collaborators. Furthermore,
we do not expect to generate any such revenues for several years, if at all. We
have incurred an accumulated deficit of approximately $70.1 million as of June
30, 2000 and expect to continue to incur operating losses for several years. We
have funded our operations primarily through public and private placements of
equity securities and payments under collaborative research agreements with
major pharmaceutical companies.

Historically, we have conducted most of our drug discovery programs through
funded collaborations with major pharmaceutical companies. These arrangements
have typically included milestone and royalty payments on the successful
development and marketing of products discovered in the collaborations. Using
this business model, we have been able to leverage the research, development and
financial resources of our corporate partners to help build and sustain a large
pipeline of product opportunities supplemented by those within our own
proprietary programs. More recently, as we have generated the financial
resources to invest more fully in our own programs, we have begun a transition
away from a partner-funded alliance model in favor of OSI-owned and sponsored
drug candidates. We intend to develop our own drug candidates through the early
stages of clinical development prior to entering into co-development and
commercialization agreements with leading pharmaceutical companies in return for
a greater share of the revenues derived from product sales.

The most advanced of our product candidates is OSI-774, which has been
shown to be active and well-tolerated as a monotherapy in three ongoing
open-label, Phase II clinical trials for the treatment of non-small cell lung,
ovarian and head and neck cancers. We have an additional candidate in clinical
trials and nine candidates in late stage pre-clinical development. The
importance of this new class of drugs led to an antitrust finding by the U.S.
Federal Trade Commission in June 2000 during its investigation of Pfizer Inc.'s
merger with Warner-Lambert Company and the return of all rights to OSI-774 to
us.

RESULTS OF OPERATIONS

NINE MONTHS ENDED JUNE 30, 2000 AND 1999

Revenues. Revenues for the nine months ended June 30, 2000 were
approximately $22.2 million, representing an increase of $5.7 million or 35%
compared to revenues of $16.5 million for the nine months ended June 30, 1999.
Collaborative research and development agreements with Anaderm Research
Corporation, Pfizer, Tanabe Seiyaku Co., Ltd., Sankyo Company, Ltd., Solvay
Pharmaceuticals, B.V. and Aventis Pharmaceutical Inc. accounted for
substantially all of our collaborative program revenues during these periods.
Total collaborative program revenues of approximately $17.8 million for the nine
months ended June 30, 2000 increased approximately $5.2 million or 42% compared
to the nine months ended June 30, 1999. These increases were primarily due to
increased funding for the Pfizer/Anaderm program for the discovery and
development of cosmeceuticals. The balance of the increase resulted from a
research agreement with Solvay, assumed by us on July 30, 1999 with the
acquisition of certain assets from Cadus Pharmaceutical Corporation, and a
collaborative research agreement with Tanabe initiated on October 1, 1999.
Increases in collaborative program revenues for the nine-month period were
partially offset by the termination of the diagnostics collaboration with The
Bayer Corporation upon the sale of our diagnostics business to

19
<PAGE> 23

Bayer in November 1999 and, to a lesser extent, the conclusion of our funded
collaborative research agreement with Helicon Therapeutics, Inc. in June 1999.

We recognized a technology access fee of $3.5 million in October 1999 from
Tanabe in conjunction with the new collaborative research agreement as discussed
in note 5(c) and 17 to the accompanying consolidated financial statements.

Sales of products and services derived from pharmaceutical services of our
UK subsidiary, OSI Pharmaceuticals, UK Ltd., or OSI-UK (formerly known as Aston
Molecules Ltd.), and from diagnostics sales of our U.S. subsidiary, OSDI, Inc.
(formerly known as Oncogene Science Diagnostics, Inc.), or OSDI, decreased
approximately $452,000 or 49% for the nine months ended June 30, 2000 compared
to the nine months ended June 30, 1999. The decrease was due to a shift in focus
of pharmaceutical services from external sales to internal programs and to the
sale of our diagnostics assets to Bayer in November 1999. During the last
quarter of the current fiscal year, we are winding-down our external sales from
pharmaceutical services in order to focus on internal programs.

Other research revenues, representing primarily government grants and other
research grants, decreased $562,000 or 69% for the nine months ended June 30,
2000 compared to the nine months ended June 30, 1999. The decrease was due to a
reduction in the number of government grant applications submitted.

License revenues decreased $2.0 million or 92% for the nine months ended
June 30, 2000 compared to the nine months ended June 30, 1999. The decrease was
primarily due to the receipt of a license fee of $2.0 million from BioChem
Pharma, Inc. in March 1999. License revenues for the nine months ended June 30,
2000 represented a patent license fee of $100,000 paid by R.W. Johnson Research
Institute and $75,000 of maintenance fees from two other licensees.

Expenses. Operating expenses increased approximately $9.3 million or 39%
for the nine months ended June 30, 2000, compared to the nine months ended June
30, 1999. Research and development expenses for the nine-month period increased
approximately $9.9 million or 64% compared to the nine-month period ended June
30, 1999. Increases in research and development expenses were attributable to:
(i) our expanded collaboration with Anaderm for the discovery and development of
novel compounds to treat pigmentation disorders, wrinkles and baldness; (ii) our
payment of $700,000 in February 2000 to Cadus for the non-exclusive,
royalty-free worldwide right and license to use and practice Cadus' technology
and patents involving Cadus' G-protein coupled receptor, or GPCR, patent estate;
(iii) our initiation of the research agreement with Tanabe; and (iv) a one-time
fee of $500,000 paid to Vanderbilt University in October 1999 in consideration
of our entering into the research agreement with Tanabe. The increases were also
related to the acquisition of certain assets from Cadus on July 30, 1999, which
included the assumption of operations of Cadus' fully-equipped research facility
in Tarrytown, New York and the retention of 47 employees. We have also increased
our investment in our proprietary drug discovery programs, including our GPCR
directed drug discovery programs which were included in the Cadus asset
acquisition. We expect to continue to increase investment in our proprietary
drug discovery programs, in particular our development of OSI-774, for which we
received a royalty-free license to all rights for further development, as more
fully described under "Liquidity and Capital Resources."

Production and service costs decreased approximately $596,000 or 48% for
the nine months ended June 30, 2000 compared to the nine months ended June 30,
1999. The decrease was primarily related to the sale of our diagnostics assets
to Bayer in November 1999.

Selling, general and administrative expenses increased by approximately
$363,000 or 7% for the nine months ended June 30, 2000 compared to the nine
months ended June 30, 1999. This increase was primarily related to the
additional administration expenses associated with the acquired operations in
Tarrytown, New York from the Cadus asset acquisition, the expansion of the
chemistry facility at OSI-UK, and our current corporate development activities.

Amortization of intangibles for the nine months ended June 30, 2000
decreased approximately $411,000 or 38% compared to the nine months ended June
30, 1999. The decrease was related to the inclusion of our

20
<PAGE> 24

diagnostic patent estate in the sale of the diagnostics business to Bayer, which
eliminated the related amortization expense effective November 30, 1999.

Other Income and Expense. Net investment income increased approximately
$1.7 million or 255% for the nine months ended June 30, 2000 compared to the
nine months ended June 30, 1999. This increase was largely due to investment of
funds generated from the financing activities described more fully under
"Liquidity and Capital Resources" below.

FISCAL YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997

Revenues. Total revenues of approximately $22.7 million in fiscal 1999
increased approximately $3.2 million or 16% compared to fiscal 1998, and total
revenues of approximately $19.5 million in fiscal 1998 increased approximately
$4.7 million or 32% compared to fiscal 1997. Collaborative program revenues
increased approximately $2.0 million or 12% in fiscal 1999. Collaborative
research and development agreements with Pfizer, Anaderm, Aventis, Sankyo,
Solvay, Bayer, Fujirebio Inc. and Helicon accounted for substantially all of our
collaborative program revenues. Increases in collaborative program revenues were
primarily due to the expansion, as of April 23, 1999, of the Pfizer/Anaderm
program for the discovery and development of cosmeceuticals, which are
pharmacologically active compounds for use in certain cosmetic and
quality-of-life indications. This agreement could result in up to $50 million in
total payments to us over a 6-year period. A research agreement with Solvay,
which was acquired on July 30, 1999 with the acquisition of certain assets from
Cadus, also contributed to the increase in collaborative program revenues.
Collaborative program revenues were partially offset by the conclusion in
October 1998 of one of our funded collaborative programs with Aventis relating
to the discovery and development of orally active drugs for the treatment of
chronic anemia.

Sales of products and services from our OSDI and OSI-UK subsidiaries,
increased approximately $99,000 or 9% in fiscal 1999 compared to fiscal 1998.
The increase was primarily due to the growth in sales of our diagnostic tests.
Other research revenue, representing predominantly government grants and other
research grants, decreased approximately $435,000 or 30% in fiscal 1999 compared
to fiscal 1998. This decrease was related to a reduction in the number of
government grants received because we narrowed our grant applications to our
disease areas of focus in order to more fully leverage our resources.

License revenue increased approximately $1.5 million or 202% in fiscal 1999
compared to fiscal 1998. This increase was primarily related to a $2.0 million
fee resulting from a license agreement entered into in March 1999 with BioChem
Pharma which replaced an earlier collaborative program focused on anti-viral
drug discovery. Under the terms of the agreement, we are licensing to BioChem
Pharma, Inc. rights to our joint technology in certain anti-viral targets. In
addition to the licensing fee, we will receive milestones and royalties based
upon BioChem Pharma's successful development of drugs arising from leads
discovered in the program. During fiscal 1998, we recognized license revenue of
approximately $702,000 from the signing of a license agreement with Aurora
Biosciences, Inc. covering our gene transcription patent estate.

The increase in total revenues of approximately $4.7 million in fiscal 1998
compared to fiscal 1997 was attributable to the commencement on October 1, 1997
of the funded phase of the collaborative research and license agreement among
us, Anaderm and Pfizer, as well as an increased level of research in the
collaborative program with Sankyo to discover and develop novel pharmaceutical
products to treat influenza which commenced in February 1997. This increase in
revenues was partially offset by a decrease in revenues related to our
collaborative program with Aventis, formerly Hoechst Marion Roussel, Inc., to
discover and develop small molecules that induce gene expression of the protein
erythropoietin. The decrease was attributable to our receipt of a $1.0 million
initiation fee from Aventis for the erythropoietin program in fiscal 1997 and
reduced funding in connection with the extension of the first phase of this
program in April 1998. The erythropoietin program did not achieve sufficient
positive data to warrant further development. Consequently, this program was
terminated in October 1998. The increase in revenue was also offset by the
completion in fiscal 1997 of the funded discovery phase of our collaborative
program with Wyeth-Ayerst Laboratories relating to the discovery and development
of drugs for the treatment of diabetes and osteoporosis.

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<PAGE> 25

Expenses. Research and development expenses increased by approximately
$4.6 million or 23% in fiscal 1999 compared to fiscal 1998, and increased by
approximately $3.1 million or 18% in fiscal 1998 compared to fiscal 1997. The
increase in fiscal 1999 was related to the Cadus asset acquisition on July 30,
1999. With the acquisition, we assumed operations of Cadus' fully equipped
research facility in Tarrytown, New York, and retained 47 employees who have
since been employed in ongoing and expanding programs at both the Tarrytown site
and at our headquarters in Uniondale, New York. In addition to the GPCR-directed
drug discovery programs, we also acquired Cadus' directed library of 150,000
small-molecule compounds specifically designed for drug discovery in the GPCR
area. We recorded a charge of $806,000 for in-process research and development
acquired in connection with the Cadus asset acquisition which is included in
research and development expenses in fiscal 1999. Also contributing to the
increase in research and development expense is the continued expansion of our
collaboration with Anaderm for the discovery and development of novel compounds
to treat pigmentation disorders, wrinkles and baldness. We also expanded our
medicinal chemistry facility at our OSI-UK subsidiary to accommodate the
increased chemistry efforts required in the expanded Anaderm collaboration.
These costs were somewhat offset by the conclusion in October 1998 of our funded
collaborative program with Aventis relating to the discovery and development of
orally active drugs for the treatment of chronic anemia.

The increase in research and development expenses in fiscal 1998 was due to
the expansion of our collaboration with Anaderm and the collaborative agreement
with Sankyo for the discovery and development of novel pharmaceutical products
to treat influenza. In addition, research and development expenses include the
amortization of our compound library assets which increased by approximately
$700,000 to $1.8 million in fiscal 1998 reflecting a full year of amortization
of the Dow Chemical Company compound library license acquired in March 1997.

Production and service costs increased approximately $940,000 and $180,000
in fiscal 1999 and 1998, respectively. The increases in fiscal 1999 and 1998
were related to increased investment by us in developing OSDI. On November 30,
1999, we sold our diagnostics business, including the assets of OSDI, to Bayer.

Selling, general and administrative expenses increased approximately
$499,000 or 6% in fiscal 1999 compared to fiscal 1998, and approximately $1.2
million or 16% in fiscal 1998 compared to fiscal 1997. The increases in fiscal
1999 compared to fiscal 1998 were primarily related to increased corporate
development activity during the fiscal year and administration expenses
associated with the acquired operations in Tarrytown from the Cadus asset
acquisition. The increases in fiscal 1998 compared to fiscal 1997 were primarily
related to the expenses associated with the expansion of our OSI-UK and OSDI
subsidiaries.

During fiscal 1999, we made the strategic decision to close down our
facilities in North Carolina and consolidate our natural products operations
into our Tarrytown facility in New York. The estimated cost of closing this
facility of approximately $535,000 was accrued as of September 30, 1999, and was
included in research and development expenses ($395,000) and selling, general
and administrative expenses ($140,000) in fiscal 1999.

Amortization of intangibles in fiscal 1999, 1998, and 1997 primarily
represents amortization of patents that resulted from the acquisition of the
cancer diagnostic business of Applied bioTechnology, Inc. in fiscal 1991 and
goodwill from the acquisition of OSI-UK in fiscal 1996. The book value of
patents related to the Applied bioTechnology acquisition were written-off with
the transfer of these patents in the sale of the diagnostic business to Bayer on
November 30, 1999.

Other Income and Expense. Net investment income decreased approximately
$177,000 or 12% in fiscal 1999 compared to fiscal 1998 and $625,000 or 30% in
fiscal 1998 compared to fiscal 1997. This decrease in fiscal 1999 was a result
of the decline in principal balance invested, offset by a gain of approximately
$436,000 from the sale of 75,000 shares of Aurora Biosciences Corporation's
common stock. Under the terms of a license agreement entered into in May 1998
with Aurora Biosciences, we received 75,000 shares of Aurora Biosciences' common
stock and $300,000 in cash, for a non-exclusive license and certain sub-
licensing rights. Also included in other income was the gain recognized on the
sale of Anaderm common stock. Under the terms of the expanded Anaderm research
agreement dated April 23, 1999, between us and Pfizer, all shareholders of
Anaderm were given the right to require Pfizer to purchase their respective
shares
22
<PAGE> 26

of Anaderm common stock based upon a predetermined formula in the agreement. On
September 23, 1999, we exercised our right and sold to Pfizer all of our shares
of common stock in Anaderm for approximately $3.6 million. The sale net of the
carrying value of the investment resulted in a gain of approximately $3.3
million.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2000, we had cash, cash equivalents and investment securities
of approximately $82.7 million compared to $18.9 million at September 30, 1999.
This increase resulted primarily from: (i) the closing of a private placement of
3,325,000 shares of common stock in February 2000, for net proceeds of
approximately $53.0 million; (ii) the exercise of options and warrants (net of a
subsequent purchase by us of shares issued upon the exercise of the warrants)
for approximately 1.6 million shares of common stock by management and employees
during the nine months ended June 30, 2000, for net proceeds to us of
approximately $9.0 million; and (iii) the sale of our diagnostics business in
November 1999, for cash proceeds of approximately $9.2 million.

In June 2000, we received a license to develop and market OSI-774 from
Pfizer. Prior to this acquisition, our strategic plan had been focused on
increasing investment in our own drug development programs and seeking an
opportunity to license rights to a drug candidate from another company for
development by us. As a result of our obtaining the license to OSI-774, our
preceding goal for in-licensing a clinical development candidate from another
company has been superceded. We expect an operating cash burn of up to $12.0
million for fiscal year 2000. The cash burn will increase significantly during
fiscal year 2001 as a result of OSI-774, to up to approximately $50 million. We
believe that the projected funding from collaborative research and development
programs and our existing cash resources will be sufficient to fund our
operations and capital requirements for at least the next fiscal year.

We expect to incur additional losses over at least the next several years
as we increase our investment in OSI-774 and our other internal proprietary
programs. To achieve profitability, we, alone or with others, must successfully
develop and commercialize our technologies and products, conduct pre-clinical
studies and clinical trials, obtain required regulatory approvals and obtain
adequate assistance to successfully manufacture, introduce and market such
technologies and products. The time required to reach profitability is highly
uncertain.

We have recently received a commitment from the State of New York to expand
and refurbish a state-of-the-art discovery research and headquarters facility
located in the Broad Hollow BioScience Park on the SUNY campus in Farmingdale,
N.Y., which we will lease from the State. We expect to move our headquarters and
Uniondale research operations to this new facility by the end of 2001. With this
additional available space, we believe that our facilities will be adequate to
meet current requirements.

ACCOUNTING PRONOUNCEMENTS

On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," or SAB No. 101. SAB No. 101
provides the SEC staff's views on the recognition of revenue including
nonrefundable technology access fees received by biotechnology companies in
connection with research collaborations with third parties. SAB No. 101 states
that in certain circumstances the SEC staff believes that up-front fees, even if
nonrefundable, should be deferred and recognized systematically over the term of
the research arrangement. SAB No. 101, as amended by SAB No. 101B, requires
registrants to adopt the accounting guidance contained therein by no later than
the fourth fiscal quarter of the fiscal year beginning after December 15, 1999
(fiscal year ending September 30, 2001 for us). We are currently assessing the
requirements of SAB No. 101, particularly as it relates to the technology access
fee from Tanabe recognized in the first quarter of fiscal year 2000. We will not
retroactively restate prior period financial statements but rather report the
effect, if any, of adopting the provisions of the SAB as a change in accounting
principle as of October 1, 2000 as required.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," or SFAS 133, which is
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<PAGE> 27

effective for all fiscal quarters of all fiscal years beginning after June 15,
2000, as amended by SFAS 137. In June 2000, SFAS 138 was issued which amended
certain provisions of SFAS 133. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In accordance with SFAS
133, an entity is required to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gain and
losses to offset related results on the hedged item in the income statement and
requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. We do not believe
that the implementation of SFAS 133, as amended, will have a material effect on
our results of operations or financial position.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our cash flow and earnings are subject to fluctuations due to changes in
interest rates in our investment portfolio of debt securities, to the fair value
of equity instruments held, and, to an immaterial extent, to foreign currency
exchange rates. We maintain an investment portfolio of various issuers, types
and maturities. These securities are generally classified as available-for-sale
and, consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a component of accumulated other
comprehensive losses included in stockholders' equity. Our investments in
certain biotechnology companies are carried on the equity method of accounting.
Other-than-temporary losses are recorded against earnings in the same period the
loss was deemed to have occurred. It is uncertain whether other-than-temporary
losses will be material to our results of operations in the future. Other than
foreign currency exchange rates, we do not currently hedge these exposures. We
hedge some of our foreign currency exchange rates exposure through forward
contracts as more fully described in note 11(d) to the consolidated financial
statements included in this prospectus.

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<PAGE> 28

BUSINESS

OVERVIEW

We are a leading biopharmaceutical company focused on the discovery and
development of gene-targeted, small molecule drugs, in the area of cancer,
diabetes, respiratory diseases and cosmeceuticals. Independently and with our
corporate partners, we have built a pipeline of discovery programs and drug
candidates for 46 individual gene targets addressing major, unmet clinical needs
and significant commercial opportunities. We have two candidates in clinical
trials and nine projects with candidates in late stage pre-clinical development.

OUR STRATEGY

Our objective is to be the leading biopharmaceutical company focused on
developing and commercializing gene-targeted, small molecule products to address
major markets with unmet clinical needs. We intend to develop our own drug
candidates through the early stages of clinical development prior to entering
into co-development and commercialization agreements with leading pharmaceutical
companies in return for a greater share of the revenues derived from product
sales. The key elements of our strategy are:

Develop and commercialize OSI-774. Our lead candidate, OSI-774, which is
currently in open-label Phase II clinical trials, has demonstrated anti-cancer
activity, as a monotherapy, in a number of tumor types including non-small cell
lung, ovarian and head and neck cancers. We intend to advance the development of
OSI-774 through a comprehensive clinical trial program. Our goal is to seek
rapid regulatory approval of OSI-774, broaden its application to additional
cancers, assess its utility in combination with existing chemotherapy agents and
demonstrate a survival benefit for earlier stage cancer patients enabling its
front-line use in major cancers.

Further the development of existing small molecule candidates to maximize
their economic value. We believe that our future growth will be driven by our
proprietary drug discovery and development efforts. We intend to emphasize the
independent development of selected proprietary candidates through clinical
development. By advancing these candidates through the early stages of clinical
development, we expect to maximize the commercial value of the resulting
products to us. In certain instances, we may out-license early drug candidates
that we choose not to develop independently to third parties, with the intent of
providing near-term revenue growth while maximizing value from these assets.

Leverage our advanced drug discovery technologies and capabilities to
generate novel, clinical candidates. We have built and continue to advance our
fully-integrated drug discovery platform. This platform includes every major
aspect of small molecule drug discovery and development, from the identification
of a validated drug discovery target to the emergence of a clinically proven
drug candidate.

Support our existing portfolio of partnered drug candidates. Our discovery
alliances with pharmaceutical partners have historically provided our primary
source of revenue through research funding and continue to represent a source of
royalty-bearing product opportunities. We intend to continue to support these
alliances.

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<PAGE> 29

OUR DEVELOPMENT PIPELINE

The following table summarizes the status of our more advanced product
candidates and identifies any related collaborator.

<TABLE>
<CAPTION>
DISEASE
AREA/PRODUCT GENE TARGET STATUS(1) COLLABORATOR
-------------------- ------------------------------------------- --------- ------------
<S> <C> <C> <C>
CANCER
OSI-774 Epidermal growth factor receptor Phase II OSI-Owned
CP-609,754 Farnesyl transferase Phase I Pfizer
CP-663,427 Farnesyl transferase IND Track Pfizer
CP-547,032 Vascular endothelial growth factor receptor IND Track Pfizer
CP-673,451 Platelet-derived growth factor receptor IND Track Pfizer
RESPIRATORY/ASTHMA
OSIC-113760 Adenosine A(1) receptor IND Track OSI-Owned
M810309 Interleukin-4, or IL-4, gene expression IND Track Aventis
CHOLESTEROL LOWERING
HMR 1171/ AVE 9103 Low density lipoprotein receptor gene IND Track Aventis
expression
COSMECEUTICALS
AD-01-728 Skin pigmentation IND Track Anaderm
CONGESTIVE HEART
FAILURE
OSIC-0961370 Adenosine A(1) receptor IND Track Solvay
</TABLE>

(1) Denotes safety and efficacy tests as follows:

"IND Track" candidates are those candidates in the final stages of
pre-clinical development which focus on meeting formal FDA requirements for
an investigational new drug, or IND, application. This phase typically takes
nine months to one year to complete.

"Phase I" -- Evaluation of safety in humans.

"Phase II" -- Evaluation of safety, dosing and efficacy in humans.

