Exhibit 99.2

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
Page
----

Independent Auditors' Report................................ F-2
Report of Independent Public Accountants.................... F-3
Consolidated Balance Sheets as of December 31, 2002 and
2001...................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 and for the period from
inception (August 10, 1990) to December 31, 2002.......... F-5
Consolidated Statement of Stockholders' Equity (Deficit) and
Partners' Investment for the period from inception (August
10, 1990) to December 31, 2002............................ F-6 to F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 and for the period from
inception (August 10, 1990) to December 31, 2002.......... F-13
Notes to Consolidated Financial Statements.................. F-14 to F-29
</Table>

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Cell Pathways, Inc.:

We have audited the accompanying consolidated balance sheet of Cell
Pathways, Inc. (a development stage company) and subsidiaries as of December 31,
2002, and the related consolidated statements of operations, stockholders'
equity (deficit) and partners' investment and cash flows for the year then
ended, and for the period from August 10, 1990 (inception) through December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of Cell
Pathways, Inc. and subsidiaries as of December 31, 2001 and for each of the
years in the two-year period ended December 31, 2001 and for the period from
August 10, 1990 (inception) through December 31, 2002, to the extent related to
the period from August 10, 1990 (inception) through December 31, 2001, were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements in their report dated
February 25, 2002. Our opinion on the consolidated statements of operations,
stockholders' equity (deficit) and partners' investment and cash flows, insofar
as it relates to the amounts included for the period from August 10, 1990
(inception) through December 31, 2001, is based solely on the report of the
other auditors.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, based on our audit and the report of other auditors, the
2002 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cell Pathways, Inc. (a development
stage company) and subsidiaries as of December 31, 2002, and the results of
their operations and their cash flows for the year then ended, and for the
period from August 10, 1990 (inception) through December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations, has an accumulated deficit and has limited liquid
resources that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ KPMG LLP

Philadelphia, Pennsylvania
February 14, 2003

F-2

THE FOLLOWING IS A COPY OF A REPORT ISSUED BY ARTHUR ANDERSEN LLP AND INCLUDED
IN THE 2001 FORM 10-K REPORT FILED ON MARCH 22, 2002. THIS REPORT HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP, AND ARTHUR ANDERSEN LLP HAS NOT CONSENTED TO
ITS USE IN THIS FORM 8-K OF OSI PHARMACEUTICALS, INC.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders
Cell Pathways, Inc.:

We have audited the accompanying consolidated balance sheets of Cell
Pathways, Inc. (a Delaware corporation in the development stage) and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity (deficit) and partners'
investment, and cash flows for each of the three years in the period ended
December 31, 2001 and for the period from inception (August 10, 1990) to
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cell Pathways, Inc. and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 and for the period from inception (August 10, 1990) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

/s/ ARTHUR ANDERSEN LLP

Philadelphia, Pennsylvania
February 25, 2002

F-3

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
DECEMBER 31,
-----------------------------
2002 2001
------------- -------------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,920,335 $ 2,905,767
Short-term investments.................................... -- 24,808,148
Accounts receivable....................................... 472,012 318,450
Inventory................................................. 2,140,615 --
Prepaid expenses and other................................ 792,610 1,130,971
Due from insurance company (Note 14)...................... -- 2,000,000
------------- -------------
Total current assets................................... 14,325,572 31,163,336
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net........ 785,766 992,856
RESTRICTED CASH............................................. 468,233 463,499
NOTES RECEIVABLE FROM OFFICERS.............................. 938,972 944,397
PRODUCT DISTRIBUTION RIGHTS................................. 908,333 --
OTHER ASSETS................................................ 42,808 57,400
------------- -------------
$ 17,469,684 $ 33,621,488
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of note payable........................... $ 180,330 $ 277,473
Current installments of obligation under capital lease.... 57,086 40,493
Accounts payable.......................................... 718,023 847,552
Accrued compensation...................................... 198,842 764,843
Other accrued liabilities................................. 3,082,995 3,272,314
Deferred revenue.......................................... 1,492,346 --
Accrued litigation settlement and expense................. -- 2,642,822
------------- -------------
Total current liabilities.............................. 5,729,622 7,845,497
------------- -------------
NOTE PAYABLE................................................ -- 180,330
------------- -------------
OBLIGATION UNDER CAPITAL LEASE.............................. 36,668 62,020
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding................... -- --
Common Stock $.01 par value, 150,000,000 shares authorized;
39,363,698 and 31,148,255 shares issued and outstanding... 393,637 311,482
Additional paid-in capital.................................. 152,524,388 148,631,231
Stock subscription receivable from issuance of Common
Stock..................................................... -- (50,683)
Deferred compensation....................................... (58,672) (73,652)
Deficit accumulated during the development stage............ (141,155,959) (123,284,737)
------------- -------------
Total stockholders' equity............................. 11,703,394 25,533,641
------------- -------------
$ 17,469,684 $ 33,621,488
============= =============
</Table>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
PERIOD FROM
YEAR ENDED DECEMBER 31, INCEPTION
------------------------------------------ (AUGUST 10, 1990) TO
2002 2001 2000 DECEMBER 31, 2002
------------ ------------ ------------ --------------------

