It is with great enthusiasm that we report to you our progress during 2004, without doubt the most remarkable year in the Company’s history to date. At the heart of a year of transformation was the successful demonstration that our flagship product Tarceva™ improved the survival of patients in large, randomized Phase III clinical trials for advanced lung and pancreatic cancers, widely recognized as amongst the toughest cancers to treat. The results from the lung cancer trial led to the filing of our first New Drug Application (NDA) at the end of July and the drug’s subsequent approval by the U.S. Food and Drug Administration (FDA) on November 18th – the fastest ever full approval by the FDA.

The Tarceva approval delivered on our long-standing commitment, to cancer patients and shareholders alike, that we would bring this innovative new medicine to market in a timely and comprehensive manner. The Tarceva success has also positioned our oncology organization at the very forefront of a paradigm-shifting change in the treatment of cancer patients – away from the aggressive and toxic chemotherapy agents that have been the mainstay of cancer treatment for decades and toward a new generation of more targeted agents many of which, like Tarceva, can be taken as a simple pill in the comfort of the patient’s home.

Even beyond the Tarceva approval, 2004 has been a productive year. Our newly established commercial organization in oncology earned $34.5 million in sales commission revenues for Novantrone®, some 15% more than our assumptions entering the year. We were also able to both trigger our co-promote rights with Genentech, Inc. (our U.S. partner for Tarceva) and participate actively in the successful launch of Tarceva.

Beyond oncology, the cornerstone of our growing business, we have quietly set about constructing a second disease area franchise in diabetes with the investment of over $90MM in our UK-based subsidiary, Prosidion. The acquisition of the dipeptidyl-peptidase inhibitor PSN9301, and its associated intellectual property estate, from the German company Probiodrug AG over the summer gave our diabetes franchise a high-quality Phase II clinical development asset in what is clearly seen as one of the most topical areas of research and development in diabetes today.

The decision in the spring to call the remaining $160 million of 4% convertible senior subordinated notes issued in 2002 followed by the recently completed $445MM secondary offering – the largest public equity offering in the global biotech industry since 2000 – has improved our balance sheet to such a degree that we are able to move forward with over $650MM in cash and investments as we enter 2005.

This year has indeed been a remarkable one for OSI. We have established ourselves amongst an elite group of biotech companies with proven capabilities from discovery through to commercialization. The Company is anchored by a strong financial foundation and is well positioned to capitalize on Tarceva, a solid oncology organization and an emerging diabetes franchise.

Tarceva – Delivering on Expectations
Last November’s commercial launch of our flagship product, Tarceva, marks the Company’s most significant milestone to date. Tarceva is a potent, selective and orally active inhibitor of HER1/EGFR, a receptor that is present, overexpressed or mutated in a wide variety of solid tumors including those of the lung, brain, liver, ovary, head and neck and pancreas. Tarceva was approved for use in the treatment of advanced non-small cell lung cancer (NSCLC) patients after failure of at least one prior chemotherapy regimen just three and a half months after OSI completed the filing of the NDA. We believe that the speed of the FDA’s response and the strength of the label we obtained are testaments to the compound itself, to the quality of the NDA assembled by the OSI development and regulatory teams (who took the lead role in this application on behalf of our partners, Genentech and Roche) and to the professionals within the FDA, who have committed themselves to respond proactively on review of drugs that address major unmet clinical needs. Tarceva was launched less than three business days after approval.

At the core of the Tarceva clinical success are two well-designed and
well-executed Phase III trials conducted by our colleagues at the National Cancer Institute of Canada’s Clinical Trial Group in collaboration with our own development group. Top-line results for the first of these two trials were announced in April and showed that the study met its primary endpoint of improving overall survival and its key secondary endpoints of progression-free survival and objective tumor response in a 731-patient, randomized, double-blind, placebo-controlled trial which compared single-agent Tarceva to placebo in the treatment of patients with advanced NSCLC following the failure of first- or second-line chemotherapy. This study formed the basis of our recently approved NDA. In September, we announced the results of a second Phase III study, this time in patients with locally advanced or metastatic pancreatic cancer who had received no prior drug therapy. The study, comparing Tarceva in combination with gemcitabine with chemotherapy alone, surprised many observers by demonstrating a 23.5% improvement in overall survival and meeting its primary endpoint. The positive outcome of this trial was great news for pancreatic cancer patients and their families. Tarceva is only the second agent ever to show the ability to improve survival in this challenging disease setting. We hope to file a supplemental NDA for Tarceva’s use for this indication in the first half of 2005. Indeed, Tarceva is the only agent in the EGFR class and the first non-traditional chemotherapy agent to demonstrate an improvement in survival in either advanced NSCLC or pancreatic cancer.