Our research and development activities are focused in the following areas,
all of which represent major unmet healthcare or quality of life needs: cancer,
respiratory diseases, diabetes and cosmeceuticals.

CANCER

Background

Traditionally, development of anti-cancer drugs has resulted in products
which generally kill all rapidly dividing cells. These products, called
cytotoxic drugs, usually interfere directly and non-selectively with normal
processes in the cell associated with DNA replication and cell division. Since
these cell division processes occur routinely in healthy tissues, the cytotoxic
drugs are severely limited in their utility by their serious side-effects
including disruption of the blood, immune and gastrointestinal systems. These
side-effects limit the anti-tumor value of these cytotoxic drugs because they
can only be used in sub-optimal dosing regimens. Overall, cancer remains a major
unmet healthcare concern with over 1.2 million Americans diagnosed with solid
tumors every year.

Since the early 1980's, substantial growth in the medical community's
understanding of the biology and genetics of cancer at the molecular level has
led to the discovery and early development of next generation anti-cancer drugs
that specifically target the molecular abnormalities associated with human
cancer. These include approaches that specifically target cancer-causing genes,
or oncogenes, and processes required for tumor growth such as angiogenesis.
Oncogenes are typically growth regulating genes that are either over-

26
<PAGE> 30

expressed or mutated in cancer cells in such a manner that they confer a
significant growth advantage on cancer cells in the body and contribute to the
uncontrolled growth that we associate with cancer. One of the most important of
these oncogenes is EGFR. Epidermal growth factor is one of several natural
proteins that promote normal cell proliferation in a tightly regulated manner by
binding to its receptor, EGFR, and sending growth signals, via the receptor's
tyrosine kinase enzyme activity, to the nucleus of the cell controlling growth.
In many human cancers, EGFR is either over-expressed or mutated leading to
abnormal signaling and the development of a cancerous mass.

EGFR kinase is over-expressed in a wide range of human tumors, including
non-small cell lung (40-80%), ovarian (30-80%) and head and neck (90%). More
than 700,000 patients diagnosed with cancer each year in the United States have
tumors that over-express EGFR. Thus, there is both an urgent medical need and a
substantial potential market for an effective anti-EGFR agent. Progress in the
field has established EGFR as a validated target for cancer intervention and
small molecule tyrosine kinase inhibitors as promising drug candidates in this
area. Antibody products are also under development which target the EGF binding
region of the receptor and have demonstrated improved anti-cancer activity when
used in conjunction with existing treatment and chemotherapy regimens. However,
these agents are unlikely to inhibit mutated forms of EGFR, require delivery via
intravenous infusion and are expensive to produce. In contrast to these agents,
small molecule inhibitors of the tyrosine kinase activity, such as OSI-774,
should be effective against either mutant or over-expressed forms of EGFR, are
active as once-a-day oral therapies and are relatively easy and inexpensive to
manufacture. In addition, OSI-774 has demonstrated anti-tumor activity when used
clinically as a single agent.

U.S. INCIDENCE OF EGFR OVER-EXPRESSION

<TABLE>
<CAPTION>
PERCENT
NEW CASES OVER-EXPRESSION
TUMOR TYPE 1999 EGFR
------------------------------------------- ---------- ---------------
<S> <C> <C>
Lung 171,600 45%
Colorectal 129,400 17%
Breast 176,300 48%
Bladder 54,800 30-90%
Esophagus/Stomach 34,400 30-70%
Head and Neck 29,800 90%
Ovarian 25,200 30-80%
Prostate 179,300 10%
</TABLE>

OSI-774

Since 1986, we have focused, through our collaboration with Pfizer, on the
discovery and development of novel classes of orally active, gene-targeted,
small molecule anti-cancer drugs based on oncogenes and tumor suppressor genes
and the fundamental mechanisms underlying tumor growth. The most prominent and
advanced of these programs targets EGFR. OSI-774, our small molecule anti-cancer
agent, is a potent, selective and orally active inhibitor of EGFR. OSI-774 has
demonstrated anti-cancer activity in ongoing, open-label Phase II trials and is
representative of an emerging new class of anti-cancer drugs directed against
EGFR. OSI-774 was jointly discovered as part of our cancer discovery alliance
with Pfizer. We gained full development and marketing rights to OSI-774 in order
to allow Pfizer to meet certain requirements of the FTC arising from its review
of Pfizer's merger with Warner Lambert.

Clinical Data. Phase I and ongoing Phase II trials on OSI-774 have
demonstrated the drug to be active as a single agent, safe and well-tolerated
with manageable side-effects. The trials revealed a reversible rash and mild to
moderate diarrhea as the principal side-effects. The incidence of both
side-effects ranges between 40-70% in these trials, and is generally mild to
moderate in severity. The dose limiting side-effect in the Phase I trials was
diarrhea at 200 mg per day. However, on a 150 mg oral daily dosing regimen, this
side-

27
<PAGE> 31

effect is generally mild and is treated effectively with Loperamide (over the
counter Imodium(R)). Clinical investigators have generally considered the rash
to be an acceptable side-effect in the context of anti-cancer therapy. A subset
of patients in both Phase I and Phase II trials have received daily doses of
OSI-774 for extended periods (from six months to over one year) and over 300
patients have now received the drug with well-managed side-effect profiles.

Phase II enrollment has been completed for single agent, open-label salvage
trials in 34 ovarian cancer patients, 56 non-small cell lung cancer patients,
and 113 head and neck cancer patients. Patients in these trials have advanced or
metastatic cancer and have generally failed standard treatment regimens. We
believe these trials are encouraging because they demonstrate objective clinical
responses as a single agent. The primary endpoint in these trials is response
rate, with stable disease rate, time to progression and quality-of-life being
monitored as secondary endpoints.

In our Phase II clinical trial of OSI-774 for lung cancer, patients have
tumors that are confirmed to be EGFR positive and have failed standard
platinum-based chemotherapy. Patients receive a daily dose of 150 mg of OSI-774.
Preliminary data emerging from this Phase II trial shows that four of the first
12 evaluable patients had objective partial responses while another four
patients show some evidence of stable disease. A second 150 mg per day trial of
OSI-774 in advanced head and neck cancer also reveals early indications of the
anti-cancer activity of OSI-774. Three confirmed and two unconfirmed partial
responses were seen in the first 24 evaluable patients and an additional nine
patients showed evidence of stable disease. Objective responses were observed in
earlier Phase I trials in patients with colorectal and renal cell cancer and in
ovarian cancer patients in an ongoing Phase II trial.

OSI-774 CLINICAL TRIALS

<TABLE>
<CAPTION>
TRIAL TRIAL DESIGN NUMBER OF PATIENTS STATUS PURPOSE
-------- ----------------------- ----------------------- ----------- ----------
<S> <C> <C> <C> <C>
Phase I Single agent, 40 healthy volunteers Completed Safety
open-label, rising
single dose
Phase I Single agent, 42 cancer patients Completed Safety
open-label, daily dose
Phase I Single agent, 27 cancer patients Completed Safety
open-label, weekly dose
Phase II Single agent, 34 patients enrolled In progress Safety and
open-label, daily dose with advanced ovarian efficacy
cancer
Phase II Single agent, 56 patients enrolled In progress Safety and
open-label, daily dose with advanced non-small efficacy
cell lung cancer
Phase II Single agent, 113 patients enrolled In progress Safety and
open-label, daily dose with advanced head and efficacy
neck cancer
</TABLE>

Other Cancer Programs

In addition to OSI-774, our collaboration with Pfizer has identified two
compounds, CP-609,754 and CP-663,427, as orally active inhibitors of an enzyme
called farnesyl transferase. CP-609,754 advanced to Phase I clinical trials in
the United States in December 1999 and CP-663,427 is in advanced pre-clinical
development. These compounds target a number of important signaling proteins
including the ras oncogene, an important target in many tumor types such as
colon and bladder cancers. In addition, other compounds are in advanced
pre-clinical development and are being developed as orally available, potent and
selective inhibitors of key protein tyrosine kinase receptors involved in
angiogenesis. Angiogenesis is the process of

28
<PAGE> 32

blood vessel growth and is induced by solid tumors which require nutrients that
enable growth. We believe that the ability to safely and effectively inhibit
this process represents one of the most exciting opportunities in cancer drug
development. These drug candidates target the vascular endothelial growth factor
receptor, VEGFR, and the platelet-derived growth factor receptor, PDGFR,
respectively. An additional 12 targets are in active research and development in
the OSI/Pfizer collaboration. Our proprietary cancer program includes drug
discovery projects directed against another RTK, the insulin growth factor
receptor-type 1, or IGF-1R. This is an important anti-apoptosis factor.
Apoptosis, or programmed cell death, is a normal process controlling cell
survival. There is a strong correlation between high IGF-1R level and an
increased risk of developing cancer. Another important apoptosis target in our
program is the PKB/AKT proto-oncogene which is a key gene in the regulation of
cell survival.

RESPIRATORY DISEASES

In July 1999, we purchased certain assets from Cadus Pharmaceutical
Corporation including a program focused on the adenosine receptor family. The
improved understanding of the physiology, pharmacology and molecular biology of
adenosine and adenosine receptors in recent years has provided a solid
foundation for active research and development in this field. Currently, four
adenosine receptor subtypes, A(1), A(2A), A(2B) and A(3), have been
characterized and research and development efforts have led to high quality
proprietary lead compounds for each. The adenosine A(1) receptor is targeted for
the treatment of the bronchioconstriction associated with the acute phase of an
asthma attack, while the adenosine A(2B) receptor is believed to mediate the
inflammatory components produced by mast cells and associated with the longer
term damage caused by the disease. There are more than 17 million asthma
sufferers in the United States alone, approximately 25% of whom are children.

We are currently developing several sub-type specific inhibitors of the
adenosine receptor family. OSIC-113760, an adenosine A(1) receptor inhibitor
will undergo evaluation, with the goal of identifying a drug candidate to treat
the acute phase of an asthma attack. Adenosine A(2B) receptor targeted compounds
will undergo evaluation with the goal of identifying drug candidates to treat
the longer term damage associated with chronic asthma. In addition to these
adenosine receptor antagonists, we have discovered an inhibitor of the IL-4 gene
expression as part of our long term alliance with Aventis in gene transcription
drug discovery. This gene mediates and sustains allergic asthmatic inflammatory
responses.

We have identified additional sub-type specific adenosine receptor
inhibitors as a result of our asthma program. These include an adenosine A(2A)
inhibitor for the treatment of Parkinson's disease, an adenosine A(3) inhibitor
for the treatment of glaucoma and an adenosine A(1) receptor, CDS-096370, for
the treatment of congestive heart failure. CDS-096370 has been licensed to
Solvay Pharmaceuticals, B.V. for advanced pre-clinical and clinical development.

CHOLESTEROL LOWERING

Another project in our Aventis alliance targeted cholesterol lowering. The
cholesterol lowering market is dominated by a class of drugs commonly referred
to as the statins, including Lipitor and Zocor, which target a key enzyme
involved in the body's metabolism of fats and cholesterol and have total
worldwide sales of over $12 billion per year. Three to five percent of patients
on these drugs have an elevation of certain liver enzymes which indicates some
low level of liver damage as a side-effect. Our program with Aventis was
designed to target a new class of compounds that would avoid these
complications. Two compounds, HMR 1171 and AVE 9103, are in advanced
pre-clinical development. These compounds enhance the expression of the low
density lipoprotein receptor, or LDLr, the principal mechanism by which liver
cells bind LDL-cholesterol, commonly referred to as bad cholesterol, for
clearance by the body. In pre-clinical primate models, these candidates are
effective in lowering LDL-cholesterol and in early pre-clinical safety studies
are apparently well-tolerated.

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DIABETES

Diabetes is a chronic, progressively debilitating disease affecting more
than 143 million people worldwide. According to the American Diabetes
Association, diabetes is the sixth leading cause of death by disease in the
United States and is estimated to afflict 16 million Americans with
approximately 800,000 new cases diagnosed annually. Approximately 90-95% of the
people affected have Type II diabetes which usually develops in adults over age
40 and is most common among adults over age 55. The prevalence of diabetes is
likely to continue to grow as this age group continues to increase in number.

Effective October 1, 1999, we entered into a fully-funded collaboration,
including milestone and success payments and royalties, with Tanabe Seiyaku Co.,
Ltd. to discover and develop small molecule drugs for the treatment of Type II
diabetes. We also received an upfront fee upon initiation of this program. This
collaboration is built upon our comprehensive drug discovery alliance with
Vanderbilt University Diabetes Center, with which we have collaborated since
April 1998. This collaboration will focus on drugs designed to normalize
elevated plasma glucose levels seen in Type II diabetes. This program is also
focused on selected targets in diabetes, while allowing us to pursue other
targets in diabetes not otherwise covered by the collaboration. In addition, we
have begun discovery efforts of our own on certain targets in this area.

COSMECEUTICALS

Every year consumers worldwide spend billions of dollars on cosmetic
products and services that promise to provide a youthful, healthy or culturally
desirable appearance. Some of these products are marketed on the basis of
ostensible pharmaceutical effects, such as the reduction of skin wrinkles and
pigmentation or the promotion of hair growth. We believe that most of these
products are not optimally effective and may have undesirable side-effects.

In 1996, we entered into a joint venture with Pfizer and New York
University to form Anaderm Research Corporation, a company dedicated to the
application of modern tools for the discovery and development of safe,
effective, pharmacologically active agents for certain cosmetic and
quality-of-life indications, such as skin pigmentation, hair loss and skin
wrinkling. We are the sole drug discovery arm of Anaderm providing discovery
biology, medicinal chemistry and pharmaceutical development resources. We have
discovered a candidate, AD-01-728, which is currently under development as a
mediator of skin pigmentation and is in advanced pre-clinical trials.

OUR DRUG DISCOVERY AND DEVELOPMENT PLATFORM

Background

Our approach is focused on the discovery and development of small molecule
pharmaceutical products which, typically, would be taken orally by a patient as
a pill, capsule or suspension. Our drug discovery platform constitutes an
integrated set of technologies and capabilities covering every major aspect of
pre-clinical and early clinical development. The process begins with a lead
seeking phase. In this phase, which generally takes one to two years, a
combination of modern molecular biology, robotics and computational science is
used to build assay or test systems in which large libraries of diverse small
molecules and natural products are tested to see if any of these molecules
possess activity against a drug target. Drug targets are usually genes or gene
products that are shown to be relevant to various disease states. After this
initial testing, active compounds are tested in a variety of secondary assays
designed to determine their potency and selectivity, and to obtain early
information on their toxicity and mechanism of action. Active compounds
surviving this selection process are considered leads and progress into lead
optimization.

During lead optimization, medicinal chemists synthesize new molecules and
combinatorial libraries which are structurally related to the lead compound.
These are tested extensively in order to produce a drug candidate which has
greatly improved drug-like qualities, is active and well-tolerated in animal
models and can be patented as a novel pharmaceutical. Having identified a
suitable drug candidate, the molecule is advanced toward clinical trials, the
IND-track phase, in which toxicological, scale-up synthesis and clinical trial
design issues are addressed. This phase usually takes nine to 12 months.

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Upon entering clinical trials (usually with an investigational new drug
approval from the FDA) a drug is first assessed for its safety, usually in
healthy volunteers (except for life-threatening diseases such as cancer where
patient volunteers are used). After these Phase I trials, drugs are tested in
efficacy, or Phase II, trials to demonstrate activity in humans prior to
extensive Phase III trials designed to collect the data necessary to support a
new drug application filing with the FDA. The entire process typically takes
over a decade and is subject to significant risk and attrition. Only
approximately 1-in-16 drug discovery projects results in a successful product
and approximately seven million compounds are tested for every successful
product. We have, therefore, adopted a research strategy that manages a
portfolio of product opportunities and have integrated a platform of
technologies designed to rapidly and cost-effectively enhance the overall
process.

Our Technology Platform

We have built a fully-integrated drug discovery platform in order to
accelerate the process of identifying and optimizing high-quality, small
molecule drug candidates. Our core discovery technologies and capabilities
include: (i) yeast-based functional genomics systems for characterizing orphan
GPCR drug discovery targets, (ii) gene transcription, signal transduction,
protein kinases and other assay systems, (iii) automated high throughput
screening, (iv) a library of over 350,000 small molecule compounds and over
125,000 natural product extracts, (v) medicinal and automated combinatorial
chemistry, (vi) in vivo pharmacology, pharmacokinetics and pharmaceutical
development capabilities and (vii) a core clinical project management and
regulatory affairs unit.

Functional Genomics

GPCRs constitute one of the largest families of targets for drug discovery
in the pharmaceutical industry, with approximately 40% of currently marketed
pharmaceutical products functioning as modulators of GPCR activity. The
physiological roles played by many of these receptors remain unknown (the
so-called "orphan" receptors). This is primarily due to a lack of identified
activators and inhibitors. We have established a powerful methodology by which
this class of orphan receptors may be converted into targets for therapeutic
intervention. This scientific platform generally relies upon strains of the
yeast, Saccharomyces cerevisiae, which have been genetically manipulated to
allow the detection of the functional coupling of mammalian GPCRs with modified
G-protein subunits. This provides a means by which both activators and
inhibitors can be detected via high throughput screening.

Our bioinformatics group has assembled comprehensive libraries of GPCR,
G-protein subunit and biological activator or inhibitor gene sequences. These
libraries are regularly updated and are analyzed by a number of different types
of searches of both protein and nucleotide databases. Proprietary software
integrates and filters the output from these various searches. The combination
of automated searches, comprehensive libraries and logical filters creates a
discovery system that eliminates false negatives, minimizes false positives and
identifies novel sequences. Finally, the software automatically creates reports
that allow scientists to view the filtered results graphically, perform final
analyses and proceed to screens for activation of the identified orphan GPCRs.

Activation of the orphan GPCRs can be detected by using receptor-expressing
cells exposed to small molecule libraries, natural product libraries or
biological extracts. If one of the compounds in these libraries or extracts acts
as an activator of the orphan GPCR resulting in a receptor gene signal, active
compounds or peptides are then verified with respect to receptor selectivity and
potency in yeast and mammalian cells. Once the activator is identified,
profiling of the G-protein coupling capabilities of the orphan GPCR is
undertaken along with animal studies to determine the physiological role of the
orphan GPCR.

Assay Biology

We specialize in the development of a variety of drug screens that
capitalize on recent advances in our understanding of the human genome and its
correlation to disease. Various assay biology techniques are used to target
selected and validated gene products for drug discovery. We pioneered the use of
genetically engineered human cells to identify compounds that affect
transcription of target genes. These assay systems,

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which employ reporter gene technology, can be utilized to discover drugs that
affect the expression of proteins encoded by the target genes. This broadly
enabling technology allows us to discover compounds that exert their effects on
signal transduction proteins, transcription factors and other sites. Over the
last several years we have broadened our assay expertise extensively. Currently,
we are able to conduct screens on a wide variety of assay platforms, including
enzyme, immuno and receptor assays. We believe that this breadth of expertise
enables us to select the most appropriate assay with which to pursue drug
discovery against a novel biological target.

High Throughput Robotic Screening

We have been at the forefront of high throughput screening since the
1980's. We developed software and automation that enables us to manage large
compound libraries and prepare test substances for screening. We have developed
proprietary hardware and software systems to automate the entire drug screening
process, from the addition of the test substances to assay systems to the
analysis of the data generated from the tests. We continue to develop the
technology to accommodate a high degree of flexibility allowing us to conduct a
wide variety of assay formats in screening. In our proprietary robotic screening
facility, we can analyze up to 300,000 different test samples each week,
depending on the complexity of the assays. Our robotic systems are not limited
to any particular assay format and can be rapidly reconfigured to run a wide
variety of assays.

Diverse Compound Libraries

Access to large libraries of diverse, small molecule compounds is a key
asset in our drug discovery efforts. Leads discovered from these libraries
become the proprietary starting materials from which drugs are optimized. We
manage over 1.5 million compounds in our compound libraries facility from our
own and several of our partners' compound libraries for high throughput
screening. Our proprietary libraries include focused libraries of small molecule
compounds derived from our high-speed combinatorial analoging, libraries of
diverse, high quality small molecule compounds that we have acquired and our
natural products library derived from our unique collection of over 70,000
fungal organisms. We have a library of 140,000 diverse, high quality small
molecule compounds directed toward GPCR discovery as well as an exclusive
worldwide license to a library of 140,000 compounds from the Dow Chemical
Company for the purposes of discovery and development of small molecular weight
pharmaceuticals and cosmeceuticals. We also continue to expand our libraries
through our high speed combinatorial analoging activities.

Chemistry and Lead Optimization

The pharmaceutical properties of a lead compound must be optimized before
clinical development of that compound begins. In 1996, we acquired OSI
Pharmaceuticals, UK Ltd., or OSI-UK (formerly known as Aston Molecules Ltd.), a
private British company with expertise in medicinal and combinatorial chemistry
and pharmaceutical development, which are critical elements in the lead
optimization and development process. With subsequent investments in
combinatorial chemistry, an expansion of the OSI-UK facility and the addition of
the Cadus chemistry team in Tarrytown, New York, this group has become a high
quality medicinal chemistry team of combinatorial, computational and natural
product chemists. The group has integrated various computational techniques for
molecular modeling and diversity analysis into its lead optimization and
development activities to further enhance the speed and quality of our drug
discovery.

Pre-Clinical and Clinical Development

We have expertise in pharmacokinetics and pharmaceutical chemistry and the
management and generation of good laboratory practices, accredited data required
for regulatory dossier submissions to agencies such as the FDA. Thus, we are
able to support the development of a drug candidate for clinical testing. We
have invested significant resources in expanding this capability and in
technological enhancements in this area. In addition, we are implementing
approaches that allow us to generate information on the metabolic liability of
lead compounds together with their physical and chemical properties. We are in
the process of establishing this integrated platform of automated and
semi-automated technologies in an effort to support decision making regarding
the quality of lead candidates earlier in the drug discovery process.
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A core team of physicians and clinical project managers (through Nadler
Pharma Associates LLC), product and pharmaceutics managers and regulatory
affairs and clinical affairs specialists work to integrate externally contracted
clinical development support activities with contract research, manufacturing
and inventory control organizations.

OUR MAJOR COLLABORATIVE PROGRAMS

We maintain collaborations with pharmaceutical companies to combine our
drug discovery and development capabilities with the collaborators' development
and marketing resources. Our agreements with Anaderm and Tanabe provide that our
partners fund our collaborative research and development programs, which are
jointly managed, and pay for clinical development, manufacturing, marketing and
launch costs for any product developed. We will receive royalties on sales of
any resulting products from these and other historical collaborations. Certain
collaborative programs involve milestone payments by the partners. The
collaborative partners usually retain manufacturing and marketing rights
worldwide. Generally, each collaborative research agreement prohibits us from
pursuing with any third party drug discovery research relating to the drug
targets covered by research under the collaboration, but does not block research
activity in the fields.

Anaderm Research Corporation

On April 23, 1996, we formed Anaderm with Pfizer for the discovery and
development of novel compounds to treat conditions such as baldness, wrinkles
and pigmentation disorders. In April 1999, we amended the research agreement
with Pfizer and Anaderm to expand the collaborative program. The amended
research agreement is for a term of three years. Pfizer may terminate the
agreement early in its sole discretion after consultation with Anaderm and us to
determine whether satisfactory progress has been made in the research program
during the previous year. The agreement provides for funding by Pfizer of up to
$35.0 million in total payments to Anaderm to fund our research and development
activities during the three-year term and up to $15.0 million in phase-down
funding following expiration of the three-year term or earlier termination by
Pfizer. In the expanded program, we will continue to provide a full range of
capabilities including assay biology, high throughput screening, compound
libraries, combinatorial, medicinal, and natural product chemistry, as well as
pharmaceutics, pharmacokinetics and molecular biology. Anaderm or Pfizer will
pay royalties to us on the sales of products resulting from the collaboration.