REVENUES:
Product sales................... $ 536,873 $ -- $ -- $ 536,873
Marketing services.............. 611,264 942,231 329,694 1,883,189
------------ ------------ ------------ -------------
1,148,137 942,231 329,694 2,420,062
------------ ------------ ------------ -------------
EXPENSES:
Cost of products sold........... 219,706 -- -- 219,706
Research and development........ 17,145,109 17,765,243 22,257,805 110,551,345
Selling, general and
administrative............... 8,704,381 7,756,128 7,246,582 38,382,298
Litigation settlement and
expense (Note 14)............ (6,749,000) 8,492,000 -- 1,743,000
------------ ------------ ------------ -------------
19,320,196 34,013,371 29,504,387 150,896,349
------------ ------------ ------------ -------------
Operating loss............... (18,172,059) (33,071,140) (29,174,693) (148,476,287)
INTEREST INCOME, net.............. 300,837 1,666,705 2,257,885 7,320,328
------------ ------------ ------------ -------------
NET LOSS.......................... $(17,871,222) $(31,404,435) $(26,916,808) $(141,115,959)
============ ============ ============ =============
Basic and diluted net loss per
Common share.................... $ (0.51) $ (1.01) $ (0.96)
============ ============ ============
Shares used in computing basic and
diluted net loss per Common
share........................... 34,712,101 31,108,939 28,003,649
============ ============ ============
</Table>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>

REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
PARTNERS' --------------------- ---------------------------- ------------------------
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ------------- ------------ ---------- -----------

BALANCE, Inception (August 10,
1990)......................... $ -- -- $ -- -- $ -- -- $ --
Partner cash contributions in
September 1990 for Class A
Partnership Units........... 406,000 -- -- -- -- -- --
Partner contribution of
interest in research grant
in September 1990 for Class
A Partnership Units, at
historical cost............. 48,638 -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1990..... 454,638 -- -- -- -- -- --
Partner cash contributions in
March 1991 for Class A
Partnership Units........... 406,000 -- -- -- -- -- --
Partner cash contributions in
December 1991 for Class B
Partnership Units........... 896,563 -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1991..... 1,757,201 -- -- -- -- -- --
Partner cash contributions in
January and April 1992 for
Class B Partnership Units... 21,812 -- -- -- -- -- --
Partner cash contributions in
December 1992 for Class B
Partnership Units........... 133,300 -- -- -- -- -- --
Partner cash contributions in
December 1992 for Class C
Partnership Units........... 1,540,000 -- -- -- -- -- --
Partner cash contributions in
December 1992 for Class D
Partnership Units........... 1,475,027 -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1992..... 4,927,340 -- -- -- -- -- --
Partner cash contributions in
January 1993 to March 1993
for Class D Partnership
Units....................... 385,015 -- -- -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 872,000 shares of
Series A
Convertible Preferred Stock... $ (812,000) -- $ -- 872,400 $ 812,000 -- $ --

<Caption>
STOCK
STOCK SUBSCRIPTION
SUBSCRIPTION RECEIVABLE DEFICIT
RECEIVABLE FROM ACCUMULATED
ADDITIONAL FROM ISSUANCE ISSUANCE OF DURING THE
PAID-IN OF CONVERTIBLE COMMON DEFERRED DEVELOPMENT
CAPITAL PREFERRED STOCK STOCK COMPENSATION STAGE
------------ --------------- ------------ ------------ -------------