Meanwhile, the recent failure of a competitor’s molecule to match Tarceva’s demonstrated ability to improve survival in NSCLC has further served to emphasize our long-held belief that Tarceva is a unique agent well positioned to emerge as the best-in-class EGFR inhibitor. It is now up to our tripartite alliance to continue to draw out the full potential of the product. Key components of this effort in 2005 will be the launching of the product in territories outside of the U.S. and the expansion of an ongoing development program for Tarceva. We are pleased that Roche, our partner for Tarceva outside of the United States, has made significant progress on the European front. Roche completed the submission of its filing to the European health authorities last August, and we anticipate a launch for Tarceva in major European markets during the second half of 2005.

Together with our partners, Genentech and Roche, we will pursue a comprehensive development program designed to demonstrate the effectiveness of Tarceva in earlier-stage lung cancer patients (in both front-line and adjuvant disease settings), broaden utility of Tarceva to additional disease settings (with the results in pancreatic cancer paving the way), and continue to explore paradigm-shifting combinations of all targeted therapies, such as Tarceva and Avastin®, for which we recently presented very intriguing preliminary data in lung and renal cell cancers.

Establishing a Premier Oncology Franchise
In March of 2003, we entered into an agreement with Serono S.A. to market and promote Novantrone for oncology use in the United States. This was a largely strategic move designed to allow the Company to transition itself into a commercial organization in preparation for the launch of Tarceva. Today we have an 80-person-plus core commercial organization including sales, marketing, medical affairs, and commercial planning functions. Notwithstanding the success of the commercial group in generating oncology sales for Novantrone that have exceeded our expectations, our foresight in building the group has allowed us to play an active role in launching Tarceva and positions us as a potential partner-of-choice for prospective alliances in the oncology arena as we move forward.

Our research and development efforts are increasingly focused on the development of next-generation targeted therapies designed to supplement and complement a portfolio built around Tarceva. OSI-930, a molecule designed as a co-inhibitor of the c-kit and VEGFR tyrosine kinase receptors, is scheduled to begin clinical trials in the first quarter of 2005 and OSI-817, a second development candidate to arise from this program, is en route to begin clinical development toward the end of the year. We were disappointed, but not surprised, to report in June that Aptosyn®, an inducer of apoptosis (or programmed cell death) that we acquired with the SAANDs technology platform from Cell Pathways in 2003, did not meet its primary endpoint of improving overall survival when used in combination with Taxotere® in patients with advanced NSCLC. We continue to evaluate OSI-461, a more potent analog of Aptosyn, and we continue to believe that apoptosis is an important area of investigation in cancer research today. In fact, we have expanded our efforts in this area beyond the SAANDs technology platform. Our research programs have also established a network of alliances with outstanding research institutions (such as Cold Spring Harbor Laboratory, where we are using siRNA technology to identify and validate novel targets for cancer drug discovery) and other biotechnology companies (such as Structural Genomix, where we are employing crystallography techniques in structure-based design approaches to drug discovery).

Although we believe that the future of our oncology franchise, and of cancer treatment in general, will focus on these targeted therapies, chemotherapeutic agents continue to be an important part of cancer treatment today. In this respect, we are continuing the development of our differentiated cytotoxic drug candidate, OSI-7904L. This candidate is a liposomal formulation of a thymidylate synthase inhibitor and is designed to compete with the most prominent agent in this class, 5-fluorouracil (5-FU). Our goal is to mimic with a single, short-term infusion of our liposomal agent, the sustained exposure achieved with long-term infusions of 5-FU. OSI-7904L is being evaluated in a development program that includes Phase II trials in gastric and biliary tract cancers and early combination studies with cisplatin and oxaliplatin.