Tanabe Seiyaku Co., Ltd.

Effective as of October 1, 1999, we entered into a collaborative research
and license agreement with Tanabe focused on discovering and developing novel
pharmaceutical products to treat diabetes. Under the agreement, we are
responsible for identification of targets (subject to Tanabe's approval), assay
development, screening of compounds from our library and Tanabe's library
against identified targets, identification of seed compounds meeting certain
criteria specified in the agreement, optimization of these seed compounds and
identification of lead compounds meeting certain criteria specified in the
agreement. Tanabe maintains responsibility for further development and marketing
of a lead compound in exchange for milestone and royalty payments to us.

If Tanabe determines to initiate further development of lead compounds
identified by us, we will grant to Tanabe exclusive, worldwide licenses to,
among other things, use, manufacture and sell all products containing these lead
compounds directed to the identified targets in exchange for license fees and
royalties on product sales. The duration of the licenses is coextensive with the
lives of the patents related to the licensed compound or ten years from the
first commercial sale, whichever is longer. If Tanabe determines not to initiate
further development of a lead compound or if Tanabe discontinues development of
candidate compounds, we will have the sole and exclusive right to develop, use,
manufacture and sell all products resulting from the collaboration, and we will
pay royalties to Tanabe.

Generally, both Tanabe and we are prohibited during the term of the
contract from pursuing independently or sponsoring, directly or indirectly,
research and development of compounds and products in

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the diabetes area relating to the identified targets in the agreement. The
agreement is for a term of four years, with the option to extend for an
additional two-year period. Tanabe, however, has the right to terminate the
agreement after two years under certain circumstances. On September 28, 1999, we
received approximately $4.3 million from Tanabe, which represented advanced
funding of the technology access fee of $3.5 million and research funding of
$812,500 for the first quarter of fiscal year 2000. Tanabe has committed to
provide research funding to us in an aggregate amount up to approximately $16.0
million.

Vanderbilt University

Effective as of April 28, 1998, we entered into a collaborative research,
option and alliance agreement with Vanderbilt University to conduct a
collaborative research program and seek a corporate partner to fund a technology
collaboration for the discovery and development of drugs to treat diabetes. The
agreement was for a term of one year, and was extended until we executed a
third-party research collaboration agreement, which we entered into with Tanabe.

Concurrently with the execution of the Tanabe agreement, we entered into an
amended and restated collaborative research, license and alliance agreement with
Vanderbilt and Tanabe with an effective date of August 31, 1999. The term of the
research program conducted by Vanderbilt and us commenced on April 28, 1998 and
will end upon termination of the contract period under the Tanabe agreement
unless mutually extended by Vanderbilt and us. The OSI/Vanderbilt research
program is comprised of both research directed toward the targets identified in
the Tanabe agreement and research directed toward targets not identified in the
agreement. We may offer to Tanabe any of the additional targets for inclusion in
the OSI/Tanabe research program. As part of the OSI/Vanderbilt research program,
Vanderbilt will assist us in fulfilling our obligations under the Tanabe/OSI
research program by providing access to Vanderbilt's drug discovery resources,
including laboratories and assays.

We will provide funding to Vanderbilt to conduct the OSI/Vanderbilt
research program. A portion of this funding will come from Tanabe's funding of
the OSI/Tanabe research program. We will also pay to Vanderbilt a percentage of
the revenues we receive from Tanabe and any other third party which is
commercializing products resulting from the research program, based on the
extent to which Vanderbilt technology and patents contributed to the product
generating the revenue.

Pfizer Inc.

In April 1986, we entered into a collaborative research agreement and
several other related agreements with Pfizer. During the first five years of the
collaboration, we focused principally on understanding the molecular biology of
oncogenes. In 1991, we renewed the collaboration for a second five-year term and
expanded the resources and scope of the collaboration to focus on the discovery
and development of cancer therapeutic products based on mechanisms-of-action
that target oncogenes and anti-oncogenes and fundamental mechanisms underlying
tumor growth. In April 1996, we renewed our collaboration for a new five-year
term by entering into new collaborative research and license agreements. Pfizer
was originally responsible for the clinical development, regulatory approval,
manufacturing and marketing of any products derived from the collaborative
research program. This changed with the divestiture of OSI-774 to us in June
2000. The funded phase of the collaborative research agreement will expire on
April 1, 2001, and we expect that the agreement will not be renewed.

Effective as of April 1, 1999, we entered into a development agreement with
Pfizer for the development of certain compounds derived from the collaborative
research agreement described above for the treatment of psoriasis. Under the
development agreement, we will conduct a program which includes pre-clinical and
clinical research and development, through and including Phase II clinical
trials, for compounds to assess their safety and efficacy to be developed as
therapeutic agents for the treatment of psoriasis and other related dermal
pathologies. Pfizer has granted to us an exclusive, with the exception of
Pfizer, license to make and use the compounds for all research and development
purposes in the development program other than the sale or manufacture for sale
of products or processes. At the end of the development program, Pfizer must
notify us if it intends to continue development and commercialization of a
compound within three months following

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receipt of the data package from the clinical studies. If Pfizer notifies us of
this intention, it will have an exclusive, worldwide license, with the right to
grant sublicenses, to make, use, sell, offer for sale and import products
developed in the course of the development program subject to the reimbursement
of clinical development costs. If Pfizer fails to notify us, we will receive an
exclusive, worldwide, royalty-bearing license, including the right to grant
sublicenses, to manufacture, use, sell, offer for sale and import products
developed in the course of the development program. We are, however, under no
obligation to accept this license. The duration of the licenses is coextensive
with the lives of patents related to the licensed compounds.

Aventis Pharmaceutical Inc.

Pursuant to an amended collaborative research and license agreement
effective April 1, 1997, we have been conducting research and development
activities with Aventis, which have focused specifically on our expertise in
live-cell assay technology. Aventis is responsible for all lead development
activities. We have identified several compounds, which Aventis is optimizing
for further development. The most advanced of these compounds are in advanced
pre-clinical development for atherosclerosis and asthma.

We have granted to Aventis an exclusive, worldwide license, and rights to
acquire additional licenses, with respect to, among other things, the use,
manufacture and sale of products resulting from our lead seeking efforts against
these individual drug targets. In exchange for the license, Aventis will pay
royalties to us on sales of these products. The funded phase of the agreement
terminated on September 30, 2000. The agreement states that the license expires
on the later of March 31, 2002 or the last to expire of any obligations of
Aventis to pay royalties.

Sankyo Company, Ltd.

Effective as of February 12, 1997, we entered into a collaborative research
and license agreement with Sankyo to be conducted in partnership with MRC
Collaborative Center, London, UK. The collaboration is focused on discovering
and developing novel pharmaceutical products to treat influenza. We are
responsible for conducting research including, without limitation, compound
screening in exchange for research funding from Sankyo. Sankyo has the
responsibility and the exclusive right to conduct pre-clinical and clinical
development of all candidate compounds in exchange for milestone payments to us.
The agreement is for a term of three years, with the option to extend for an
additional one or two-year period upon conditions and terms acceptable to each
of us. The agreement is subject to early termination in the event of certain
defaults by each of us. We renewed the collaboration for an additional two years
in November 1999.

Solvay Pharmaceuticals, B.V.

With the acquisition of the assets of Cadus in July 1999, we assumed a
collaborative research and license agreement effective as of November 1, 1995,
which Cadus had with Solvay. The collaboration is directed toward GPCR drug
discovery in differing fields of use. Our fields of use include cancer, asthma
and inflammatory diseases. Solvay's fields of use include cardiovascular,
central nervous system disorders and gastrointestinal diseases. In exchange for
milestone and royalty payments, Solvay maintains sole responsibility for
pre-clinical and clinical development as well as marketing and commercialization
of any lead compound it discovers from its use of the screens developed as part
of the collaboration. The term of the research program expires December 31,
2000, and we have elected not to continue collaboration with Solvay, but rather
to focus our research in cancer in our proprietary programs.

CLINICAL TESTING

We intend to rely on third-party clinical research organizations, or CROs,
under the management and supervision of our OSI-774 development team, to conduct
clinical studies and assist us in obtaining regulatory approvals for our product
candidates. We have entered into an agreement with Theradex, a CRO with
expertise in oncology, to monitor our ongoing Phase II clinical trials for
OSI-774 in non-small cell lung, head and neck and ovarian cancers.

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MANUFACTURING AND SUPPLY

We intend to rely on contract manufacturers to supply our products for use
in our pre-clinical and anticipated clinical trials. We also expect to rely on
third parties to provide any necessary raw materials or intermediates for
product manufacture.

We have sufficient quantities of OSI-774 to conduct our current and
anticipated clinical trials. OSI-774, a small molecule, is manufactured in a
relatively simple, inexpensive three-step process with high yield. We are
currently in discussion with potential manufacturers of OSI-774, however, no
agreement has been reached. We expect to enter into manufacturing and supply
agreements with at least two suppliers of bulk product and manufacturing
intermediates in the near term. We have engaged McKesson Bioservices to
undertake inventory control, packaging and distribution of OSI-774. If we are
unable to establish or maintain relationships with third parties for
manufacturing sufficient quantities of our product candidates, including
OSI-774, that meet our planned time and cost parameters, the development of our
product candidates and the timing of our clinical trials may be adversely
affected.

OUR INTELLECTUAL PROPERTY

Patents and other proprietary rights are vital to our business. Our policy
is to protect our intellectual property rights in technology developed by our
scientific staff through a variety of means, including applying for patents in
the United States and other major industrialized countries. 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.

We currently own 13 U.S. patents and 38 foreign patents. In addition, we
currently own 23 pending applications for U.S. patents, three of which have been
allowed, and 16 applications for foreign patents, one of which has been allowed.
Moreover, we jointly own with Pfizer rights to 16 issued U.S. and 66 issued
foreign patents and 36 pending U.S. and 426 pending foreign patent applications.
Further, other institutions have granted us exclusive rights under their United
States and foreign patents and patent applications.

Included in the above patents and patent applications are one issued U.S.
patent and 13 issued foreign patents for OSI-774 and related compounds, which
contain composition of matter, process of preparation and method of use claims
and six U.S. and 144 pending foreign patent applications relating to OSI-774 and
related compounds. We also have six applications for U.S. patents and six
applications for foreign patents pending, which contain composition of matter
and method of use claims for our receptor-subtype specific adenosine receptor
antagonist compounds. We intend to aggressively seek patent protection for all
lead compounds discovered or developed in our own programs.

We have assembled a strong gene transcription patent position. We currently
have six issued U.S. patents and two issued foreign patents in this expanding
patent estate. These include U.S. Patent Nos. 5,863,733, 5,665,543 and 5,976,793
which cover the use of reporter genes in many cell-based transcription assays
used for drug discovery. U.S. Patent No. 5,776,502 covers methods of modulating
gene transcription in vivo using any low molecular weight compound. Also U.S.
Patent Nos. 5,580,722 and 5,846,720 cover modulation of genes associated with
cardiovascular disease. We have additional patent applications pending, three of
which have been allowed in the United States, which should further enhance our
patent position in the area of gene transcription. We believe that this
technology is in widespread use throughout the pharmaceutical and biotechnology
sectors. We are conducting a non-exclusive out-licensing program for this patent
estate. Currently, we have licensed this technology to Aurora Biosciences
Corporation, Pharmacia & UpJohn SpA, the R.W. Johnson Pharmaceutical Research
Institute, American Cyanamid Company, and Merck & Co., Inc. Under these
agreements, we receive annual fees together with milestone and royalty payments
with respect to small-molecule gene transcription modulators developed and
marketed as pharmaceutical products or reciprocal license rights to other
technology. We expect to execute similar additional license agreements with
third parties that use this technology.

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OUR COMPETITION

The pharmaceutical and biotechnology industries are intensely competitive.
We face, and will continue to face, intense competition from organizations such
as large pharmaceutical companies, biotechnology companies and academic and
research institutions. We face significant competition from industry
participants who are pursuing the same or similar technologies as those which
constitute our technology platform and from organizations that are pursuing
pharmaceutical products or therapies that are competitive with our potential
products. Most of the major pharmaceutical organizations competing with us have
greater capital resources, larger research and development staffs and
facilities, and greater experience in drug development, obtaining regulatory
approval and pharmaceutical product manufacturing and marketing. Our major
competitors include fully-integrated pharmaceutical companies that conduct
extensive drug discovery efforts and are developing novel small molecule
pharmaceuticals, as well as numerous smaller companies.

With respect to our small molecule drug discovery programs, other companies
have potential drugs in clinical trials to treat disease areas for which we are
seeking to discover and develop drug candidates. These competing drug candidates
may be further advanced in clinical development than are any of our potential
products in our small molecule programs and may result in effective,
commercially successful products. In the cancer field, our lead drug candidate,
OSI-774, is currently in Phase II trials. At least four competitors, Pfizer/
Warner Lambert, Astra-Zeneca PLC, ImClone Systems Incorporated and Abgenix,
Inc., also have compounds in clinical testing for this target.

In addition, CP-609,754 is being developed by Pfizer as a farnesyl
transferase inhibitor and has recently entered Phase I clinical trials. This
target is also the subject of active research and development at several other
companies including Schering-Plough Corporation and Johnson & Johnson. Moreover,
our efforts in the area of asthma have led to advanced pre-clinical development
OSIC-113760, a promising adenosine A(1) receptor inhibitor. Schering-Plough
Corporation and Johnson & Johnson each have similar drug candidates. Several
other biotechnology and pharmaceutical companies are pursuing novel anti-cancer
therapeutics.

Companies with related research and development activities also present
significant competition for us. For example, research efforts with respect to
gene sequencing and mapping are identifying new and possibly superior target
genes. In addition, alternative drug discovery strategies, such as rational drug
design, may prove more effective than those pursued by us. Furthermore,
competitors may have access to more diverse compounds for testing by virtue of
larger compound libraries or through combinatorial chemistry skills or other
means.

Our technology platform consists of a variety of cell free and live-cell
assay systems, gene transcription technologies, high throughput drug screening
and medicinal, combinatorial and natural product chemistry. Pharmaceutical and
biotechnology companies and others are active in all of these areas and employ
live-cell assays, gene transcription and high throughput robotics in their drug
discovery operations. Numerous other companies use one or more of these
technologies.

We believe that our ability to compete successfully will be based on, among
other things, our ability to create and maintain scientifically advanced
technology, attract and retain scientific personnel possessing a broad range of
expertise, obtain patent protection or otherwise develop and protect proprietary
products or processes, enter into co-development and marketing arrangements with
our collaborative partners, conduct clinical trials, obtain required government
approvals on a timely basis and commercialize our products.

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, labeling, marketing, export,
storage, record keeping, advertising and promotion of pharmaceutical and
diagnostic products.

37
<PAGE> 41

The FDA Process

The process required by the FDA before pharmaceutical products may be
approved for marketing in the United States generally involves:

- pre-clinical laboratory and animal tests;

- submission to the FDA of an investigational new drug application, which
must become effective 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;

- submission to the FDA of a new drug application; and

- FDA review of the new drug application or product license application in
order to determine, among other things, whether the drug is safe and
effective for its intended uses.

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 manufacturing practices. The results of the
pre-clinical tests are submitted to the FDA as part of an investigational new
drug application and are reviewed by the FDA prior to the commencement of
clinical trials.

Clinical trials are conducted under protocols that detail matters such as
the objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the investigational new drug application. Protocol 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 may result in FDA rejection of clinical trial results
and data, and may delay ultimate FDA approval of the drug candidates.

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, metabolism,
distribution and excretion. Phase II involves studies in a limited patient
population 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 trials are undertaken in order to further evaluate
clinical efficacy and to further test for safety within an expanded patient
population. The FDA may suspend or terminate clinical trials at any point in
this process if it concludes that clinical subjects are being exposed to an
unacceptable health risk.

FDA approval of our own and our collaborators' products, including the
review of the manufacturing processes and facilities used to produce these
products, will be required before they may be marketed in the United States. The
process of obtaining approvals from the FDA can be costly, time consuming and
may be affected by unanticipated delays.

Among the conditions for new drug application approval is the requirement
that the prospective manufacturer's procedures conform to 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 and quality control to ensure compliance. Domestic manufacturing
establishments are subject to periodic inspections by the FDA in order to
assess, among other things, compliance with good manufacturing practices. To
supply products for use in the United States, foreign manufacturing
establishments must comply with 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.

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<PAGE> 42

Both before and after approval is obtained, a product, its manufacturer and
the holder of the new drug application for the product are subject to
comprehensive regulatory oversight. 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 new drug application holder. In addition,
later discovery of previously unknown problems may result in restrictions on the
product, manufacturer or new drug application holder, including withdrawal of
the product from the market. Furthermore, new government requirements may be
established that could delay or prevent regulatory approval of our products
under development.

Other Regulatory Processes

For marketing outside the United States, we and our collaborators and the
drugs developed by us, if any, will be subject to foreign regulatory
requirements governing human clinical trials and marketing approval for drugs.
The requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. In addition,
before a new drug may be exported from the United States, it must be the subject
of an approved new drug application or comply with FDA regulations pertaining to
investigational new drug applications.

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. Our research and
development activities involve the controlled use of hazardous materials,
chemicals and various radioactive compounds. Although we believe that our safety
procedures for handling and disposing of hazardous materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages, which
could exceed our resources.

OUR EMPLOYEES

We believe that our success is largely dependent upon our ability to
attract and retain qualified personnel in scientific and technical fields. As of
September 27, 2000, we employed 217 persons worldwide (152 in the United
States), of whom 167 were primarily involved in research and development
activities, with the remainder engaged in executive and administrative
capacities. Although we believe that we have been successful to date in
attracting skilled and experienced scientific personnel, competition for
personnel is intense and we cannot assure that we will continue to be able to
attract and retain personnel of high scientific caliber. We consider our
employee relations to be good.

OUR FACILITIES

We lease three facilities, one located at 106 Charles Lindbergh Boulevard,
Uniondale, New York, consisting of 30,000 square feet, one located at 777 Old
Saw Mill Road, Tarrytown, New York, consisting of 45,000 square feet, and
another located at 50 Charles Lindbergh Boulevard, Uniondale, New York,
consisting of 4,500 square feet. The larger Uniondale facility houses our
principal executive offices and drug discovery laboratory. The Tarrytown
facility houses an additional laboratory, which was acquired in the Cadus asset
acquisition on July 30, 1999. The smaller facility at 50 Charles Lindbergh
Boulevard houses our finance and administrative offices. We have another
subsidiary, OSI-UK, which leases a 25,000 square foot facility located at 10
Holt Court South, Aston Science Park, Birmingham, England.

We have recently received a commitment from the State of New York to expand
and refurbish a state-of-the-art discovery research and headquarters facility
located in the Broad Hollow BioScience Park on the SUNY campus in Farmingdale,
N.Y. which we will lease from the State. We expect to move our headquarters and
Uniondale research operations to this new facility by the end of 2001. With this
additional space, we believe that our facilities will be adequate to meet
current requirements.

LEGAL PROCEEDINGS

There are currently no material legal proceedings pending against us.

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<PAGE> 43

MANAGEMENT AND KEY EMPLOYEES

EXECUTIVE OFFICERS AND DIRECTORS

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Colin Goddard, Ph.D. ..................... 41 Chairman of the Board of Directors and
Chief Executive Officer
Nicholas G. Bacopoulos, Ph.D. ............ 51 President and Head of Research and
Development
Paul I. Nadler, M.D. ..................... 51 Vice President, Medical Affairs
Arthur M. Bruskin, Ph.D. ................. 45 Executive Vice President, Pharmaceutical
Operations
Eric W. Collington, Ph.D. ................ 55 Vice President, Chemistry
Geoffrey Cooper, Ph.D. ................... 51 Vice President, Business Development
Robert L. Van Nostrand.................... 43 Vice President and Chief Financial Officer
David R. Webb, Ph.D. ..................... 55 Vice President, Discovery Research
John A. Slack, Ph.D. ..................... 49 Vice President, Pre-Clinical Development
Christine Boisclair, BSc.................. 39 Director, Regulatory Affairs
Charmaine Quarterman, Ph.D. .............. 45 Director, Pharmaceutical Development
Arlindo L. Castelhano, Ph.D. ............. 48 Senior Director, Chemistry and GPCR Drug
Discovery
P. John Murray, Ph.D. .................... 46 Senior Director, Research and Development
Operations
Nils Bergenhem, Ph.D. .................... 41 Director, Diabetes Research
Edwin A. Gee, Ph.D. ...................... 80 Chairman Emeritus of the Board and
Director
G. Morgan Browne.......................... 65 Director
John H. French, II........................ 69 Director
Daryl K. Granner, M.D. ................... 63 Director
Walter M. Lovenberg, Ph.D. ............... 66 Director
Viren Mehta............................... 50 Director
Sir Mark Richmond, Ph.D. ................. 69 Director
John P. White............................. 54 Director
</TABLE>

EXECUTIVE OFFICERS AND KEY EMPLOYEES

Colin Goddard, Ph.D., was appointed our Chairman of the Board in August
2000 and our Chief Executive Officer in October 1998. He served as our President
from 1997 to 2000; Executive Vice President and Chief Operating Officer from
1996 to 1997; Vice President Research Operations from 1993 to 1996; Director,
Drug Discovery from 1992 to 1993; and Program Manager, Drug Discovery from 1991
to 1992. Dr. Goddard joined us as a scientist in January 1989. In the early
1990's, Dr. Goddard was responsible for the development of our pioneering
robotic high throughput screening operation and was instrumental in the
development of our fully integrated drug discovery strategy. Before joining us,
Dr. Goddard spent four years at the National Cancer Institute in Bethesda,
Maryland conducting research on the src oncogene. Dr. Goddard trained as a
cancer pharmacologist in Birmingham, U.K., receiving his Ph.D. from the
University of Aston, Birmingham in 1985.

Nicholas G. Bacopoulos, Ph.D., was appointed our President effective
September 28, 2000. Prior to this, Dr. Bacopoulos served 17 years with Pfizer
Inc., holding senior management positions in discovery research and
pharmaceutical planning prior to taking the helm at Anaderm Research Corporation
in 1996. Under Dr. Bacopoulos' leadership and in collaboration with us, Anaderm
established an extensive network for developing potential cosmeceutical agents
for quality-of-life indications such as skin pigmentation, hair loss, and
anti-wrinkling. Dr. Bacopoulos served as Senior Director, Global Pharmaceutical
Planning, heading technology assessment efforts, and as Senior Director,
Corporate Strategic Planning at Pfizer Headquarters in
40
<PAGE> 44

New York. Within Pfizer Central Research in Groton, Connecticut, Dr. Bacopoulos'
previous positions included Executive Director, Biology and Group Director,
Neuroscience, Cancer, Clinical Measurement Laboratory and Applied Biotechnology
Group. During this time, Dr. Bacopoulos' team was an integral part of research
and development programs for products including Pfizer's Zoloft(R), the
anti-psychotic Zeldox(R), and was responsible for laying the foundation of an
outstanding cancer discovery operation and emerging pipeline of cancer drugs at
Pfizer. Dr. Bacopoulos received his Bachelor of Arts degree from Cornell College
and his Ph.D. degree from the University of Iowa. He completed his postdoctoral
training in pharmacology at Yale University School of Medicine and was a faculty
member at Dartmouth Medical School.