BALANCE, Inception (August 10,
1990)......................... $ -- $ -- $ -- $ -- $ --
Partner cash contributions in
September 1990 for Class A
Partnership Units........... -- -- -- -- --
Partner contribution of
interest in research grant
in September 1990 for Class
A Partnership Units, at
historical cost............. -- -- -- -- --
Net loss...................... -- -- -- -- (252,116)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1990..... -- -- -- -- (252,116)
Partner cash contributions in
March 1991 for Class A
Partnership Units........... -- -- -- -- --
Partner cash contributions in
December 1991 for Class B
Partnership Units........... -- -- -- -- --
Net loss...................... -- -- -- -- (738,204)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1991..... -- -- -- -- (990,320)
Partner cash contributions in
January and April 1992 for
Class B Partnership Units... -- -- -- -- --
Partner cash contributions in
December 1992 for Class B
Partnership Units........... -- -- -- -- --
Partner cash contributions in
December 1992 for Class C
Partnership Units........... -- -- -- -- --
Partner cash contributions in
December 1992 for Class D
Partnership Units........... -- -- -- -- --
Net loss...................... -- -- -- -- (1,391,531)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1992..... -- -- -- -- (2,381,851)
Partner cash contributions in
January 1993 to March 1993
for Class D Partnership
Units....................... -- -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 872,000 shares of
Series A
Convertible Preferred Stock... $ -- $ -- $ -- $ -- $ --
</Table>

(continued)

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

F-6

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>

Exchange of interests in the
Partnership in September 1993
for 848,100 shares of Series B
Convertible Preferred Stock... $ (868,000) -- $ -- 848,100 $ 868,000 -- $ --
Exchange of interests in the
Partnership in September
1993 for 700,000 shares of
Series C Convertible
Preferred Stock............. (1,540,000) -- -- 700,000 1,540,000 -- --
Exchange of interests in the
Partnership in September
1993 for 616,808 shares of
Series D Convertible
Preferred Stock............. (1,860,042) -- -- 616,808 1,860,042 -- --
Exchange of interests in the
Partnership in September
1993 for 61,250 shares of
Redeemable Preferred Stock.. (613) 61,250 613 -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 2,279,500 shares of
Common Stock................ (231,700) -- -- -- -- 2,279,500 22,795
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1993..... -- 61,250 613 3,037,308 5,080,042 2,279,500 22,795
Issuance of Common Stock for
services valued at $0.41 per
share....................... -- -- -- -- -- 16,667 167
Issuance of 542,761 shares of
Series E
Convertible Preferred Stock
for cash at $4.10 per
share....................... -- -- -- 542,761 2,225,320 -- --
Net loss...................... $ -- $ -- -- $ -- -- $ --
----------- ------- ----------- ------------- ------------ ---------- -----------

Exchange of interests in the
Partnership in September 1993
for 848,100 shares of Series B
Convertible Preferred Stock... $ -- $ -- $ -- $ -- $ --
Exchange of interests in the
Partnership in September
1993 for 700,000 shares of
Series C Convertible
Preferred Stock............. -- -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 616,808 shares of
Series D Convertible
Preferred Stock............. -- -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 61,250 shares of
Redeemable Preferred Stock.. -- -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 2,279,500 shares of
Common Stock................ 208,905 -- -- -- --
Net loss...................... -- -- -- -- (2,269,099)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1993..... 208,905 -- -- -- (4,650,950)
Issuance of Common Stock for
services valued at $0.41 per
share....................... 6,667 -- -- -- --
Issuance of 542,761 shares of
Series E
Convertible Preferred Stock
for cash at $4.10 per
share....................... -- (23,501) -- -- --
Net loss...................... $ -- $ -- $ -- $ -- $ (3,110,446)
------------ ----------- -------- -------- -------------
</Table>

(continued)

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

F-7

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>

BALANCE, December 31, 1994..... $ -- 61,250 $ 613 3,580,069 $ 7,305,362 2,296,167 $ 22,962
Issuance of 1,121,800 shares
of Series E
Convertible Preferred Stock
for cash at $3.15 per
share....................... -- -- -- 1,121,800 3,533,670 -- --
Issuance of 163,701 shares of
Series E
Convertible Preferred Stock to
effect the price change from
$4.10 to $3.15.............. -- -- -- 163,701 -- -- --
Conversion of bridge notes
payable plus interest to
253,633 shares of Series E
Convertible Preferred Stock at
a price of $3.15 per
share....................... -- -- -- 253,633 800,199 -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1995..... -- 61,250 613 5,119,203 11,639,231 2,296,167 22,962
Issuance of 887,661 shares of
Series E
Convertible Preferred Stock
for cash at $3.15 per share,
net of offering costs of
$298,313.................... -- -- -- 887,661 2,497,819 -- --
Collection of Series E
Convertible Preferred Stock
subscription receivable..... -- -- -- -- -- -- --
Issuance of 270,270 shares of
Series F
Convertible Preferred Stock
for cash at $3.70 per
share....................... -- -- -- 270,270 1,000,000 -- --
Issuance of 185,000 shares of
Common Stock in February
1996 as bonuses to officers
and employees valued at
$0.32 per share............. -- -- -- -- -- 185,000 1,850
Issuance of 14,828 shares of
Common Stock in May 1996 for
consulting services, valued
at $0.32 per share.......... -- -- -- -- -- 14,828 148
Exercise of warrants to
purchase 148 shares of
Series E Convertible
Preferred Stock at $3.15 per
share....................... $ -- -- $ -- 148 $ 466 -- $ --