Paul I. Nadler, M.D., serves as our Vice President of Medical Affairs to
lead the OSI-774 clinical development program and will assist in establishing
working partnerships with an appropriate contract research organization. Dr.
Nadler has over 23 years experience in clinical trials and has medical training
in the areas of oncology, internal medicine and clinical immunology, with the
last 18 years of this experience in the pharmaceutical industry. Dr. Nadler
previously served as a medical advisor for our asthma program. Prior to founding
Nadler Pharma Associates, LLC in 1998, Dr. Nadler served as Chief Medical
Officer, Kern McNeill International from 1996 to 1998; Vice President, Medical
and Regulatory Affairs with Protein Design Labs, Inc., from 1993 to 1996; Vice
President, Sandoz Research Institute and Chairman of Sandoz Pharma Group from
1988 to 1993; Vice President, Medical Pharmaceuticals, Knoll Pharmaceuticals,
BASF Group from 1986 to 1988; and Director of Clinical Immunology with Hoffmann
La Roche, Inc from 1982 to 1986. He received his M.D. from Washington University
School of Medicine, and he spent five years in the Immunology Branch of the
National Cancer Institute in Bethesda, Maryland.

Arthur M. Bruskin, Ph.D., was appointed our Executive Vice President,
Pharmaceutical Operations in October 1999, having previously served as Executive
Vice President, Drug Discovery from April 1998 to September 1999 and Senior Vice
President, Drug Discovery from October 1996 to April 1998. Dr. Bruskin joined
Applied bioTechnology, Inc., one of our wholly-owned subsidiaries, in July 1987
and became Director, Cancer Research following the acquisition of Applied
bioTechnology, Inc. by us in 1991. Prior to that, Dr. Bruskin spent three years
as a post doctoral fellow in the lab of Nobel Laureate Dr. Michael Bishop at the
University of California, San Francisco, studying the molecular mechanisms of
the activation of oncogenes. Dr. Bruskin obtained his Ph.D. in molecular biology
at Indiana University, Bloomington, Indiana. Dr. Bruskin has served as Vice
President of Anaderm Research Corp. since October 1996 and Vice President of
Helicon Therapeutics, Inc. since July 1997.

Eric W. Collington, Ph.D., was elected as a corporate officer in December
1998, prior to which he was appointed Vice President, Chemistry in September
1996 when we acquired OSI-UK, one of our wholly-owned subsidiaries. Prior to
joining us, Dr. Collington was Research Director of OSI-UK from July 1996 to
September 1996. Prior to that Dr. Collington held various positions with Glaxo
Research and Development Ltd. from February 1983 to September 1995, including
Head of Medicinal Chemistry and Deputy Head of CNS Diseases Research. He has
been associated with a number of drugs that have reached the market place.
Trained as an organic chemist, Dr. Collington received his Ph.D. from Keele
University, England, followed by two years of post-doctoral work in the United
States.

Geoffrey Cooper, Ph.D., was appointed our Vice President, Business
Development in June 1998. Prior to joining us, Dr. Cooper was Senior Licensing
Officer at Tanabe Seiyaku Co., Ltd. from February 1996 to June 1998, Assistant
Vice President, Worldwide Licensing at Wyeth-Ayerst Laboratories from January
1995 to January 1996, and Senior Director, Licensing at American Cyanamid
Pharmaceuticals from October 1989 to January 1995. After graduating in pharmacy,
Dr. Cooper received his Ph.D. in pharmaceutical chemistry from the University of
Aston, Birmingham, U.K., in 1974 and conducted post-doctoral research in
metabolic disease at University College, Cardiff, U.K. before commencing his
career in the pharmaceutical industry.

Robert L. Van Nostrand was appointed our Vice President and Chief Financial
Officer in December 1996, having previously served as Vice President, Finance
and Administration. Mr. Van Nostrand has served as our Treasurer since March
1992 and our Secretary since March 1995. Mr. Van Nostrand joined us as
Controller and Chief Accounting Officer in September 1986. Prior to joining us,
Mr. Van Nostrand was in a managerial position with the accounting firm of Touche
Ross & Co. Mr. Van Nostrand holds a Bachelor of Science in

41
<PAGE> 45

Accounting from Long Island University, New York, and he completed advanced
management studies at the Wharton School, Philadelphia, Pennsylvania. He is a
Certified Public Accountant.

David R. Webb, Ph.D., was appointed our Vice President, Discovery Research
in August 1999. Prior to joining us, Dr. Webb was Vice President of Research and
Chief Scientific Officer of Cadus Pharmaceutical Corporation from 1995 to 1999.
From 1989 to 1996, Dr. Webb was a Consulting Professor of Cancer Biology at
Stanford University. From 1990 to 1995, Dr. Webb was a Distinguished Scientist
and Director, Institute of Immunology and Biological Sciences, Syntex, Inc. and
from 1987 to 1990, a Distinguished Scientist, Department of Molecular
Immunology, Syntex, Inc. Dr. Webb is presently an adjunct professor of
Microbiology and Immunology at New York Medical College. Dr. Webb has been a
member of the Board of Directors of Axiom Biotechnologies, Inc. since 1998 and a
member of its Scientific Advisory Board since 1999.

John A. Slack, Ph.D., serves as our Vice President, Pre-Clinical
Development. He was appointed as Managing Director of OSI-UK in 1993 and Vice
President for Pre-Clinical Development in September 1996, from his previous
position as Technical Director of OSI-UK. Prior to OSI-UK, Dr. Slack held
lectureships in the Department of Pharmaceutical Sciences at Aston University
and the Department of Therapeutics and Clinical Pharmacology at Birmingham
University. Following an undergraduate degree in pharmacy and a Ph.D. in
analytical chemistry, both at Aston University, Dr. Slack obtained postdoctoral
experience at King's College, London in drug metabolism.

Christine Boisclair, BSc., serves as our Director of Regulatory Affairs.
Ms. Boisclair joined us as Director Regulatory Affairs in July 2000. Ms.
Boisclair has over 17 years experience in US and International Regulatory
Affairs with both drugs and biologics. Prior to joining us, Ms. Boisclair was
Associate Director Regulatory Affairs at Genzyme Corporation. Her previous
regulatory affairs positions have been at ImmuLogic Pharmaceuticals, Parexel
International Corporation, Searle Pharmaceuticals and Glaxo Wellcome. Ms.
Boisclair holds a BSc. degree in biochemistry from York University in the UK.

Charmaine Quarterman, Ph.D., has served as Director of Pharmaceutical
Development since September 1996. Dr. Quarterman worked for a number of years
within the Cancer Campaign Laboratories at Aston University undertaking clinical
and experimental pharmacokinetics and gaining extensive experience in the
pharmaceutical development of a wide range of new chemical entities. Having
moved to OSI-UK in 1990, she has, on behalf of a number of pharmaceutical
companies, had direct involvement in new chemical entities development projects
covering a range of therapeutic areas with particular responsibility for
providing for the chemistry and pharmacy sections of regulatory dossiers. She
has contributed to the successful development of a number of new chemical
entities in a range of pharmaceutical presentations to allow their progression
to clinical evaluation. Dr. Quarterman studied medical biochemistry at
Birmingham University prior to completing a Ph.D. in pharmacokinetics within the
Department of Therapeutics and Clinical Pharmacology.

Arlindo L. Castelhano, Ph.D., has served as our Senior Director of
Chemistry and GPCR Drug Discovery since August 1999. Prior to joining us, Dr.
Castelhano was the Executive Director of Chemistry at Cadus Pharmaceutical
Corporation from September 1995 to July 1999 where he focused on GPCR drug
discovery targets. Dr. Castelhano was a scientist at Syntex Inc. from 1981 to
1995, serving as Principal Scientist from 1993 to 1995. From 1980 to 1981, Dr.
Castelhano was a Research Associate at the National Research Council, Ottawa,
Ontario. Dr. Castelhano is a co-inventor on 17 patent applications. Dr.
Castelhano received his Bachelor of Science in chemistry and biochemistry from
the University of Toronto and his Ph.D. in chemistry from McMaster University,
Hamilton, Ontario.

P. John Murray, Ph.D., was appointed Senior Director of Research and
Development Operations in January 2000. Prior to his current position, Dr.
Murray held the position of Director of Medicinal Chemistry from May 1999 to
January 2000. Prior to joining us, Dr. Murray spent 13 years with Glaxo
Wellcome, holding positions within Chemical Development and Medicinal Chemistry
and culminating in Group Leader and Laboratory Head, Glaxo Wellcome Cambridge
Chemistry Laboratory. Trained as an organic chemist, Dr. Murray studied for his
Ph.D. at the Imperial College, University of London, followed by one year's
postdoctoral work at the University of New Brunswick, Canada and two years at
the Universite de Montreal.

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<PAGE> 46

Nils Bergenhem, Ph.D., joined us as Director for Diabetes Research in May
2000. Prior to this, Dr. Bergenhem was employed by Novo Nordisk A/S in
Copenhagen as manager of a discovery research department addressing metabolic
dysregulation in type 2 diabetes. Prior to this, he was on the research faculty
of the Department of Biological Chemistry, University of Michigan School of
Medicine, where he also was associated with the Institute of Gerontology. Dr.
Bergenhem holds a Ph.D. degree in protein biochemistry from Umeaa University,
Sweden, and was trained in molecular biology and genetics as a postdoctoral
fellow in the Department of Human Genetics, University of Michigan School of
Medicine.

DIRECTORS

Edwin A. Gee, Ph.D., a director since 1985, served as President, Chairman
of the Board and Chief Executive Officer of International Paper Company from
1978 until his retirement in April 1985. Prior to 1978, Dr. Gee was a Senior
Vice President, member of the Executive Committee and director of E.I. du Pont
de Nemours and Company. Dr. Gee serves as a member of the Board of Directors of
Biocryst Pharmaceuticals, Inc. Dr. Gee served as one of our executive officers
holding the position of Chairman of the Board from April 1987 until March 1990.
From March 1990 to December 1997, Dr. Gee was Chairman of the Board, but no
longer served as one of our officers. As of December 1997, Dr. Gee was elected
Chairman, Emeritus of the Board.

G. Morgan Browne has been Administrative Director of Cold Spring Harbor
Laboratory since June 1985. Prior to 1985, Mr. Browne provided management
services to a series of scientifically based companies. He is presently a
director of Harris & Harris Group, Inc. Mr. Browne currently serves as a trustee
of our 401(K) Savings and Investment Plan. Mr. Browne became a director in March
1993.

John H. French, II, has been Vice Chairman of Southern Pacific Petroleum
N.L. (U.S.) for the past seven years and Vice Chairman of Company of the Far
Countries since 1998. Mr. French currently serves as a trustee of our 401(K)
Savings and Investment Plan. Mr. French became a director in July 1988.

Daryl K. Granner, M.D., is a professor of molecular physiology and
biophysics and director of Vanderbilt Diabetes Center, Vanderbilt University.
Dr. Granner served as Chairman of Molecular Physiology/ Biophysics and of
Internal Medicine at Vanderbilt University from July 1984 to August 1998. From
1970 to 1984, he was a faculty member at the University of Iowa, where he
directed the Division of Endocrinology and Diabetes and the Iowa Diabetes
Center. He directs the Vanderbilt Diabetes Center and is an acknowledged
authority in the mechanism of insulin action and the pathophysiology of diabetes
mellitus. He has served on numerous national advisory panels. Dr. Granner has
been a director since September 1996. Dr. Granner has served as a scientific
consultant to us since 1992.

Walter M. Lovenberg, Ph.D., was an Executive Vice President and member of
the Board of Directors of Marion Merrell Dow Inc. from 1989 through 1993. Dr.
Lovenberg served as President of the Marion Merrell Dow Research Institute from
1989 to 1993 and Vice President from 1986 through 1989. Dr. Lovenberg has
received the Fulbright-Hayes Senior Scholar Award, the Public Health Service
Superior Service Award and the Third International Award for Research on Adult
Diseases. Dr. Lovenberg currently serves as a member of the Board of Directors
of Xenometrix, Inc., Cytoclonal Pharmaceutics, Inc., and Inflazyme, Inc. He has
served on the Scientific Advisory Board of Amylin Pharmaceuticals, Inc. from
1996 to 2000. Dr. Lovenberg presently serves as a director and had been Chief
Executive Officer of Helicon Therapeutics, Inc. from July 1997 to December 1999.
Dr. Lovenberg has served as a consultant to us since October 1993. Dr. Lovenberg
became a director in March 1994.

Viren Mehta has been a strategic and financial advisor to us since 1996.
Dr. Mehta has been the managing member of Mehta Partners, LLC, a firm which
provides investment, and strategic and financial advice to the pharmaceutical
and biotechnology industries, since 1998. Prior to that, Dr. Mehta was a partner
of Mehta and Isaly from July 1989 to December 1997. He was also a part of the
strategic planning team of the international division of Merck & Co. Dr. Mehta
became a director in November 1999.

Sir Mark Richmond, Ph.D., currently holds a position as a senior fellow at
University College, London. Prior to this, Sir Mark served as the Head of
Research and Special Assignments, Research Directorate at

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<PAGE> 47

Glaxo Research & Development Ltd. from 1993 to 1996. Previously, from 1981 to
1990, he was the Vice Chancellor of the University of Manchester, and in 1990
was appointed Chairman of the Science and Engineering Research Council, the
leading government funded agency supporting academic research in the United
Kingdom. Sir Mark is a non-executive director of a number of biotechnology
companies in the U.S. and Europe, including Genentech, Inc. and presently serves
as the Chairman of Cancer Research Campaign Technology. He is also a consultant
in the biotechnology and pharmaceutical industries. Sir Mark became a director
in April 2000.

John P. White is a partner of Cooper & Dunham LLP, a New York City law firm
specializing in patent, trademark and related intellectual property matters, and
has been associated with the firm since 1977. Mr. White is a member of numerous
professional organizations, both legal and scientific, and has written and
lectured extensively on the subject of legal protection for biotechnology. Mr.
White has been a director since May 1985.

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<PAGE> 48

UNDERWRITING

The underwriters named below, acting through their representatives,
Robertson Stephens, Inc., Lehman Brothers Inc., Prudential Securities
Incorporated, Lazard Freres & Co. LLC and Adams, Harkness & Hill, Inc., have
severally agreed with us, subject to the terms and conditions of the
underwriting agreement, to purchase from us the number of shares of common stock
set forth below opposite their respective names. The underwriters are committed
to purchase and pay for all shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Robertson Stephens, Inc. ................................... 1,641,250
Lehman Brothers Inc. ....................................... 1,641,250
Prudential Securities Incorporated.......................... 1,010,000
Lazard Freres & Co. LLC..................................... 505,000
Adams, Harkness & Hill, Inc. ............................... 252,500
William Blair & Company L.L.C. ............................. 100,000
Dain Rauscher Incorporated.................................. 100,000
Fidelity Capital Markets, a division of National Financial
Services LLC.............................................. 100,000
Total............................................. 5,350,000
=========
</TABLE>

The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $2.52 per share, of which $0.10 may be reallowed
to other dealers. After this offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No such reduction
shall change the amount of proceeds to be received by us as set forth on the
cover page of this prospectus. The common stock is offered by the underwriters
as stated herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part.

Over-Allotment Option

We have granted to the underwriters an option, exercisable during the 30
day period after the date of this prospectus, to purchase up to 802,500
additional shares of common stock to cover over-allotments, if any, at the
public offering price less the underwriting discount set forth on the cover page
of this prospectus. If the underwriters exercise their over-allotment option to
purchase any of the additional 802,500 shares of common stock, the underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof as the number of shares to be purchased by each of
them bears to the total number of shares of common stock offered in this
offering. If purchased, these additional shares will be sold by the underwriters
on the same terms as those on which the 5,350,000 shares offered by this
prospectus are being sold. We will be obligated, pursuant to the over-allotment
option, to sell shares to the underwriters to the extent the over-allotment
option is exercised. The underwriters may exercise the over-allotment option
only to cover over-allotments made in connection with the sale of the shares of
common stock offered in this offering. The following table summarizes the
compensation to be paid to the underwriters by us:

<TABLE>
<CAPTION>
TOTAL
--------------------------
WITHOUT WITH
PER OVER- OVER-
SHARE ALLOTMENT ALLOTMENT
----- ----------- -----------
<S> <C> <C> <C>
Underwriting discount and commissions............ $4.20 $22,470,000 $25,840,500
</TABLE>

We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $615,000.

Indemnity

The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.

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<PAGE> 49

Lock-Up Agreements

Each of our executive officers and directors has agreed, during the period
of 90 days after the date of this prospectus, subject to specified exceptions,
not to offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to any shares of common stock or any
options or warrants to purchase any shares of common stock, or any securities
convertible into or exchangeable for shares of common stock, owned as of the
date of this prospectus or thereafter acquired directly by the officer or
director or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of Robertson Stephens, Inc. on
behalf of the underwriters. However, Robertson Stephens, Inc. may, in its sole
discretion and at any time or from time to time, release all or any portion of
the securities subject to the lock-up agreements.

In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of Robertson Stephens, Inc. on behalf of the
underwriters, subject to specified exceptions, consent to the disposition of any
shares held by stockholders subject to lock-up agreements prior to the
expiration of the lock-up period or issue, sell, contract to sell, or otherwise
dispose of, any shares of common stock, any options or warrants to purchase any
shares of common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than the sale of shares in this
offering, the issuance of common stock upon the exercise of outstanding options
or warrants and the issuance of options under our existing stock option and
incentive plans, provided that those options do not vest prior to the expiration
of the lock-up period.

Stabilization

The representatives have advised us that, pursuant to Regulation M under
the Securities Act, some persons participating in this offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above that
which might otherwise prevail in the open market. A "stabilizing bid" is a bid
for or the purchase of shares of common stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of common stock. A "syndicate
covering transaction" is the bid for or the purchase of the common stock on
behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with this offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with this offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have advised us that such transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.

Passive Market Making

In connection with this offering and before the commencement of offers or
sales of the common stock, certain underwriters who are qualified market makers
on the Nasdaq National Market may engage in passive market making transactions
in the common stock on the Nasdaq National Market in accordance with Rule 103 of
Regulation M under the Exchange Act, during the business day prior to the
pricing of the offering. Passive market makers must comply with applicable
volume and price limitations and must be identified as such. In general, a
passive market maker must display its bid at a price not in excess of the
highest independent bid for such security; if all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded.

Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor(SM), a full service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors.

46
<PAGE> 50

LEGAL MATTERS

Saul Ewing LLP, Philadelphia, Pennsylvania, will pass upon the validity of
the shares of common stock offered in this prospectus by us. Testa, Hurwitz &
Thibeault, LLP will pass upon certain legal matters on behalf of the
underwriters.

EXPERTS

Our consolidated financial statements as of September 30, 1999 and 1998,
and for each of the years in the three-year period ended September 30, 1999
included in our 1999 annual report on Form 10-K/A, have been included in and
incorporated by reference in this prospectus and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, also included in and incorporated by reference in this prospectus,
and upon the authority of KPMG LLP as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement, of which this prospectus is a part,
and related exhibits with the SEC as required by the Securities Act. The
registration statement contains additional information about us and our common
stock. We also file annual and quarterly reports, proxy statements and other
information with the SEC. You may read and copy the registration statement or
any other document we file with the SEC at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the Public Reference Room.

The SEC also maintains a website that contains reports, proxy and
information statements, and other information that we have filed electronically.
The SEC's website is located at http://www.sec.gov.

47
<PAGE> 51

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The SEC allows us to incorporate into this prospectus information that we
file with the SEC in other documents, which means that we can disclose important
information by referring to those documents. The information incorporated by
reference is an important part of this prospectus. Any statement contained in a
document which is incorporated by reference is automatically updated and
superseded if such information is contained in this prospectus, or information
that we later file with the SEC, modifies and replaces such information. We
incorporate by reference the following documents we have filed with the SEC:

- our annual report on Form 10-K for the fiscal year ended September
30, 1999, filed with the SEC on December 29, 1999 and amended on January
25, 2000 and May 23, 2000;

- our current report on Form 8-K, filed with the SEC on December 15,
1999 and amended on May 23, 2000;

- our current report on Form 8-K, filed with the SEC on March 1, 2000;

- our current report on Form 8-K, filed with the SEC on June 20, 2000;

- our current report on Form 8-K, filed with the SEC on September 27,
2000;

- our quarterly report on Form 10-Q for the quarter ended December 31,
1999, filed with the SEC on February 14, 2000;

- our quarterly report on Form 10-Q for the quarter ended March 31,
2000, filed with the SEC on May 15, 2000 and amended on June 19, 2000;

- our quarterly report on Form 10-Q for the quarter ended June 30,
2000, filed with the SEC on August 14, 2000;

- our proxy statement, dated February 7, 2000, for our 2000 annual
meeting of stockholders, filed with the SEC on January 28, 2000; and

- the description of our common stock, which is registered under
Section 12 of the Exchange Act in our registration statement on Form 8-A,
filed on November 21, 1986 (No. 0-15190) including any amendments or
reports filed for the purpose of updating such description.

All documents we have filed with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this prospectus will become a part
of this prospectus. To receive a free copy of any of the documents incorporated
by reference in this prospectus call or write Robert L. Van Nostrand, Vice
President and Chief Financial Officer, OSI Pharmaceuticals, Inc., 106 Charles
Lindbergh Boulevard, Uniondale, New York 11553, telephone (516) 222-0023. We
will not send exhibits to the documents unless those exhibits have been
specifically incorporated by reference in this prospectus.

48
<PAGE> 52

CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets -- September 30, 1999 and 1998
(audited) and June 30, 2000 (unaudited)................... F-3
Consolidated Statements of Operations -- Years ended
September 30, 1999, 1998 and 1997 (audited) and the nine
months ended June 30, 2000 and 1999 (unaudited)........... F-4
Consolidated Statements of Stockholders' Equity -- Years
ended September 30, 1999, 1998 and 1997 (audited) and the
nine months ended June 30, 2000 (unaudited)............... F-5
Consolidated Statements of Cash Flows -- Years ended
September 30, 1999, 1998 and 1997 (audited) and the nine
months ended June 30, 2000 and 1999 (unaudited)........... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 53

INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors
OSI Pharmaceuticals, Inc.:

We have audited the accompanying consolidated balance sheets of OSI
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of September 30, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
September 30, 1999. 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 generally accepted auditing
standards. 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 at September 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1999 in conformity with generally accepted
accounting principles.

/s/ KPMG LLP

Melville, New York
December 22, 1999

F-2
<PAGE> 54

OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------- JUNE 30,
1999 1998 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,863,887 $ 11,315,166 $ 66,412,771
Investment securities..................................... 9,997,967 13,103,115 16,319,161
Receivables, including amounts due from related parties of
$363,580, $1,176,975 and $16,430 and trade receivables
of $236,067, $258,905 and $127,308 at September 30, 1999
and 1998, and June 30, 2000, respectively............... 1,033,917 1,720,737 223,370
Receivable from sale of Anaderm common stock.............. 3,645,136 -- --
Interest receivable....................................... 171,340 283,908 58,107
Grants receivable......................................... 343,509 406,149 120,278
Prepaid expenses and other................................ 1,088,318 788,496 1,264,955
------------ ------------ ------------
Total current assets............................... 25,144,074 27,617,571 84,398,642
------------ ------------ ------------
Property, equipment and leasehold improvements -- net....... 10,915,589 7,996,555 9,058,749
Compound library assets -- net.............................. 4,197,085 5,515,517 2,797,443
Other assets................................................ 374,288 1,564,336 149,722
Intangible assets -- net.................................... 6,400,292 7,724,001 967,684
------------ ------------ ------------
$ 47,031,328 $ 50,417,980 $ 97,372,240
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 5,229,672 $ 4,232,540 $ 3,411,078
Unearned revenue -- current; including amounts received in
advance from related parties of $524,636, $0 and
$404,356 as of September 30, 1999 and 1998 and June 30,
2000, respectively...................................... 5,185,410 1,116,685 879,530
Loans payable -- current.................................. 166,656 -- 166,656
------------ ------------ ------------
Total current liabilities.......................... 10,581,738 5,349,225 4,457,264
------------ ------------ ------------
Other liabilities:
Unearned revenue -- long-term, all relating to related
parties................................................. 404,762 -- 351,191
Loans payable -- long-term................................ 277,791 49,326 188,975
Deferred acquisition costs................................ 711,037 670,916 350,648
Accrued postretirement benefit cost....................... 1,691,054 1,289,267 1,684,622
------------ ------------ ------------
Total liabilities.................................. 13,666,382 7,358,734 7,032,700
------------ ------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued at September 30, 1999 and
1998, and June 30, 2000, respectively................... -- -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 22,404,096, 22,288,583 and 27,425,160 shares
issued at September 30, 1999 and 1998, and June 30,
2000, respectively...................................... 224,041 222,886 274,252
Additional paid-in capital................................ 105,173,158 104,963,082 167,360,725
Accumulated deficit....................................... (65,640,618) (55,842,181) (70,132,353)
Accumulated other comprehensive (loss) income............. (333,933) 325 (730,382)
------------ ------------ ------------
39,422,648 49,344,112 96,772,242
Less: treasury stock, at cost; 865,386, 897,838 and 939,641
shares at September 30, 1999 and 1998, and June 30, 2000,
respectively.............................................. (6,057,702) (6,284,866) (6,432,702)
------------ ------------ ------------
Total stockholders' equity......................... 33,364,946 43,059,246 90,339,540
------------ ------------ ------------
Commitments and contingencies...............................
$ 47,031,328 $ 50,417,980 $ 97,372,240
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.
F-3
<PAGE> 55

OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
-------------------------------------------- ---------------------------
1999 1998 1997 2000 1999
------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Collaborative program
revenues, principally from
related parties........... $ 18,166,693 $ 16,165,613 $ 12,200,801 $ 17,841,481 $12,600,139
Technology access fee........ -- -- -- 3,500,000 --
Sales of products and
services.................. 1,220,317 1,121,449 1,167,604 463,989 915,608
Other research revenue....... 994,277 1,428,853 1,408,918 252,459 814,203
License revenue.............. 2,271,016 752,422 -- 175,000 2,171,016
------------ ------------ ------------ ------------ -----------
22,652,303 19,468,337 14,777,323 22,232,929 16,500,966
------------ ------------ ------------ ------------ -----------
Expenses:
Research and development..... 24,484,540 19,877,339 16,804,844 25,468,586 15,561,868
Production and service
costs..................... 1,753,474 813,464 635,768 643,876 1,239,443
Selling, general and
administrative............ 9,190,774 8,691,386 7,516,038 5,930,806 5,567,759
Amortization of
intangibles............... 1,468,801 1,460,740 1,460,748 684,288 1,095,555
------------ ------------ ------------ ------------ -----------
36,897,589 30,842,929 26,417,398 32,727,556 23,464,625
------------ ------------ ------------ ------------ -----------
Loss from operations.... (14,245,286) (11,374,592) (11,640,075) (10,494,627) (6,963,659)
Other income (expense):
Net investment income........ 1,290,611 1,467,412 2,092,331 2,332,915 657,311
Other expense-net............ (134,777) (277,288) (38,493) (75,867) (54,060)
Gain on the sale of Anaderm
common stock.............. 3,291,015 -- -- -- --
Gain on sale of diagnostic
business.................. -- -- -- 3,745,844 --
------------ ------------ ------------ ------------ -----------
Net loss....................... $ (9,798,437) $(10,184,468) $ (9,586,237) $ (4,491,735) $(6,360,408)
============ ============ ============ ============ ===========
Weighted average number of
shares of common stock
outstanding.................. 21,450,812 21,372,655 21,604,344 23,801,264 21,430,958
============ ============ ============ ============ ===========
Basic and diluted net loss per
weighted average share of
common stock outstanding..... $ (0.46) $ (0.48) $ (0.44) $ (0.19) $ (0.30)
============ ============ ============ ============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.
F-4
<PAGE> 56

OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (AUDITED)
AND FOR THE NINE MONTHS ENDED JUNE 30, 2000 (UNAUDITED)

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------------- PAID-IN ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) STOCK EQUITY
---------- -------- ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30,
1996....................... 22,175,214 $221,752 $104,347,231 $(36,071,476) $(210,548) $ -- $ 68,286,959
Comprehensive income (loss):
Net loss................... -- -- -- (9,586,237) -- -- (9,586,237)
Unrealized holding gains on
investment securities,
net of reclassification
adjustment............... -- -- -- -- 107,493 -- 107,493
Translation adjustment..... -- -- -- -- (96,176) -- (96,176)
-------------
Total comprehensive loss..... (9,574,920)
-------------
Options exercised............ 74,618 746 407,503 -- -- -- 408,249
Issuance of common stock for
employee purchase plan..... 12,388 124 74,456 -- -- -- 74,580
Purchase of treasury stock... -- -- -- -- -- (8,750,000) (8,750,000)
Issuance of treasury stock
for Dow Compound library
license.................... -- -- 34,866 -- -- 2,465,134 2,500,000
---------- -------- ------------ ------------ --------- ------------ -------------
BALANCE AT SEPTEMBER 30,
1997....................... 22,262,220 222,622 104,864,056 (45,657,713) (199,231) (6,284,866) 52,944,868
Comprehensive income (loss):
Net loss................... -- -- -- (10,184,468) -- -- (10,184,468)
Unrealized holding gains on
investment securities,
net of reclassification
adjustment............... -- -- -- -- 116,780 -- 116,780
Translation adjustment....... -- -- -- -- 82,776 -- 82,776
-------------
Total comprehensive loss..... (9,984,912)
-------------
Options exercised............ 5,699 57 24,007 -- -- -- 24,064
Issuance of common stock for
employee purchase plan..... 20,664 207 75,019 -- -- -- 75,226
---------- -------- ------------ ------------ --------- ------------ -------------
BALANCE AT SEPTEMBER 30,
1998....................... 22,288,583 222,886 104,963,082 (55,842,181) 325 (6,284,866) 43,059,246
Comprehensive income (loss):
Net loss................... -- -- -- (9,798,437) -- -- (9,798,437)
Unrealized holding gains on
investment securities,
net of reclassification
adjustment............... -- -- -- -- (185,710) -- (185,710)
Translation adjustment..... -- -- -- -- (148,548) -- (148,548)
-------------
Total comprehensive loss..... (10,132,695)
-------------
Options exercised............ 92,187 922 269,143 -- -- -- 270,065
Issuance of common stock for
employee purchase plan..... 23,326 233 68,097 -- -- -- 68,330
Issuance of treasury stock
for consulting services.... -- -- (127,164) -- -- 227,164 100,000
---------- -------- ------------ ------------ --------- ------------ -------------
BALANCE AT SEPTEMBER 30,
1999....................... 22,404,096 224,041 105,173,158 (65,640,618) (333,933) (6,057,702) 33,364,946
Comprehensive income (loss):
Net loss (unaudited)....... -- -- -- (4,491,735) -- -- (4,491,735)
Unrealized holding loss on
investment securities,
net of reclassification
adjustment (unaudited)... -- -- -- -- (67,710) -- (67,710)
Translation adjustment
(unaudited).............. -- -- -- -- (328,739) -- (328,739)
-------------
Total comprehensive loss
(unaudited)................ (4,888,184)
-------------
Options exercised
(unaudited)................ 1,516,179 15,161 8,087,443 -- -- -- 8,102,604
Warrants exercised
(unaudited)................ 173,055 1,731 1,297,736 -- -- -- 1,299,467
Issuance of common stock for
employee purchase plan
(unaudited)................ 6,830 69 43,027 -- -- -- 43,096
Proceeds from issuance of
common stock, net of
$3,732,389 of expenses
(unaudited)................ 3,325,000 33,250 52,759,361 -- -- -- 52,792,611
Purchase of treasury stock
(unaudited)................ -- -- -- -- -- (375,000) (375,000)
---------- -------- ------------ ------------ --------- ------------ -------------
BALANCE AT JUNE 30, 2000
(unaudited)................ 27,425,160 $274,252 $167,360,725 $(70,132,353) $(730,382) $ (6,432,702) $ 90,339,540
========== ======== ============ ============ ========= ============ =============
</TABLE>

See accompanying notes to consolidated financial statements.
F-5
<PAGE> 57

OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
---------------------------------------- ---------------------------
1999 1998 1997 2000 1999
----------- ------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net loss............................................... $(9,798,437) $(10,184,468) $(9,586,237) $(4,491,735) $(6,360,408)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Gain on sale of Anaderm common stock................. (3,291,015) -- -- -- --
Gain on sale of diagnostic business.................. -- -- -- (3,745,844) --
(Gain) loss on sale of investments................... (435,907) 45,847 36,523 (487,594) --
Loss on sale of equipment and leasehold
improvements....................................... -- -- -- 60,547 --
Depreciation and amortization........................ 2,574,776 1,944,344 1,518,751 2,108,158 1,496,530
In-process research and development charge on
acquisition of Cadus' research business............ 806,065 -- -- -- --
Amortization of library assets....................... 1,761,809 1,811,583 1,101,509 1,399,642 1,201,616
Amortization of intangibles assets................... 1,468,800 1,460,740 1,460,739 684,287 1,095,555
Accretion of deferred acquisition costs.............. 40,121 40,120 40,121 14,611 30,091
Cashless exercise of stock options................... -- -- 126,600 -- --
Common stock received for patent license fee......... -- (402,422) -- -- --
Issuance of treasury stock for services rendered..... 100,000 -- -- -- 227,164
Changes in assets and liabilities, net of the effects
of an acquisition and sale of a business:
Receivables........................................ 680,934 (505,065) 816,278 4,443,221 (592,129)
Interest receivable................................ 112,568 191,892 4,250 113,233 140,911
Grants receivable.................................. 62,640 (226,409) 151,274 223,231 171,299
Prepaid expenses and other current assets.......... 55,516 31,655 (196,324) (206,553) (117,191)
Other assets....................................... 835,933 33,963 (69,489) (39,814) 212,824
Accounts payable and accrued expenses.............. 764,348 52,501 493,401 (1,722,212) (580,907)
Unearned revenue................................... 4,247,075 383,308 487,339 (4,141,805) 295,297
Accrued postretirement used in benefit cost........ 401,787 344,767 301,000 224,999 210,000
----------- ------------ ----------- ----------- -----------
Net cash provided by (used in) operating activities...... 387,013 (4,977,644) (3,314,265) (5,563,628) (2,569,348)
----------- ------------ ----------- ----------- -----------
Cash flows from investing activities:
Payments for acquisition of Cadus' research
business........................................... (2,216,682) -- -- -- --
Net proceeds from sale of diagnostic business........ -- -- -- 8,636,104 --
Purchases of investments............................. (10,676,970) (4,004,770) (4,019,935) (10,638,904) (9,632,191)
Proceeds from sale of equipment and leasehold
improvements....................................... -- -- -- 375,000 --
Maturities and sales of short-term investments....... 14,032,315 14,573,046 15,025,749 4,987,599 12,122,970
Change in other assets............................... -- (276,200) (914,319) -- --
Additions to property, equipment and leasehold
improvements....................................... (4,519,678) (2,188,613) (2,775,925) (1,564,241) (1,180,244)
Additions to compound library assets................. (107,517) (526,694) (353,332) -- --
----------- ------------ ----------- ----------- -----------
Net cash provided by (used in) investing activities...... (3,488,532) 7,576,769 6,962,238 1,795,558 1,310,535
----------- ------------ ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock........... -- -- -- 52,792,611 --
Proceeds from exercise of stock options, employee
purchase plan, and other........................... 338,395 99,290 356,230 9,070,167 87,531
Proceeds from loan payable........................... 500,000 -- -- -- 500,000
Payments on loan payable, net........................ (102,741) (102,659) 68,741 (86,808) (61,528)
Purchase of treasury stock........................... -- -- (8,750,000) (375,000) --
----------- ------------ ----------- ----------- -----------
Net cash provided by (used in) financing activities...... 735,654 (3,369) (8,325,029) 61,400,970 526,003
----------- ------------ ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents..... (2,365,865) 2,595,756 (4,677,056) 57,632,900 (732,810)
Effect of exchange rate changes on cash and cash
equivalents............................................ (85,414) 82,776 (96,176) (84,016) (84,993)
Cash and cash equivalents at beginning of year........... 11,315,166 8,636,634 13,409,866 8,863,887 11,315,166
----------- ------------ ----------- ----------- -----------
Cash and cash equivalents at end of year................. $ 8,863,887 $ 11,315,166 $ 8,636,634 $66,412,771 $10,497,363
=========== ============ =========== =========== ===========
Non-cash activities:
Issuance of treasury stock for acquisition of Dow
compound library license............................. $ -- $ -- $ 2,500,000 $ -- $ --
=========== ============ =========== =========== ===========
Issuance of common stock in satisfaction of deferred
acquisition costs.................................... $ -- $ -- $ -- $ 375,000 $ --
=========== ============ =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.
F-6
<PAGE> 58

OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 AND NINE MONTHS ENDED JUNE 30,
2000 AND 1999
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999, AS OF JUNE 30, 2000, AND FOR THE
NINE MONTHS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation

The consolidated financial statements of the Company include the accounts
of OSI Pharmaceuticals, Inc., known as Oncogene Science, Inc. prior to October
1, 1997, and its wholly-owned subsidiaries Applied bioTechnology, Inc.,
MYCOsearch, Inc., OSDI, Inc., formerly known as Oncogene Science Diagnostics,
Inc. (OSDI) and OSI Pharmaceuticals UK, Ltd., known as Aston Molecules Ltd.
prior to March 22, 2000 (Aston). All intercompany balances and transactions have
been eliminated. The Company operates in one segment and utilizes a platform of
drug discovery technologies in order to discover and develop novel, small
molecule compounds for the treatment of major human diseases. It conducts the
full range of drug discovery activities, from target identification to
development of drug candidates.

(b) Revenue Recognition

Collaborative program revenues represent funding arrangements for the
conduct of 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. Other research revenues are
recognized pursuant to the terms of grants which provide reimbursement of
certain expenses related to the Company's other research and development, or
R&D, activities. Collaborative and other research revenues are accrued for
expenses incurred in advance of the reimbursement and deferred for cash payments
received in advance of expenditures. Such deferred revenues are recorded as
revenue when earned (See note 5).

License revenue includes patent license fees, maintenance fees and
milestone payments. Patent license fees received upon the signing of an
agreement are generally recognized upon the inception of the license term.
Maintenance fees are recognized as revenue in the period stipulated in the
license agreements. All related milestone and royalty payments are recognized as
revenue when earned in accordance with the terms of the corresponding agreement.

Revenue from the sale of diagnostic and research reagent products is
recognized at time of shipment. Revenues from the performance of chemistry
services provided by Aston are recognized when performed.

See note 17 for a discussion of SEC Staff Accounting Bulletin No. 101 on
revenue recognition.

As a result of the Company's R&D programs, including programs funded
pursuant to the R&D funding agreements (See note 5), the Company has applied for
a number of patents in the United States and abroad. Such patent rights are of
significant importance to the Company to protect products and processes
developed. Costs incurred in connection with patent applications for the
Company's R&D programs have been expensed as incurred.

Patents and goodwill acquired in connection with the acquisition of Applied
bioTechnology's cancer business in October 1991 have been capitalized and are
being amortized on a straight-line basis over the remaining lives of the
respective patents, and over five years for goodwill. The goodwill acquired in
connection with the acquisition of Aston in September 1996 is being amortized on
a straight-line basis over five years. The Company continually evaluates the
recoverability of its intangible assets by assessing whether the unamortized
value can be recovered through expected future results.

(d) Deferred Acquisition Costs

Deferred acquisition costs represent common stock purchase rights issued in
connection with the Company's acquisition of Aston on September 19, 1996. The
Company issued rights exercisable at the end of three and five years following
the closing date (for an aggregate exercise price of $7,500) to obtain a number
of shares of the Company's common stock having an aggregate value of $750,000
(based on the then current

F-7
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 AND NINE MONTHS ENDED JUNE 30,
2000 AND 1999
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999, AS OF JUNE 30, 2000, AND FOR THE
NINE MONTHS ENDED JUNE 30, 2000 AND 1999 IS UNAUDITED)

market value). The present value of such rights, which are exercisable at the
end of three and five years from the closing date, amounted to $711,037 and
$670,916 as of September 30, 1999 and 1998, respectively.

(e) Research and Development Costs

R&D costs are charged to operations as incurred and include direct costs of
research scientists and equipment and an allocation of laboratory facility and
central service. In fiscal years 1999, 1998, and 1997, R&D activities include
approximately $12,296,000, $5,772,000, and $5,052,000 of independent R&D,
respectively. Included in R&D expenses in fiscal 1999 is $806,000 of in-process
R&D acquired in connection with the acquisition of Cadus' research business (See
note 3(a)). Independent R&D represents those R&D activities, including R&D
activities funded by government research grants, substantially all the rights to
which the Company will retain. The balance of R&D represents expenses under the
collaborative agreements and co-ventures with Pfizer Inc., Anaderm Research
Corporation, Tanabe Seiyaku Co., Ltd., Vanderbilt University, Sankyo Company,
Ltd., Hoechst Marion Roussel, Inc., Solvay Pharmaceutical, B.V., Novartis Pharma
AG, Helicon Therapeutics, Inc., Wyeth-Ayerst Laboratories, Sepracor, Inc., Bayer
Corporation, Fujirebio, Inc., and BioChem Pharma, Inc.

(f) Depreciation and Amortization

Depreciation of equipment is provided over the estimated useful lives of
the respective asset groups on a straight-line basis. Leasehold improvements are
amortized on a straight-line basis over the lesser of the estimated useful lives
or the remaining term of their lease.

Amortization of the fungal cultures and compounds acquired in connection
with the acquisition of MYCOsearch in fiscal 1996, the acquisition of Cadus
Pharmaceutical Corporation's research business in fiscal 1999 (See note 3(a)),
and amortization of The Dow Company compound library license (See note 3(b)) are
on a straight-line basis over five years, which represents the estimated period
over which the fungal cultures, compounds and license will be used in the
Company's R&D efforts.

(g) 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.

(h) Investments

Investment securities at September 30, 1999 and 1998 consist of U.S.
Treasury obligations and corporate debt and equity securities. The Company
classifies its investments as available-for-sale. These securities are recorded
at their fair value. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis.

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. Premiums and discounts are amortized or
accreted over the life of the related held-to-maturity security as an adjustment
to yield using the effective interest method. Dividend and interest income are
recognized when earned.

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

As further discussed in notes 5(b) and 5(i), the Company received equity
interests in two research and development companies in exchange for research
services provided to these companies. The Company has recorded its investment in
the two companies based on the cost of services rendered to such companies. The
Company recognizes its share of the operating losses of these companies based on
its percentage ownership interest under the equity method of accounting.

(i) 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 period.
The diluted loss per share presented excludes the number of common share
equivalents (stock options and warrants), since such inclusion in the
computation would be anti-dilutive.

(j) Cash and Cash Equivalents

The Company includes as cash equivalents reverse repurchase agreements,
treasury bills, and other time deposits with original maturities of three months
or less. Such cash equivalents amounted to $2,582,281 and $9,227,339 as of
September 30, 1999 and 1998, respectively.

(k) Use of Estimates

Management of the Company has made a number of estimates and assumptions
relative to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

(l) Comprehensive Income (Loss)

In October 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) 130, "Reporting Comprehensive Income". SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components.
SFAS 130 requires unrealized gains or losses on the Company's available-for-sale
securities (referred to as investment securities on the accompanying
consolidated balance sheets) and foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income (loss).

A summary of unrealized holding gains on investment securities, net of
reclassification adjustment is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Unrealized holding gains arising during period......... $ 250,197 $ 70,933 $ 70,970
Less: reclassification adjustment for (gains) and
losses realized in net loss.......................... (435,907) 45,847 36,523
--------- -------- --------
Unrealized holding gains on investment securities, net
of reclassification adjustment....................... $(185,710) $116,780 $107,493
========= ======== ========
</TABLE>

The components of accumulated other comprehensive losses were as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 2000
------------- ---------
<S> <C> <C>
Cumulative foreign currency translation adjustment.......... $(167,303) $(496,042)
Unrealized losses on available-for-sale securities.......... (166,630) (234,340)
--------- ---------
Accumulated other comprehensive losses...................... $(333,933) $(730,382)
========= =========
</TABLE>

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

(m) Basis of Presentation

Certain reclassifications have been made to the prior period financial
statements to conform them to current presentations.

(n) Interim Financial Statements (unaudited)

In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company, as of June 30, 2000 and their results of operations and cash flows for
the nine months ended June 30, 2000 and 1999.

Results for interim periods are not necessarily indicative of results for
the entire year.

(2) LICENSE AGREEMENTS

(a) Aurora Biosciences

Pursuant to a license agreement effective May 26, 1998, the Company granted
to Aurora Biosciences Corporation a non-exclusive worldwide license to practice
the technology under the Company's patent for live-cell gene transcription
assays utilizing a reporter gene. The Company also granted Aurora an option to
obtain a non-exclusive license to practice the technology under the Company's
patent concerning Methods of Modulation. The duration of each license is to be
coextensive with the life of the last to expire of the underlying patents. Under
the license agreement, Aurora has the right to grant sublicenses. In addition,
Aurora will pay the Company an annual fee of $50,000, milestone payments and
royalties on sales of products derived from the licensed patents, if any. The
Company has exclusive control over prosecution, maintenance and enforcement of
the patents subject to the agreement. The Company received 75,000 shares of
Aurora's common stock with an estimated fair market value of $473,000 and a
license fee of $300,000 upon execution of the agreement. The shares of common
stock were subsequently sold in September 1999 at a then fair market value of
$909,000. The resulting realized gain of approximately $436,000 is included in
net investment income in the accompanying consolidated statement of operations
for fiscal 1999.

(b) Pharmacia UpJohn Spa

Pursuant to a license agreement effective July 29, 1999, the Company
granted to Pharmacia & UpJohn SpA a non-exclusive, non-transferable, worldwide,
royalty-bearing license of certain gene transcription patents for drug discovery
and development of product candidates for human therapeutic or diagnostic
purposes (other than in the area of cosmeceuticals). Following April 24, 2002,
the scope of the non-exclusive license will be expanded to include the discovery
and development of cosmeceuticals. The duration of the license is to be
coextensive with the life of the last to expire of the underlying patents. Upon
signing the license agreement, Pharmacia & UpJohn paid the Company $100,000.
Pharmacia & UpJohn will pay the Company an annual fee of $50,000, and milestone
and royalty payments on sales of products derived from the licensed patents, if
any. The Company has exclusive control over prosecution, maintenance and
enforcement of the patents subject to the agreement.

Effective January 3, 2000, the Company entered into a worldwide,
non-exclusive cross license agreement with American Home Products Corporation
and American Cyanamid Company involving the Company's gene transcription patent
estate and patents covering yeast screening technologies developed by American
Cyanamid. The agreement provides the Company access to American Cyanamid's
technology covered in four issued U.S. patents which include claims for
recombinant expression of a variety of targets in yeast, including G-protein
coupled receptors, or GPCRs, hybrid GPCRs and orphan receptors for use in human
therapeutics. The agreement also allows American Cyanamid to retain exclusive
rights to the use of the Company's GPCR

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

technologies in the agricultural field. The duration of each license is to be
coextensive with the life of the last to expire of the patents underlying each
license.

(d) Merck & Co., Inc.

Effective June 8, 2000, Merck & Co., Inc. became an additional licensee of
the Company gene transcription patent estate. In exchange for such gene
transcription rights, Merck granted the Company a worldwide, non-exclusive
license to certain patents referred to as the Transcription Based Assay, or TBA,
patents which were previously the property of Sibia Neurosciences, Inc. prior to
their acquisition by Merck. In July 1999, the Company acquired substantially all
of the research assets of Cadus after Sibia had successfully sued Cadus for
infringement of the TBA patents. By obtaining this cross-license agreement, the
Company has secured complete freedom to operate the core Cadus technology assets
covering G-protein coupled receptor (GPCR) discovery acquired in the original
July 1999 deal with Cadus and in a subsequent licensing transaction concluded in
February 2000, as more fully described above. The TBA patents consist of claims
that cover assay systems designed to identify compounds that bind to
cell-surface receptors. Taken together with the Company's patent estate, this
also comprises a comprehensive intellectual property estate for drug discovery
in the gene transcription area. The duration of each license is coextensive with
the life of the last to expire of the patents underlying each license.

(e) Cadus Pharmaceutical Corporation

Effective February 15, 2000, Cadus granted to the Company a non-exclusive,
royalty-free, worldwide right and license (without the right to sublicense) to
use and practice Cadus' technology and patents involving Cadus' yeast GPCR
patent estate; to access various reagents; to use a library of over 30,000 yeast
strains; and to use Cadus' proprietary bi-informatics software for the mining of
genomic databases.

Under the license agreement, the Company may practice the Cadus technology
and patents with third parties under collaborative research programs so long as
the Company personnel conduct such research at the Company's facilities. The
cost of the license was $700,000 and was recorded in research and development
expense in the consolidated statement of operations for the nine-month period
ended June 30, 2000. As part of this licensing arrangement, Cadus granted to the
Company a non-exclusive, non-transferable license to the use of certain of
Cadus' software related to its technology.

(3) ACQUISITIONS

(a) Cadus Pharmaceutical Corporation

On July 30, 1999, the Company acquired certain assets from Cadus for
approximately $2.2 million in cash which includes professional fees and other
costs and the assumption of certain liabilities. The acquisition was accounted
for under the purchase method of accounting. The purchase price has been
allocated to the assets and the liabilities assumed based on the fair values at
the date of acquisition. The excess of the fair value of the net assets acquired
over the purchase price paid representing negative goodwill was approximately
$2.9 million. The negative goodwill was allocated proportionately to reduce the
value of the noncurrent assets acquired and the in-process R&D which was charged
to operations. The in-process R&D charge is included in R&D expenses in the
accompanying consolidated statement of

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<PAGE> 63
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

operations for the year ended September 30, 1999. The purchase price was
allocated as follows (in thousands):

<TABLE>
<S> <C>
Prepaid expenses and other current assets................... $ 362
Work force intangible....................................... 145
In-process R&D acquired..................................... 806
Compound library............................................ 336
Fixed assets................................................ 1,045
------
Total assets and in-process R&D acquired.................... 2,694
Less liabilities assumed.................................... (477)
------
Cash paid................................................... $2,217
======
</TABLE>

The value of the purchased in-process R&D from the acquisition was
determined by estimating the projected net cash flows related to products under
development, based upon the future revenues to be earned upon commercialization
of such products. The percentage of the cash flow allocated to purchased
in-process research and development was based upon the estimated percentage
complete for each of the R&D projects. These cash flows were discounted back to
their net present value. The resulting projected net cash flows from such
projects were based on management's estimates of revenues and operating profits
related to such projects. The in-process R&D was valued based on the income
approach that focuses on the income-producing capability of the assets. The
underlying premise of this approach is that the value of an asset can be
measured by the present worth of the net economic benefit (cash receipts less
cash outlays) to be received over the life of the asset. Significant assumptions
and estimates used in the valuation of in-process R&D included: the stage of
development for each of the five projects; future revenues based on royalties;
growth rates for each product; individual product revenues; product sales
cycles; the estimated life of a product's underlying technology of seven years
from the date of introduction; future operating expenses; and a discount rate of
60% to reflect present value and risk of developing the acquired technology into
commercially viable products.

The assets purchased include (a) certain assets associated with certain of
Cadus' research programs (including the GPCR-directed drug discovery program and
a collaboration with Solvay), (b) Cadus' compound library of 150,000 components,
(c) the purchase or license of certain intellectual property rights, and (d)
certain furniture, equipment, inventory, and supplies. Several assets were
retained by Cadus, including (a) monies in escrow in connection with the
judgment of SIBIA Neurosciences, Inc. against Cadus, (b) cash and accounts
receivable, (c) Cadus' Living Chip Technology, (d) Cadus' Functional Genomics
Program, and (e) Cadus' Research Collaboration and License Agreement with
SmithKline Beecham Corporation. Forty-seven Cadus employees were hired by the
Company. The Company intends to utilize the acquired assets in the GPCR Directed
Chemistry Program and the collaboration with Solvay, but expects to deploy the
balance of the assets in other research areas.

The Company also assumed Cadus' facility lease in Tarrytown, New York
(approximately 45,569 square feet) as of July 1, 1999 (approximately $898,249 in
rental payments per annum through December 31, 2002) and an equipment lease with
General Electric Capital Corporation (GECC). On August 23, 1999, the Company
elected to payoff the GECC lease in exchange for a payment of $2.8 million and
obtained ownership of the fixed assets covered by the lease agreement. On
September 21, 1999, Cadus reimbursed the Company $308,000 in exchange for those
fixed assets that have been retained by Cadus for its own use. The source of the
cash portion of the purchase price and the subsequent decision to payoff the
lease agreement with GECC was the Company's existing cash resources. Liabilities
and the facility lease obligation assumed will be paid from existing cash
resources and working capital to be generated in future periods.

F-12
<PAGE> 64
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

In connection with the acquisition, the Company entered into the following
additional agreements with Cadus: (a) a Patent License Agreement, (b) a
Technology License Agreement, and (c) a Software License Agreement, pursuant to
which the Company obtained non-exclusive licenses for the use and practice of
certain of Cadus' patents, Cadus' technology and Cadus' software programs,
respectively. The Company and Cadus also entered into another Patent License
Agreement under which the Company will license back to Cadus on a non-exclusive
basis certain of the patents which were assigned to the Company as part of the
acquisition.

In connection with the acquisition, the Company adopted a Non-Qualified
Stock Option Plan for former employees of Cadus. The Company granted options to
purchase an aggregate of 415,000 shares of common stock of the Company at a
purchase price of $5.00 per share, which represents the fair value of the
Company's stock at the date granted. These options become exercisable on July
30, 2000.

The operating results of Cadus' research business have been included in the
consolidated statements of operations from July 30, 1999. The following
unaudited pro forma information presents a summary of consolidated results of
operations for the years ended September 30, 1999 and 1998 assuming the asset
acquisition had taken place as of October 1, 1998 and October 1, 1997,
respectively:

<TABLE>
<CAPTION>
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 24,902 $ 22,168
Net loss.................................................... (15,013) (16,452)
Net loss per share.......................................... (0.70) (0.77)
</TABLE>

Effective February 15, 2000 Cadus granted the Company a non-exclusive,
royalty-free, worldwide right and license (without the right to sublicense) to
use and practice Cadus' technology and patents involving Cadus' yeast GPCR
patent estate; to access various reagents; to use a library of over 30,000 yeast
strains; and to use Cadus' proprietary bi-informatics software for the mining of
genomic databases. As more fully described in note 2(e).

The pro forma results give effect to the amortization of acquired
intangibles and reduction of investment income. The pro forma information is not
necessarily indicative of the results of operations had the asset acquisition
been affected on the assumed date.

(b) Compound Library License

On March 18, 1997, the Company entered into a license agreement with The
Dow Chemical Company giving the Company exclusive worldwide rights to use more
than 140,000 compounds for screening and potential development of small molecule
drugs and cosmeceuticals. The initial payment for the license was 352,162 shares
of the Company's common stock with a fair market value of approximately
$2,500,000. Dow Chemical is also entitled, in certain instances where
pre-existing Dow Chemical patents are in effect, to royalty payments from any
new drug products that may result from the screening of the subset of the
compound library covered by such patents. The common stock issued to Dow
Chemical was from the shares held in treasury. The Company will amortize the
license agreement cost on a straight-line basis over a five-year period, which
represents the estimated period over which the compounds will be used in the
Company's research and development efforts. Since the Company did not conduct
significant research utilizing these compounds during fiscal 1997, the Company
began amortizing the license agreement cost in October 1997 and recorded
$505,446 of amortization expense in both fiscal 1998 and 1999.

(4) INVESTMENTS

The Company invests its excess cash in U.S. Government securities and debt
and equity instruments of financial institutions and corporations with strong
credit ratings. The Company has established guidelines relative to
diversification of its investments and their maturities that should maintain
safety and liquidity.

F-13
<PAGE> 65
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. The Company uses the specific
identification method to determine the cost of securities sold.

The following is a summary of available-for-sale securities as of September
30, 1999 and 1998:

<TABLE>
<CAPTION>
GROSS
UNREALIZED
COST (LOSSES) GAINS FAIR VALUE
----------- -------------- ----------
<S> <C> <C> <C>
1999
---------------------------------------------
US Treasury Securities and obligations of US
Government agencies........................ $ 9,149,811 $(166,905) $8,982,906
Corporate debt securities.................... 1,014,786 275 1,015,061
----------- --------- ----------
Total.............................. $10,164,597 $(166,630) $9,997,967
=========== ========= ==========
</TABLE>

<TABLE>
<CAPTION>
GROSS
UNREALIZED
COST (LOSSES) GAINS FAIR VALUE
----------- -------------- -----------
<S> <C> <C> <C>
1998
--------------------------------------------
US Treasury Securities and obligations of US
Government agencies....................... $ 9,201,681 $(17,154) $ 9,184,527
Corporate debt securities................... 3,479,932 36,234 3,516,166
Corporate equity securities................. 402,422 -- 402,422
----------- -------- -----------
Total............................. $13,084,035 $ 19,080 $13,103,115
=========== ======== ===========
</TABLE>

Net realized gains on sales of investments during fiscal 1999 were
approximately $436,000, and net realized losses on sales of investments during
fiscal 1998 and 1997 were approximately $46,000 and $37,000, respectively.

The Company also has investments in certain biotechnology companies which
are included in other noncurrent assets in the accompanying consolidated balance
sheets. The net investments are summarized as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
-------- ----------
<S> <C> <C>
Anaderm Research Corporation................................ $ -- $ 977,471
Helicon Therapeutics, Inc. ................................. -- 200,000
Tularik Inc. ............................................... 250,000 250,000
-------- ----------
$250,000 $1,427,471
======== ==========
</TABLE>

As further discussed in note 5, the Company has collaborative research
agreements with Anaderm and Helicon and the investments were carried based on
the equity method of accounting. On September 23, 1999, the Company exercised
its right to require Pfizer to purchase all of its shares of Anaderm common
stock at a sale price of $3.6 million. As of September 30, 1999, the Company
recognized a gain of $3.3 million on the sale of the Anaderm common stock and
recorded a receivable of $3.6 million. On November 10, 1999, the Company
received a cash payment of this receivable from Pfizer. As of September 30,
1999, the Company has fully reserved its investment in Helicon as more fully
discussed in note 5(i). The investment in Tularik Inc. is carried at cost and
approximates fair market value.

(5) PRODUCT DEVELOPMENT CONTRACTS

(a) Pfizer

Effective April 1, 1996, the Company and Pfizer renewed their ten-year-old
collaboration for a new five-year term by entering into new Collaborative
Research and License Agreements. Under these agreements, all

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<PAGE> 66
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

patent rights and patentable inventions derived from the research under this
collaboration are owned jointly by the Company and Pfizer. Under the
collaborative research agreement, Pfizer has committed to provide research
funding to the Company in an aggregate amount of approximately $18.8 million.
Pursuant to a schedule set forth in the collaborative research agreement, Pfizer
will make maximum annual research funding payments to the Company, which will
gradually increase from approximately $3.5 million in the first year of the
five-year term to approximately $4 million in the fifth year. The collaborative
research agreement will expire on April 1, 2001. It may, however, be terminated
earlier by either party upon the occurrence of certain defaults by the other
party. Any termination of the collaboration resulting from a Pfizer default will
cause a termination of Pfizer's license rights. Pfizer will retain its license
rights if it terminates the agreement in response to a default by the Company.
Upon such early termination by Pfizer, Pfizer will retain its license rights.
The Company also granted Pfizer an exclusive, worldwide license to make, use,
and sell the therapeutic products resulting from this collaboration in exchange
for royalty payments. This license terminates on the date of the last to expire
of the Company's relevant patent rights.

Effective as of April 1, 1999, the Company entered into a Development
Agreement with Pfizer for the development of certain compounds derived from the
collaborative research agreement described above for the treatment of psoriasis.
Under the Development Agreement, the Company will conduct a development program
formulated by the Company and Pfizer which includes pre-clinical and clinical
research through and including Phase II clinical trials for compounds to assess
their safety and efficacy to be developed as therapeutic agents for the
treatment of psoriasis and other related dermal pathologies. Pursuant to the
terms, Pfizer has granted to the Company an exclusive, with the exception of
Pfizer, license to make and use the compounds for all research purposes in the
development program other than the sale or manufacture for sale of products or
processes. At the end of the development program, Pfizer must notify the Company
of its intention to continue development and commercialization of a compound
within three (3) months following receipt of the data package from the clinical
studies. If Pfizer does so notify the Company of such intention, it will have an
exclusive, world-wide license, with the right to grant sublicenses, to make,
use, sell, offer for sale and import products developed in the course of the
development program subject to the reimbursement of clinical development costs.
If Pfizer fails to notify the Company of such intention, the Company will
receive an exclusive, world-wide, royalty-bearing license, including the right
to grant sublicenses, to manufacture, use, sell, offer for sale and import
products developed in the course of the development program. The Company,
however, has the right to refuse to accept this license. The party receiving the
license must pay milestone and royalty payments as consideration therefor. The
duration of the licenses is coextensive with the lives of patents related to the
licensed compounds. Each of the parties has rights and obligations to prosecute
and maintain patent rights related to specified areas of the research under the
Development Agreement. The Development Agreement is subject to early termination
in the event of certain defaults by the parties.

During the quarter ended June 30, 2000, Pfizer Inc., in order to meet
Federal Trade Commission requirements for its merger with Warner-Lambert
Company, granted all development and marketing rights of OSI-774 (formerly
CP-358,774), an epidermal growth factor receptor, or EGFR, inhibitor, to the
Company. The reason for the divestiture was the determination by the FTC of an
anti-trust issue in the emerging EGFR cancer market arising as a result of the
development by Warner-Lambert of an EGFR inhibitor that is currently in early
Phase I studies. The divestiture of OSI-774 through the vehicle of the existing
OSI/Pfizer collaboration presented the most expeditious resolution of the
anti-trust issue. Under terms of a May 23, 2000 agreement with Pfizer, which
became effective upon issuance and publication of the FTC's order on June 19,
2000, the Company received a royalty-free license to all rights for the further
development and commercialization of OSI-774. The terms of the agreement did not
require the Company to make any payments to Pfizer for the license. Currently,
the Company is continuing the development of OSI-774, but intends to seek a
co-development and marketing

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

partnership with a major pharmaceutical company. The Company does not have, and
does not currently plan to develop, its own marketing capability.

(b) Anaderm

In April 1996, in connection with the formation of Anaderm, the Company
entered into a Stockholders' Agreement (1996 Stockholders' Agreement) among the
Company, Pfizer, Anaderm, New York University and certain NYU faculty members,
and a Collaborative Research Agreement among the Company, Pfizer and Anaderm.
Anaderm issued common stock to Pfizer and the Company and options to purchase
common stock to NYU and the faculty members. NYU and the faculty members have
since exercised their options fully, and until November 10, 1999 Pfizer held
82%, the Company held 14% and NYU and the faculty members collectively held 4%
of Anaderm's common stock. In exchange for its 14% of the outstanding shares of
Anaderm common stock, the Company provided formatting for high throughput
screens and conducted compound screening for 18 months at its own expense under
the 1996 Research Agreement. The term of the 1996 Research Agreement was three
years. During the initial phase of the agreement (the first 18 months), the
Company was required to provide at its own cost formatting for high throughput
screens and perform screening of its own compounds and those compounds provided
by Pfizer. Upon the termination of the initial phase, the board of directors of
Anaderm made a determination that the initial phase was successfully completed.
With Pfizer's approval, the funded phase commenced on October 1, 1997. During
this phase, Anaderm made payments to the Company equal to its research costs,
including overhead, plus 10%. Anaderm or Pfizer will pay royalties to the
Company on the sales of products resulting from this collaboration. In December
1997, the Company and Pfizer entered into an agreement for a second round of
equity financing for Anaderm. The agreement called for an equity contribution of
$14 million, of which the Company contributed $2 million in drug discovery
resources, including assay biology, high throughout screening, lead optimization
and chemistry, through 1999.

On April 23, 1999, the Company entered into an Amended and Restated
Collaborative Research Agreement (1999 Research Agreement) with Pfizer and
Anaderm to expand the collaborative program begun by the 1996 Research Agreement
and an Amended and Restated Stockholders' Agreement with Pfizer, Anaderm, NYU
and the faculty members (1999 Stockholders' Agreement). The 1999 Research
Agreement is for a term of three years. Pfizer may terminate the 1999 Research
Agreement, however, after the first or second year of the term in its sole
discretion after consultation with Anaderm and the Company to determine whether
satisfactory progress has been made in the research program during the previous
year. The 1999 Research Agreement provides for funding by Pfizer of up to $35
million in total payments to Anaderm to fund the Company's research and
development activities during the three-year term and up to $15 million in
phase-down funding following expiration of the three-year term or earlier
termination by Pfizer. In the expanded program, the Company will continue to
provide a full range of capabilities including assay biology, high throughput
screening, compound libraries, combinatorial, medicinal, and natural product
chemistry, as well as pharmaceutics, pharmacokinetics and molecular biology. The
Company anticipates a significant increase in its staffing of the program to
conduct its drug discovery efforts during the term of the 1999 Research
Agreement. Anaderm or Pfizer will pay royalties to the Company on the sales of
products resulting from the collaboration.

A significant change to the 1996 Stockholders' Agreement by the 1999
Stockholders' Agreement is the addition of a right on the part of each of the
Company, NYU and each of the faculty members, exercisable at any time prior to
December 31, 1999, to require Anaderm or Pfizer to purchase all, but not less
than all, of the shares of common stock of Anaderm held by each such stockholder
for a fixed price based upon a formula as set forth in the 1999 Stockholders'
Agreement. The stockholders, also continue to have the right, exercisable at any
time subsequent to April 23, 2000, to require Anaderm or Pfizer to purchase all,
but not

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

less than all, of the shares of common stock of Anaderm held by each such
stockholder at the "Fair Value" (as such term is defined in the 1999
Stockholders' Agreement) of such shares. In addition, Anaderm or Pfizer had the
right, exercisable at any time subsequent to April 23, 2002, to require the
Company, NYU or any faculty member to sell to Anaderm all, but not less than
all, of the shares of common stock of Anaderm held by such stockholder at the
Fair Value of such shares. In the 1996 Stockholders' Agreement, this call right
was exercisable by Anaderm only with respect to the shares owned by NYU and the
faculty members.

As of September 30, 1999, the Company has expended approximately $12.5
million, of which, $2.6 million has been capitalized as the cost of the
Company's 14% interest in Anaderm. This capitalized cost has been offset by the
Company's interest in the loss of Anaderm through September 23, 1999. As
discussed in Note 4, the Company exercised its option to sell its Anaderm common
stock to Pfizer as of September 23, 1999 for a total sale price of $3.6 million.
The Company's net investment in Anaderm at the date of the sale was
approximately $354,000 resulting in a net gain of $3.3 million on the sale of
common stock. During fiscal 1999 and 1998, the Company recorded revenue of
approximately $6.6 million and $3.5 million, respectively, from Anaderm for
contracted research activities.

Effective as of October 1, 1999, the Company entered into a Collaborative
Research and License Agreement with Tanabe. The collaboration is focused on
discovering and developing novel pharmaceutical products to treat diabetes.

Under the agreement, the Company is responsible for identification of
targets (subject to Tanabe's approval), assay development, screening of
compounds from the Company's library and Tanabe's library against identified
targets, identification of seed compounds meeting certain criteria specified in
the agreement, optimization of such seed compounds, and identification of lead
compounds meeting certain criteria specified in the agreement. Tanabe maintains
responsibility for further development and marketing of a lead compound in
exchange for milestone and royalty payments to the Company.

If Tanabe determines to initiate further development of a lead compound
identified by the Company, the Company will grant to Tanabe exclusive, worldwide
licenses to, among other things, use, manufacture and sell all products
containing such lead compounds directed to the identified targets. In exchange
for these licenses, Tanabe will pay the Company license fees and royalties on
product sales. The duration of the licenses is coextensive with the lives of the
patents related to the licensed compound or ten years from first commercial
sale, whichever is longer. If Tanabe determines not to initiate further
development of a lead compound or if Tanabe discontinues development of
candidate compounds, the Company will have the sole and exclusive right to
develop, use, manufacture and sell all products resulting from the
collaboration, and it will pay royalties to Tanabe. Each of the parties has
rights and obligations to prosecute and maintain patent rights related to
specified areas of the research under the agreement.

Generally, the Company is prohibited during the term of the contract from
pursuing independently, having sponsored or sponsoring research and development
of compounds and products in the diabetes area relating to the identified
targets in the agreement. Tanabe is prohibited from sponsoring research relating
to the identified targets and from being sponsored by another pharmaceutical
company with respect to research relating to the identified targets. The
agreement is for a term of four years, with the option to extend for an
additional one two year period. Tanabe, however, has the right to terminate the
agreement after two years under certain circumstances. On the effective date of
the agreement Tanabe was required to pay the Company a technology access fee of
$3.5 million. On September 28, 1999, the Company received $4,312,500 from Tanabe
which represented advanced funding of the technology access fee of $3.5 million
and research funding of $812,500 for the first quarter of fiscal 2000. This
amount has been recorded in unearned revenue-current in the accompanying
consolidated balance sheet as of September 30, 1999. During the first quarter

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

ended December 31, 1999, the Company recognized as revenue the technology access
fee of $3.5 million in accordance with its accounting policy. Under the
agreement, the Company is responsible for identification of targets (subject to
Tanabe's approval), assay development, screening of compounds from the Company's
library and Tanabe's library against identified targets, identification of seed
compounds meeting certain criteria specified in the agreement, optimization of
such seed compounds, and identification of lead compounds meeting certain
criteria specified in the agreement. Tanabe maintains responsibility for further
development and marketing of a lead compound in exchange for milestone and
royalty payments to the Company. Concurrent with execution of the Tanabe
agreement, the Company and Tanabe entered into an Amended and Restated
Collaborative Research, License, and Alliance Agreement with Vanderbilt
University. Vanderbilt will assist the Company in fulfilling its obligations
under the Tanabe/OSI research program by providing access to Vanderbilt's
diabetes research resources, including laboratories and assays. During the
quarter ended December 31, 1999, the Company paid a one-time success fee of
$500,000 to Vanderbilt as well as other direct costs of $250,000 in connection
with the Company entering into the Tanabe agreement, both amounts of which are
included in research and development expenses in the accompanying unaudited
statement of operations for the nine months ended June 30, 2000. See note 17 for
a discussion of SEC Staff Accounting Bulletin No. 101 on revenue recognition of
technology access fees.

(d) Vanderbilt

Effective as of April 28, 1998, the Company entered into a Collaborative
Research, Option and Alliance Agreement with Vanderbilt University to conduct a
collaborative research program and seek a corporate partner to fund a technology
collaboration for the discovery and development of drugs to treat diabetes. The
collaborative research was funded by the Company in exchange for which the
Company received an option to negotiate a commercially reasonable, worldwide,
exclusive license from Vanderbilt to develop, make, use, and sell products
derived from the research program. The Company and Vanderbilt committed equal
resources to the program, including, among other things, access to all their
respective laboratory facilities and dedicated teams of research scientists. The
Company had certain rights and obligations to prosecute and maintain patent
rights related to specified areas of the research under the agreement. The
agreement was for a term of one year, and was extended until the execution of a
third-party research collaboration agreement by the Company - i.e., the
agreement with Tanabe.

Concurrently with the execution of the Tanabe agreement, the Company and
Tanabe entered into an Amended and Restated Collaborative Research, License and
Alliance Agreement with Vanderbilt with an effective date of August 31, 1999.
This agreement amended and restated the agreement from April 1998 to add Tanabe
as a party to the agreement with respect to certain sections and to amend
certain other provisions to clarify Vanderbilt's role in the OSI/Tanabe research
program. The term of the research program conducted by the Company and
Vanderbilt commenced on April 28, 1998 and will end upon termination of the
contract period under the Tanabe agreement unless mutually extended by the
Company and Vanderbilt.

The OSI/Vanderbilt research program is comprised of two parts: research
directed toward the targets identified in the Tanabe agreement and research
directed toward additional targets which are not targets under the Tanabe
agreement. The Company may offer to Tanabe any of the additional targets for
inclusion in the OSI/Tanabe research program. As part of the OSI/Vanderbilt
research program, Vanderbilt will assist the Company in fulfilling its
obligations under the Tanabe/OSI research program by providing access to
Vanderbilt's drug discovery resources, including laboratories and assays.

The Company will provide funding to Vanderbilt to conduct the
OSI/Vanderbilt research program. A portion of such funding will come from
Tanabe's funding of the OSI/Tanabe research program. The Company will also pay
to Vanderbilt a percentage of the revenues (milestone and royalty payments) it
receives from Tanabe and any other third party which is commercializing products
resulting from the OSI/Vanderbilt

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

research program. The percentage received by Vanderbilt will vary in accordance
with the extent to which Vanderbilt technology and patents contributed to the
product giving rise to such revenue. As discussed in note 5(c), the Company also
paid Vanderbilt a one-time success fee in the amount of $500,000 in October 1999
in respect of the Company entering into the Tanabe agreement.

(e) Sankyo

Effective as of February 12, 1997, the Company entered into a Collaborative
Research and License Agreement with Sankyo to be conducted in partnership with
MRC Collaborative Center, London, U.K. The collaboration is focused on
discovering and developing novel pharmaceutical products to treat influenza. The
Company is responsible for conducting research as directed by a research
committee, including, without limitation, compound screening in exchange for
research funding from Sankyo. Sankyo has the responsibility and the exclusive
right to conduct pre-clinical and clinical development of all candidate
compounds in exchange for milestone payments to the Company. In November 1999,
the Company and Sankyo renewed the collaboration for an additional two years.
During 1997, the Company received and recorded $267,000 for a non-refundable
technology disclosure fee upon signing the agreement. During fiscal 1999 and
1998, the Company recorded revenue of approximately $2.1 million and $2.6
million, respectively, from Sankyo pursuant to this agreement.

The Company and MRC CC have granted to Sankyo exclusive, worldwide licenses
to, among other things, use, manufacture and sell all products resulting from
the collaboration. In exchange for these licenses, Sankyo will pay to the
Company and MRC CC license fees and royalties on product sales. The duration of
the licenses is coextensive with the lives of the patents related to the
licensed compound. If Sankyo discontinues development of all candidate
compounds, the Company will have the sole and exclusive right to develop, use,
manufacture and sell all products resulting from the collaboration, and it will
pay royalties to Sankyo.

(f) Hoechst Marion (HMRI)

Effective as of April 1, 1997, the Company and HMRI entered into an Amended
Collaborative Research and License Agreement that consolidated and extended
formerly separate collaborative programs between the Company and each of Marion,
Hoechst Roussel and Hoechst AG. This resulted from the corporate reorganization
of HMRI in July 1995 in which the pharmaceutical operations Marion, Hoechst
Roussel and Hoechst AG were combined into HMRI. This Amended Collaborative
Research and License Agreement provides for HMRI and the Company to collaborate
in the discovery and development of drugs for the treatment of various diseases.

Under this collaboration, a research committee, with equal representation
from the Company and HMRI, meets at least three times a year to evaluate the
progress of the research program, make priority and program decisions, and
prepare research plans identifying the drug targets to be pursued. New targets
are added to the program on an ongoing basis by mutual agreement. The Company is
responsible for achieving objectives outlined in the annual research plans. HMRI
is responsible for assisting the Company in the pursuit of such objectives and
for the clinical development and commercialization of drugs resulting from the
program. HMRI is responsible for funding the costs of the Company's discovery
efforts, and as of September 30, 1999, the Company has recognized an aggregate
of $22.8 million in research funding from HMRI and its predecessors.

The Company has granted to HMRI an exclusive, worldwide license (and rights
to acquire additional licenses) with respect to, among other things, the use,
manufacture and sale of products resulting from the Company's lead seeking
efforts against individual drug targets. In exchange for these licenses, HMRI
will pay royalties to the Company on sales of such products. The Company and
HMRI have mutually exclusive rights

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

and obligations to prosecute and maintain certain patent rights related to
various specified areas of the research.

Effective as of January 1, 1997, the Company entered into a Collaborative
Research and License Agreement with HMRI to develop orally active, small
molecule inducers of erythropoietin gene expression for the treatment of anemia
due to chronic renal failure and anemia associated with chemotherapy for AIDS
and cancer. This collaboration identified active lead compounds that were
advanced to a pre-clinical development stage. During fiscal 1997, the Company
received and recorded as income a $1.0 million initiation fee from HMRI in
connection with this collaboration. This research effort, however, did not
achieve sufficient data to warrant further development. Consequently, in October
1998, this program was terminated.

(g) Solvay

With the acquisition of certain assets of Cadus, the Company assumed a
Collaborative Research and License Agreement effective as of November 1, 1995
between Cadus and Solvay. The collaboration is directed toward GPCR drug
discovery in differing fields of use. The Company's fields of use include
cancer, autoimmune and inflammatory diseases. Solvay's fields of use include
central nervous system disorders, cardiovascular and gastrointestinal diseases.

The parties are to develop and manufacture screens that incorporate targets
which are the subject of the agreement. The screens are to enable Solvay and the
Company to test compounds for biological activity as part of their respective
drug discovery efforts in their respective fields. The parties are responsible
for the identification of targets and the Company undertakes assay development
using funds from Solvay. In exchange for milestone and royalty payments, Solvay
maintains sole responsibility for pre-clinical and clinical development as well
as marketing and commercialization of any lead compound it discovers from its
use of the screens developed as part of the collaboration.

Under the agreement, Cadus granted to Solvay a worldwide license in
Solvay's fields of use to, among other things, use and practice the screens to
identify and confirm potential human therapeutics. The license is exclusive for
the term of the research program, or longer if Solvay has identified or
confirmed a potential product during the exclusive period, and non-exclusive for
five years following the research program. In exchange for these licenses,
Solvay will pay the Company, as Cadus' successor, license fees and royalties on
product sales. If Solvay discontinues the development of candidate compounds,
the Company, as Cadus' successor, will have the sole and exclusive right to
develop, use, manufacture and sell all products resulting from the
collaboration, and the Company will pay milestones and royalties to Solvay. Each
of the parties has rights and obligations to prosecute and maintain patent
rights related to specified areas of the research under the agreement. The term
of the research program is until December 31, 2000. The Company is to receive
$2.5 million per year in research funding plus cost of living adjustments. The
Company recorded revenue of $447,000 from Solvay for the two months ended
September 30, 1999.

(h) Novartis

The Company entered into an agreement with Novartis in April 1995 (1995
Agreement) for the development of TGF-Beta 3 for various indications. TGF-Beta 3
is a naturally occurring human growth factor, first isolated by the Company,
that exerts either stimulatory or inhibitory effects depending upon the
particular cell type to which it is applied. This agreement granted to Novartis
an exclusive, worldwide license to use and sell TGF-Beta 3 products for wound
healing and oral mucositis, as well as certain other indications, in exchange
for royalty payments to the Company on the sale of TGF-Beta 3 products.

During 1998, Phase II clinical trials being conducted by Novartis for both
wound healing and oral mucositis failed to achieve their primary clinical end
points. Consequently, no further clinical development of TGF-Beta 3 by Novartis
for either wound healing or oral mucositis has been anticipated.

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

In May 1999, certain terms of the 1995 Agreement including the definition
of licensed indications, the supply of TGF-Betas, the amount of royalty
payments, and the schedules of the Company's patents and applications and
Novartis' patents were amended. Specifically, oral mucositis and the healing of
soft wound tissue were removed from the licensed indications. Novartis
acknowledged that it has discontinued development of products for the
indications of oral mucositis and healing of soft wound tissue. The parties
agreed that all licenses theretofore granted to Novartis with respect to such
discontinued indications are terminated and that the Company is free to continue
development work and to grant licenses to third parties with respect to such
discontinued indications. The Company is also free to use the results of any
development work with respect to the discontinued indications carried out by
Novartis prior to the date of the amendment provided that the Company pays to
Novartis royalties and/or certain other agreed-upon amounts with respect to
sales of products resulting from any such continued development work by the
Company or a licensee thereof. Under the amendment, the new licensed indications
are bone, cartilage and tendon repair. Under the amended agreement, Novartis'
exclusive option has been amended to include in the definitions of licensed
indications, the treatment of transplant patients (e.g., graft protection), the
treatment of ischemia (e.g., angina pectoris and peripheral vascular disease),
the treatment of stroke patients, and the treatment of inflammatory bowel
disease, and Novartis also has a non-exclusive option to include any other
additional indications relating to TGF-Betas (other than the discontinued
indications) upon payment of a milestone payment. The exercise of the option
will result in Novartis making a milestone payment of $5.0 million or purchasing
$5.0 million of the Company's common stock at a per share price equal to 115% of
the average closing price for the 30-day period ending on the date of purchase.
The time period to exercise the option was extended until May 31, 2003. The
Company's agreement with Novartis ends upon the expiration of the last of the
Company's patents relating to TGF-Beta 3.

(i) Helicon

In July 1997, the Company, Cold Spring Harbor Laboratory and Hoffman-La
Roche Inc. formed Helicon Therapeutics, Inc., a new Delaware corporation. In
exchange for approximately 30% of Helicon's outstanding capital stock, the
Company contributed to Helicon molecular screening services and a nonexclusive
license with respect to certain screening technology. Such services were
completed in fiscal 1998. Cold Spring Harbor Laboratory contributed a
royalty-free license to commercialize certain technology relating to genes
associated with long-term memory in exchange for a portion of Helicon's
outstanding capital stock. Hoffman-La Roche contributed cash for a portion of
Helicon's outstanding capital stock. Certain individuals associated with Cold
Spring Harbor Laboratory hold the remaining outstanding capital stock of
Helicon.

The parties entered into various collaborative research and license
agreements pursuant to which they were to jointly pursue the discovery,
development and commercialization of novel drugs for the treatment of long-term
memory disorders and other central nervous system dysfunctions. The Company and
Cold Spring Harbor Laboratory conducted research under the program, which was
funded by Helicon (except for the molecular screening services that the Company
contributed to Helicon). Helicon received this funding from Hoffman-La Roche for
the first two years of the program. Hoffman-La Roche terminated the program at
the end of the second year and the terms of termination are being negotiated.
Helicon had granted to Hoffman-La Roche a worldwide license to commercialize
pharmaceutical products resulting from the collaborative program in exchange for
certain milestone payments and royalties on Hoffman-La Roche's sales of such
products. The Company is currently contributing funds to Helicon on an as-needed
basis in amounts required to cover the costs of conducting research activities,
which amounts are charged to R&D expense.

As of September 30, 1998, the Company had capitalized $1.0 million as the
cost of the Company's 30% interest in Helicon, which was offset by the Company's
equity interest in the losses of Helicon and a reserve for impairment based on
the uncertainty of Helicon's future profitability. The Company's net investment
in

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

Helicon at September 30, 1998 of $200,000 was included in other assets in the
accompanying consolidated balance sheet. At September 30, 1999, this investment
was reduced by recognition of the Company's equity interest in Helicon's net
losses and the balance of the equity interest has been written off in
recognition of the impairment of the investment upon the termination of the
Hoffman-La Roche research collaboration. The Company recorded revenue of
$642,000 and $203,000 from Helicon in fiscal 1999 and 1998, respectively, in
connection with its collaborative research and license agreement.

(j) Wyeth-Ayerst

Effective December 31, 1991, the Company entered into a collaborative
research agreement with Wyeth. This agreement was extended and expanded in
January 1994 for an additional three years through December 31, 1996 to provide
for additional funding of approximately $4.3 million. The Company had received
approximately $1.6 million annually in research and development funding from
Wyeth pursuant to this collaborative agreement. The funded portions of the
research collaboration expired on December 31, 1996. To the extent Wyeth
commercializes any products derived from this collaboration, it will pay certain
royalties to the Company on sales of such products, if any.

(k) Sepracor

Pursuant to an Amendatory and Collaborative Agreement dated March 31, 1998,
the Company and Sepracor amended their Collaborative Research, Development and
Commercialization Agreement dated March 7, 1997, terminating certain provisions
contained therein, including, without limitation, provisions establishing the
research program. Each party will be free to independently pursue the discovery
of new compounds in the anti-infective area without incurring any responsibility
to the other party. To the extent Sepracor commercializes certain compounds
arising out of the joint venture, however, it will pay royalties to the Company.
The Company provided discovery biology and certain other services to Sepracor
until September 1, 1998, in exchange for fees. In fiscal 1999, the Company had
received approximately $74,000 in funding from Sepracor pursuant to the amended
agreement.

(l) Bayer

Effective January 1, 1997, the Company and Bayer entered into an agreement
to develop serum-based cancer diagnostic products. Under the agreement, the
Company granted to Bayer licenses to manufacture, use and sell clinical
diagnostic products based on the Company's cancer diagnostic technology in
exchange for royalties on net sales. Bayer owns all the technology, and has the
exclusive right to commercialize automated clinical diagnostic products derived
from the collaboration. The Company retained rights and was actively selling
non-automated, or manual, versions of these tests to the clinical research
market and retained the right to commercialize automated the manual versions in
the clinical diagnostic market. Bayer's license is perpetual with respect to
non-patented technology and would terminate with respect to patented technology
upon the expiration of the last to expire of the Company's patents. Bayer
provided funding for the Company's research under the collaboration in the
amount of $1.5 million for each of the first two contract years, and $1 million
for each subsequent year. After the first two contract years, the Company was
required to provide up to $500,000 in annual funding for the collaboration to
the extent the Company derived net revenues from out-licensing any cancer
diagnostics technology or the sale of any clinical diagnostic or clinical
research products. The agreement was to terminate on December 31, 2002. Bayer
had the right to terminate the agreement at any time after December 31, 1997
upon 12 months notice. Upon the sale of the Company's diagnostic business to
Bayer, the agreement terminated. During fiscal 1999 and 1998, the Company
recorded revenue of approximately $1.1 million and $1.5 million, respectively,
from Bayer pursuant to this agreement. See note 16 for sale of the Company's
diagnostic business to Bayer on November 30, 1999.

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

(m) Fujirebio

The Company, through its wholly-owned subsidiary OSDI, entered into a
Research Collaboration and License Agreement with Fujirebio effective April 1,
1998, creating a collaborative program focused on discovering and developing
certain proprietary cancer assays and commercializing cancer products. Under the
agreement, Fujirebio funded the Company's research and development of cancer
assays over a four-year term. The Company provided Fujirebio with antibodies,
antigens and other substances necessary to manufacture the diagnostic products
derived from the collaboration. Further, the Company granted to Fujirebio a
non-exclusive license to, among other things, develop, manufacture and sell the
products developed pursuant to the collaboration in exchange for license fees
and royalties on product sales. The duration of the license was coextensive with
the lives of the patents related to the licensed products. Each of the parties
had rights and obligations to prosecute and maintain patent rights related to
specified areas of the research under the agreement. The agreement was subject
to early termination by either party in the event of certain defaults. Upon the
sale of the Company's diagnostics business to Bayer, the agreement was assigned
to Bayer. During fiscal 1999, the Company recorded $433,333 of revenue under
this agreement. See note 16 for sale of the Company's diagnostic business to
Bayer on November 30, 1999.

(n) BioChem

Pursuant to an Agreement, dated March 19, 1999, the Company and BioChem
Pharma, Inc. (formerly BioChem Pharma (International) Inc.) amended their
Collaborative Research, Development and Commercialization Agreement, effective
as of May 1, 1996, terminating certain provisions contained therein, including,
without limitation, provisions establishing the research program. Under the
amended agreement, BioChem received from the Company a worldwide, irrevocable,
exclusive license, and right to grant sublicenses, in a certain anti-viral
target for a license fee of $2 million in cash, which is included in license fee
income in the accompanying consolidated statement of operations for the year
ended September 30, 1999. In addition, each party will be free to independently
pursue the discovery of new compounds in the Hepatitis B and HIV areas without
incurring any responsibility to the other party. To the extent BioChem completes
any clinical trials or pursues any regulatory approvals for any products covered
by the license, it will pay milestones to the Company. In addition, to the
extent BioChem commercializes certain compounds arising out of the joint
venture, it will pay royalties to the Company.

(o) Other

Under the terms of aforementioned collaborative research agreements, the
collaborative partners will pay the Company royalties ranging from 2% to 8% of
net sales of products resulting from these research programs. To date, the
Company has not received any royalties pursuant to these agreements. The Company
or its collaborative partners may terminate each of the collaborative research
programs upon the occurrence of certain events.

The Company does not intend to conduct late-stage clinical trials,
manufacturing or marketing activities with respect to any of its product
candidates in the foreseeable future. The Company is dependent on the companies
with which it collaborates for the pre-clinical testing, clinical development,
regulatory approval, manufacturing and marketing of potential products developed
under its collaborative research programs. The Company's collaborative
agreements allow its collaborative partners significant discretion in electing
to pursue or not to pursue any of these activities. The Company cannot control
the amount and timing of resources its collaborative partners devote to the
Company's programs or potential products. If any of the Company's collaborative
partners were to breach or terminate its agreements with the Company or
otherwise fail to conduct its collaborative activities successfully in a timely
manner, the pre-clinical or clinical development or commercialization of product
candidates or research programs could be delayed or terminated. Any such

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

delay or termination could have a material adverse effect on the Company's
business, financial condition and results of operations.

Total program research revenues under the aforementioned agreements are as
follows:

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Related Parties:
Pfizer.................................... $ 4,001,043 $ 3,682,056 $ 3,622,363
Hoechst Marion............................ 2,420,787 4,301,263 5,136,257
BioChem Pharma............................ 80,000 100,000 517,888
Anaderm................................... 6,633,536 3,467,203 388,254
Helicon................................... 641,640 203,437 --
----------- ----------- -----------
Total related parties............. 13,777,006 11,753,959 9,664,762
Bayer..................................... 1,125,000 1,500,000 1,125,000
Sankyo.................................... 2,082,570 2,614,297 1,011,039
Sepracor.................................. 74,416 197,357 --
Solvay.................................... 447,368 -- --
SmithKline Beecham........................ 227,000 -- --
Fujirebio................................. 433,333 100,000 --
Wyeth..................................... -- -- 400,000
----------- ----------- -----------
Total............................. $18,166,693 $16,165,613 $12,200,801
=========== =========== ===========
</TABLE>

Included in receivables are the following amounts due from related parties:

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
-------- ----------
<S> <C> <C>
Pfizer...................................................... $108,987 $ 125,975
Hoechst Marion.............................................. 59,317 74,623
Anaderm..................................................... -- 803,240
Helicon..................................................... 195,276 173,137
-------- ----------
Total............................................. $363,580 $1,176,975
======== ==========
</TABLE>

(6) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements are recorded at cost and
consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
ESTIMATED --------------------------
LIFE (YEARS) 1999 1998
------------- ----------- -----------
<S> <C> <C> <C>
Laboratory equipment....................... 5-15 $14,209,633 $10,728,319
Office furniture and equipment............. 5-10 4,870,206 3,945,292
Automobile equipment....................... 3 119,654 122,775
Leasehold improvements..................... Life of lease 6,582,509 5,520,703
----------- -----------
25,782,002 20,317,089
Less: accumulated depreciation and
amortization............................. 14,866,413 12,320,534
----------- -----------
Net property, equipment and leasehold
improvements............................. $10,915,589 $ 7,996,555
=========== ===========
</TABLE>

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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

(7) INTANGIBLE ASSETS

The components of intangible assets are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Patents..................................................... $4,876,189 $5,643,401
Goodwill.................................................... 1,387,072 2,080,600
Acquired work force......................................... 137,031 --
---------- ----------
$6,400,292 $7,724,001
========== ==========
</TABLE>

The above amounts reflect accumulated amortization of $8,226,456 and
$6,757,655 at September 30, 1999 and 1998, respectively. On November 30, 1999
the Company sold all of its capitalized patents in the sale of assets of its
diagnostics business to Bayer (See note 16).

(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at September 30, 1999 and 1998 are
comprised of:

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Accounts payable............................................ $1,357,400 $1,064,242
Accrued future lease escalations............................ 465,765 446,137
Accrued payroll and employee benefits....................... 638,530 350,831
Accrued incentive compensation.............................. 750,000 625,000
Accrued closing costs (see note 15)......................... 535,000 --
Accrued expenses............................................ 1,482,977 1,746,330
---------- ----------
$5,229,672 $4,232,540
========== ==========
</TABLE>

(9) STOCKHOLDERS' EQUITY

(a) Stock Redemption

On February 18, 1997, the Company repurchased all 1.25 million shares of
the Company's common stock held by Becton for an aggregate price of $8.75
million. The Company's collaborative research agreement with Becton had ended on
its scheduled expiration date of September 30, 1996.

(b) Stock Option Plans

The Company has established five stock option plans for its employees,
officers, directors and consultants, including a stock option plan adopted upon
the acquisition of Cadus' research business (See note 3(a)). 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 may expire no later than 10 years from
date of grant. The total authorized shares under these plans is 5,400,000.

On June 23, 1999, the Board of Directors adopted the 1999 Incentive and
Non-Qualified Stock Option Plan which was approved by the stockholders at the
annual meeting of stockholders on March 15, 2000. Under the plan, the Company
may grant incentive stock options and non-qualified stock options. Participation
in the plan is limited to directors, officers, employees and consultants of the
Company or a parent or subsidiary of the Company. The plan also continues the
automatic, formula-based grants of non-qualified stock options to directors who
are not employees of the Company.

The following table summarizes changes in the number of common shares
subject to options in the stock option plans:

F-25
<PAGE> 77
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
EXERCISE PRICE
---------------------------------------
WEIGHTED
SHARES LOW HIGH AVERAGE
--------- ----- ----- --------
<S> <C> <C> <C> <C>
Balance at September 30, 1996
Unexercised................................. 2,218,057 $1.75 $9.32 $5.67
Granted..................................... 907,500 6.50 7.09 6.82
Exercised................................... (84,618) 2.50 9.25 4.32
Forfeited................................... (55,887) 3.50 9.00 5.19
---------
Balance at September 30, 1997
Unexercised................................. 2,985,052 $1.75 $9.32 $6.07
Granted..................................... 840,250 3.25 6.75 5.26
Exercised................................... (5,699) 3.50 9.25 4.22
Forfeited................................... (37,872) 3.75 9.00 6.66
---------
Balance at September 30, 1998
Unexercised................................. 3,781,731 $1.75 $9.32 $5.89
Granted..................................... 996,258 2.94 6.00 4.36
Exercised................................... (92,187) 1.75 4.13 2.93
Forfeited................................... (251,033) 1.94 9.00 4.38
---------
Balance at September 30, 1999
Unexercised................................. 4,434,769 $1.75 $9.32 $5.70
=========
</TABLE>

At September 30, 1999, the Company has reserved 4,243,406 shares of its
authorized common stock for all shares issuable under options. At September 30,
1999, 1998, and 1997 options exercisable were 3,077,028, 2,454,082 and
1,290,829, respectively.

Information regarding stock options outstanding as of September 30, 1999,
is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
PRICE RANGE (IN THOUSANDS) PRICE LIFE (IN THOUSANDS) PRICE
------------- -------------- -------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C>
Under $4.50 1,718 $3.91 6.52 1,243 $3.89
$4.50 - $7.00 1,942 6.01 7.69 1,061 6.41
Over $7.00 775 8.89 6.57 773 8.89
</TABLE>

Stock option grants are set at the closing price of the Company's common
stock on the date of grant and the related number of shares granted are fixed at
that point in time. Therefore under the principles of APB Opinion No. 25, the
Company does not recognize compensation expense associated with the grant of
stock options. SFAS 123, "Accounting for Stock-Based Compensation," requires the
use of option valuation models to determine the fair value of options granted
after 1995. Pro forma information regarding net loss and loss per share shown
below was determined as if the Company had accounted for its employee stock
options and shares sold under its stock purchase plan under the fair value
method of SFAS 123.

The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997 respectively: risk-free interest rates of
5.75%, 4.38% and 5.84%; dividend yields of 0%; volatility factors of the
expected market price of the Company's common stock of 60.7%, 64.9% and 65.8%
and expected life of the options 3.7 years for all three years. These
assumptions resulted in weighted-average fair values of $2.22, $2.87 and $3.61
per share for stock options granted in 1999, 1998 and 1997, respectively.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net loss for the periods presented is not representative of

F-26
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

the pro forma effect on net income or loss in future years because it does not
take into consideration pro forma compensation expense related to grants made
prior to 1996. Pro forma information in future years will reflect the
amortization of a larger number of stock options granted in several succeeding
years. The Company's pro forma information is as follows (in thousands, except
per share information):

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Pro forma net loss................................... $12,563 $(12,802) $(11,205)
Pro forma net loss per share:
Basic.............................................. $ (0.59) $ (0.57) $ (0.51)
</TABLE>

During 1999, the Company adopted certain amendments to its certificate of
incorporation which included the authorization of 5,000,000 shares of preferred
stock with a par value of $.01 per share with such designations, preferences,
privileges, and restrictions as may be determined from time to time by the
Company's Board of Directors.

(d) Sale of Common Stock and Warrant to Marion Merrell Dow

In December 1992, the Company entered into the common stock purchase and
common stock warrant purchase agreements with Marion Merrell Dow. The Company
issued 1,090,909 shares of common stock at $5.50 per share and a warrant to
purchase up to 500,000 additional shares at $5.50 per share which was
exercisable until December 10, 1999. The proceeds to the Company were $6
million.

(e) Employee Stock Purchase Plan

On May 1, 1993, the Company adopted an Employee Stock Purchase Plan under
which eligible employees may contribute up to 10% of their base earnings toward
the quarterly purchase of the Company's common stock. The employees 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
fiscal 1999, 1998 and 1997, 23,326, 20,664 and 12,388 shares were issued with
55, 52 and 48 employees participating in the plan, respectively.

(f) Private Placement

On February 28, 2000, the Company sold 3.325 million newly-issued shares of
its common stock to a select group of institutional investors for net proceeds
of approximately $53 million. The Company intends to use the proceeds from this
private placement to advance its research and development programs, particularly
its OSI-774 (note 5) development and commercialization program and its
GPCR-directed drug development and functional genomics programs, as well as for
commercial development and other general corporate purposes. The Company agreed
to register the resale of the shares of common stock issued in the private
placement, and filed a registration statement on Form S-3 with the Securities
and Exchange Commission which became effective on June 21, 2000.

(10) INCOME TAXES

There is no provision (benefit) for federal or state income taxes, since
the Company has incurred operating losses since inception and has established a
valuation allowance equal to the total deferred tax assets.

F-27
<PAGE> 79
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

The tax effect of temporary differences, net operating loss carry forwards
and research and development tax credit carry forwards as of September 30, 1999
and 1998 are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards....................... $ 19,530,528 $ 16,942,035
Research and development credits........................ 867,171 874,246
Intangible assets....................................... 695,702 797,137
Other................................................... 2,845,293 2,041,480
------------ ------------
23,938,694 20,654,898
Valuation allowance..................................... (23,938,694) (20,654,898)
------------ ------------
$ -- $ --
============ ============
</TABLE>

As of September 30, 1999, the Company has available federal net operating
loss carry forwards of approximately $57 million which will expire in various
years from 2000 to 2019, and may be subject to certain annual limitations. The
Company's research and development tax credit carry forwards expire in various
years from 2000 to 2019.

(11) COMMITMENTS AND CONTINGENCIES

(a) Lease Commitments

The Company leases office, operating and laboratory space under various
lease agreements.

Rent expense was approximately $1,533,000, $1,090,000 and $1,081,000 for
the fiscal years ended September 30, 1999, 1998, and 1997, respectively.

The following is a schedule by fiscal years of future minimum rental
payments required as of September 30, 1999, assuming expiration of the leases
for the two Uniondale facilities on July 31, 2003 and June 30, 2006,
respectively, the Durham facility on October 31, 2004, the Tarrytown facility on
June 30, 2008, the Birmingham facility on April 30, 2006, and the transfer of
the Cambridge facility on November 30, 1999 to Bayer (see note 16).

<TABLE>
<S> <C>
2000........................................................ $ 1,958,475
2001........................................................ 1,931,941
2002........................................................ 1,950,877
2003........................................................ 2,000,365
2004........................................................ 1,829,898
2005 and thereafter......................................... 4,140,403
-----------
$13,811,959
===========
</TABLE>

(b) Contingencies

The Company has received several letters from other companies and
universities advising the Company that various products being marketed and
research being conducted by the Company may be infringing on existing patents of
such entities. These matters are presently under review by management and
outside counsel for the Company. Where valid patents of other parties are found
by the Company to be in place, management will consider entering into licensing
arrangements with the universities and/or other companies or modify the conduct
of its research. The Company's future royalties, if any, may be reduced by up to
50% if its licensees or collaborative partners are required to obtain licenses
from third parties whose patent rights are infringed by the Company's products,
technology or operations. In addition, should any infringement claims result in
a patent infringement lawsuit, the Company could incur substantial costs in
defense of such a

F-28
<PAGE> 80
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

suit, which could have a material adverse effect on the Company's business,
financial condition and results of operations, regardless of whether the Company
were successful in the defense.

As of September 30, 1999, the Company had a line of credit with a
commercial bank in the amount of $10 million. This line expires annually on
March 31st, and its current rate of interest is prime plus 3/4. There were no
amounts outstanding under the line of credit as of September 30, 1999. In
addition, in 1999, the Company obtained a secured loan of $500,000 from the same
bank. The loan is payable over a three-year period, with monthly principal
payments of $13,888, plus interest at 8.12%. The carrying value of the loan
approximates fair value at September 30, 1999, based on borrowing rates
currently available for similar loans with similar terms.

(d) Derivative Financial Instruments

During the quarter ended June 30, 2000, the Company entered into forward
foreign exchange contracts through a financial institution in order to reduce
the risk of exchange rate fluctuations in the British pound, in connection with
its ongoing funding of the operations of its UK subsidiary. At June 30, 2000,
the Company had $2.2 million in such contracts, with remaining terms not
exceeding six months. The difference between the foreign currency rate in the
contract and such rate as of June 30, 2000 was immaterial to the results of
operations for the quarter ended June 30, 2000.

(12) RELATED PARTY TRANSACTIONS

Effective January 1, 1995, the Company compensates its independent outside
directors on a $1,500 retainer per month. For the years ended September 30,
1999, 1998 and 1997, such fees amounted to $141,000, $135,000 and $126,000,
respectively. The Company also has compensated directors for consulting services
performed. For the years ended September 30, 1999, 1998 and 1997, consulting
services in the amounts of $465,000, $157,000 and $144,000, respectively, were
paid by the Company pursuant to these arrangements.

One director is a partner in a law firm which represents the Company on its
patent and license matters. Fees paid to this firm for the years ended September
30, 1999, 1998 and 1997 were approximately $525,000, $604,000 and $404,000,
respectively.

During fiscal 1997, the Board of Directors of the Company approved the
cashless exercise of certain stock options held by a director. The Company
recorded a charge of $126,750, which represents the fair market value of the
common stock issued.

A board member is an officer of Cold Spring Harbor Laboratory which was a
founder of Amplicon (which was acquired by Tularik) and Helicon. The Company's
chairman was a member of the board of directors of Anaderm through September 23,
1999 and is on the board of directors of Helicon. An executive officer of the
Company is vice president of Helicon. A board member is the chief executive
officer and a board member of Helicon. The Company has investments in Tularik
and Helicon and has collaborative research agreements with Anaderm and Helicon.
A board member is on the faculty of Vanderbilt with which the Company has a
collaborative research agreement. He also has a consulting agreement with the
Company. A board member is a controlling member of MEHTA Partners, LLC with
which the Company has a strategic and financial services arrangement. During
fiscal 1999, the Company paid MEHTA Partners, LLC $75,000 in cash and issued
32,452 shares of treasury stock with a fair value of $100,000 in exchange for
consulting services received.

(13) EMPLOYEE SAVINGS AND INVESTMENT PLAN

The Company sponsors an Employee Savings and Investment Plan under Section
401(k) of the Internal Revenue Code. The plan allows employees to defer from 2%
to 10% of their income on a pre-tax basis

F-29
<PAGE> 81
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

through contributions into designated investment funds. For each dollar the
employee invests up to 6% of his or her earnings, the Company will contribute an
additional 50 cents into the funds. For the years ended September 30, 1999,
1998, and 1997, the Company's expenses related to the plan were approximately
$203,000, $197,000 and $233,000, respectively.

(14) EMPLOYEE RETIREMENT PLAN

On November 10, 1992, the Company 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.

The Company utilizes SFAS 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions" to account for the benefits to be provided by the
plan. Under SFAS No. 106 the cost of post-retirement medical and life insurance
benefits is accrued over the active service periods of employees to the date
they attain full eligibility for such benefits. As permitted by SFAS 106, the
Company elected to amortize over a 20 year period the accumulated postretirement
benefit obligation related to prior service costs.

On October 1, 1998, the Company adopted SFAS 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits". SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. SFAS 132 does
not change the method of accounting for such plans.

Net postretirement benefit cost for the years ended September 30, 1999,
1998 and 1997 includes the following components:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost for benefits earned during the
period........................................... $278,219 $220,785 $194,900
Interest cost on accumulated postretirement benefit
obligation....................................... 122,122 104,831 99,600
Amortization of unrecognized net loss.............. -- 3,327 9,600
Amortization of initial benefits attributed to past
service.......................................... 19,803 17,493 17,500
-------- -------- --------
Net postretirement benefit cost.................... $420,144 $346,436 $321,600
======== ======== ========
</TABLE>

The accrued postretirement benefit cost at September 30, 1999 and 1998 was
as follows:

<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation-fully eligible
active plan participants.................................. $2,193,325 $1,721,206
Unrecognized prior service cost............................. (203,893) --
Unrecognized cumulative net loss............................ (65,764) (181,832)
Unrecognized transition obligation.......................... (232,614) (250,107)
---------- ----------
Accrued postretirement benefit cost......................... $1,691,054 $1,289,267
========== ==========
</TABLE>

The accumulated postretirement benefit obligation was determined using a
discount rate of 7.5 percent in 1999 and in 1998 and a health care cost trend
rate of approximately 6 percent in 1998, decreasing down to 5 percent in 1999
and thereafter. Increasing the assumed health care cost trend rates by one
percentage point in each year and holding all other assumptions constant would
increase the accumulated postretirement benefit obligation as of September 30,
1999 by approximately $326,000 and the net postretirement benefit cost by
approximately $88,000. Benefits paid during fiscal 1999 and 1998 were $18,357
and $1,669, respectively.

(15) CONSOLIDATION OF FACILITIES

During fiscal 1999 the Company made the strategic decision to close down
its facilities in North Carolina and consolidate its natural products operations
into its Tarrytown facility in New York. This close down occurred on March 31,
2000. The fungal extract libraries and certain equipment will be relocated to
the Tarrytown facility. It is anticipated that none of the current employees in
the North Carolina facility will be

F-30
<PAGE> 82
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

relocating. Under the plan for relocating this facility, 16 research and
administrative employees will receive a severance package which will include
continued payment of four months salary, plus four months of continuous health
insurance. The leases in North Carolina expire in 2004. The Company believes
that, due to the desirable space and location, it should be able to secure
another party to take over its lease; however, the Company has accrued an
estimate of a reserve for an expected delay in finalizing a new tenant and
entering into a sublease agreement. The estimated cost of closing this facility
is approximately $535,000, and has been included in the accompanying
consolidated balance sheet in accrued expenses as of September 30, 1999, and in
R&D expense ($395,000) and selling, general and administrative expenses
($140,000) in the accompanying consolidated statement of operations for the year
ended September 30, 1999. Over the nine months ended June 30, 2000, the Company
incurred approximately $414,000 principally in severance and subleasing-related
costs, including a $61,000 loss resulting from the assumption of a lease and
related leasehold improvements by a third party. As of June 30, 2000, the
Company has approximately $121,000 remaining in its accrual that it expects to
use for severance costs.

(16) SALE OF DIAGNOSTIC BUSINESS

On November 30, 1999, the Company sold assets of its diagnostics business
to Bayer including the assets of the Company's wholly-owned diagnostics
subsidiary, OSDI, based in Cambridge, Massachusetts. The assets sold include
certain contracts, equipment and machinery, files and records, intangible
assets, intellectual property, inventory, prepaid expenses and other assets
primarily related to the operations of the diagnostics business. In connection
with the sale, the Company and OSDI entered into certain agreements with Bayer
including an Assignment and Assumption of Lease with respect to the OSDI
facility located in Cambridge and certain patent assignment and license
agreements. Certain employees of the Company and OSDI entered into employment
agreements with Bayer. Under the terms of the agreement, the Company will
receive $9.2 million up-front from Bayer with additional contingent payments of
$1.25 million to be made to the Company by 2001. Bayer intends to retain all
employees of OSDI and will maintain the unit's headquarters in Cambridge. The
assets sold to Bayer include approximately $4.9 million of unamortized patent
costs and approximately $600,000 of fixed assets, net of depreciation and
amortization as of September 30, 1999.

The Company recorded a gain on the sale of approximately $3.7 million
during the nine months ended June 30, 2000. The net gain was calculated as
follows (in thousands):

<TABLE>
<S> <C>
Cash received from Bayer.................................... $ 9,151
Accrued expenses assumed by Bayer........................... 599
Net book value of fixed assets sold......................... (611)
Net book value of patent costs (intangibles)................ (4,748)
Professional and legal fees incurred........................ (172)
Commission costs paid....................................... (315)
Other related costs......................................... (158)
-------
Gain on sale of diagnostics business........................ $ 3,746
=======
</TABLE>

(17) NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standard Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" or SFAS 133 which
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000, as amended by SFAS 137 and 138. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. In
accordance with SFAS 133, an entity is required to recognize all derivatives as
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 requires that changes in the derivative's
fair value as recognized currently in earnings unless specific hedge accountings
are met. Special accounting for qualifying hedging allows a derivative's gain
and

F-31
<PAGE> 83
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES

losses to offset related results on the hedged item in the income statement and
requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. We do not believe
that the implementation of SFAS 133, as amended, will have a material effect on
our results of operations and financial position.

On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 -- "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaborations with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB No. 101 as amended
by SAB No. 101B, requires registrants to adopt the accounting guidance contained
therein by no later than the fourth fiscal quarter of the fiscal year beginning
after December 15, 1999 (fiscal year ending September 30, 2001 for the Company).
The Company is currently assessing the financial impact of complying with SAB
No. 101, particularly as it relates to the technology access fee from Tanabe
recognized in the first quarter of fiscal 2000. The Company will not
retroactively restate prior period financial statements but rather report the
effect, if any, of adopting the provisions of the SAB as a change in accounting
principle as of October 1, 2000 in accordance with APB Opinion No. 20.

(18) SUBSEQUENT EVENTS (UNAUDITED)

(a) Shareholders Rights Plan

On September 27, 2000, the Board of Directors adopted a new shareholder
rights plan, declared a dividend distribution of one Series SRPA Junior
Participating Preferred Stock Purchase Right on each outstanding share of its
common stock, and authorized the redemption of the rights issued pursuant to the
Company's existing shareholder rights plan. The Company will distribute new
rights to all shareholders of record at the close of business on September 27,
2000, the record date.

The Company can redeem the new rights at any time before (but not after) a
person has acquired 17.5% or more of the Company's common stock, with certain
exceptions. The rights will expire on August 31, 2010 if not redeemed prior to
such date.

The existing rights issued and outstanding at the close of business on the
record date will be redeemed with the redemption price of $0.001 per existing
right payable on October 4, 2000. The existing rights plan will be terminated
upon the redemption of the existing rights.

(b) Stock Option Grant

On August 17, 2000, the Board of Directors granted non-qualified options to
purchase up to 250,000 shares to the Company's new President and Head of
Research and Development. The terms of this grant provided for 100,000 options
with an exercise price equal to 50% of the fair market value on the grant date,
vesting immediately, upon his employment on September 28, 2000 and 150,000
options with an exercise price equal to the fair market value on the grant date,
vesting one-third in a year and monthly thereafter for twenty-four months. The
granting of the options at 50% of fair market value resulted in a compensation
charge of approximately $5 million. The granting of the other 150,000 options
resulted in deferred compensation of approximately $4 million which will be
recognized as compensation expense over the vesting period.

On August 17, 2000, one member of the Company's Board of Directors retired
as a director but will continue to provide consulting services to the Company.
In connection with his retirement, the Board of Directors declared the then
outstanding unvested options held by this director as immediately vested. This
modification to the previously unvested options resulted in a compensation
charge of approximately $1.6 million.

F-32
<PAGE> 84

[OSI PHARMACEUTICALS LOGO]
<PAGE> 85
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

FILED PURSUANT TO RULE 424(B)(4)
REGISTRATION NO. 333-47060
AND A RELATED RULE 462(B)
REGISTRATION STATEMENT NO. 333-49062

[OSI PHARMACEUTICALS LOGO]

5,350,000 SHARES

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

INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.

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

OSI Pharmaceuticals has granted the underwriters a 30-day option to
purchase up to an additional 802,500 shares of common stock to cover
over-allotments.
JOINT BOOKRUNNING MANAGERS

ROBERTSON STEPHENS INTERNATIONAL LEHMAN BROTHERS

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

PRUDENTIAL-BACHE INTERNATIONAL

LAZARD
ADAMS, HARKNESS & HILL, INC.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 2000
<PAGE> 86
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

UNDERWRITING

The underwriters named below, acting through their representatives,
Robertson Stephens International, Ltd., Lehman Brothers International (Europe),
Prudential-Bache International Limited, Lazard Capital Markets and Adams,
Harkness & Hill, Inc., have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth below opposite their respective names. The
underwriters are committed to purchase and pay for all shares if any are
purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Robertson Stephens, Inc. and Robertson Stephens
International, Ltd. ...................................... 1,641,250
Lehman Brothers Inc. and Lehman Brothers International
(Europe).................................................. 1,641,250
Prudential Securities Incorporated and Prudential-Bache
International Limited..................................... 1,010,000
Lazard Freres & Co. LLC and Lazard Capital Markets.......... 505,000
Adams, Harkness & Hill, Inc. ............................... 252,500
---------
William Blair & Company L.L.C. ............................. 100,000
Dain Rauscher Incorporated.................................. 100,000
Fidelity Capital Markets, a division of National Financial
Services LLC*............................................. 100,000
---------
Total............................................. 5,350,000
=========
</TABLE>

Over-Allotment Option

We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $615,000.

---------------
*Sales in the United States only.
45
<PAGE> 87
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

Indemnity

Lock-Up Agreements

Each of our executive officers and directors has agreed, during the period
of 90 days after the date of this prospectus, subject to specified exceptions,
not to offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to any shares of common stock or any
options or warrants to purchase any shares of common stock, or any securities
convertible into or exchangeable for shares of common stock, owned as of the
date of this prospectus or thereafter acquired directly by the officer or
director or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of Robertson Stephens
International, Ltd. on behalf of the underwriters. However, Robertson Stephens
International, Ltd. may, in its sole discretion and at any time or from time to
time, release all or any portion of the securities subject to the lock-up
agreements.

In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of Robertson Stephens International, Ltd. on
behalf of the underwriters, subject to specified exceptions, consent to the
disposition of any shares held by stockholders subject to lock-up agreements
prior to the expiration of the lock-up period or issue, sell, contract to sell,
or otherwise dispose of, any shares of common stock, any options or warrants to
purchase any shares of common stock or any securities convertible into,
exercisable for or exchangeable for shares of common stock other than the sale
of shares in this offering, the issuance of common stock upon the exercise of
outstanding options or warrants and the issuance of options under our existing
stock option and incentive plans, provided that those options do not vest prior
to the expiration of the lock-up period.

Stabilization

Passive Market Making