BALANCE, December 31, 1994..... $ 215,572 $ (23,501) $ -- $ -- $ (7,761,396)
Issuance of 1,121,800 shares
of Series E
Convertible Preferred Stock
for cash at $3.15 per
share....................... -- (125) -- -- --
Issuance of 163,701 shares of
Series E
Convertible Preferred Stock to
effect the price change from
$4.10 to $3.15.............. -- -- -- -- --
Conversion of bridge notes
payable plus interest to
253,633 shares of Series E
Convertible Preferred Stock at
a price of $3.15 per
share....................... -- -- -- -- --
Net loss...................... -- -- -- -- (3,190,824)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1995..... 215,572 (23,626) -- -- (10,952,220)
Issuance of 887,661 shares of
Series E
Convertible Preferred Stock
for cash at $3.15 per share,
net of offering costs of
$298,313.................... -- -- -- -- --
Collection of Series E
Convertible Preferred Stock
subscription receivable..... -- 20,505 -- -- --
Issuance of 270,270 shares of
Series F
Convertible Preferred Stock
for cash at $3.70 per
share....................... -- -- -- -- --
Issuance of 185,000 shares of
Common Stock in February
1996 as bonuses to officers
and employees valued at
$0.32 per share............. 57,350 -- -- -- --
Issuance of 14,828 shares of
Common Stock in May 1996 for
consulting services, valued
at $0.32 per share.......... 4,596 -- -- -- --
Exercise of warrants to
purchase 148 shares of
Series E Convertible
Preferred Stock at $3.15 per
share....................... $ -- $ -- $ -- $ -- $ --
</Table>

(continued)

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

F-8

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>

Exercise of options to
purchase Common Stock at
$0.32 per share............. $ -- -- $ -- -- $ -- 222,850 $ 2,229
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1996..... -- 61,250 613 6,277,282 15,137,516 2,718,845 27,189
Issuance of 4,538,675 shares
of Series F Convertible
Preferred Stock for cash at
$3.70 per share, net of
offering costs of
$249,239.................... -- -- -- 4,538,675 16,547,859 -- --
Exercise of warrants to
purchase 149,462 shares of
Series E Convertible
Preferred stock at $3.15 per
share....................... -- -- -- 149,462 470,805 -- --
Exercise of warrants to
purchase 492 shares of
Series F Convertible
Preferred stock at $3.70 per
share....................... -- -- -- 492 1,820 -- --
Cashless exercise of warrants
to purchase 2,476 shares of
Series E Convertible
Preferred Stock............. -- -- -- 2,476 -- -- --
Exercise of options by
employees and directors at
$0.32 -- $0.50 per share.... -- -- -- -- -- 251,250 2,512
Issuance of Common Stock to
director at $3.70 per
share....................... -- -- -- -- -- 10,000 100
Issuance of Common Stock to
consultant at $3.70 per
share....................... -- -- -- -- -- 10,000 100
Collection of stock
subscription receivable..... -- -- -- -- -- -- --
Provision for redemption of
Redeemable Preferred Stock.. -- -- 1,091,387 -- -- -- --
Net loss...................... $ -- -- $ -- -- $ -- -- $ --
----------- ------- ----------- ------------- ------------ ---------- -----------

Exercise of options to
purchase Common Stock at
$0.32 per share............. $ 69,084 $ -- $ -- $ -- $ --
Net loss...................... -- -- -- -- (4,735,204)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1996..... 346,602 (3,121) -- -- (15,687,424)
Issuance of 4,538,675 shares
of Series F Convertible
Preferred Stock for cash at
$3.70 per share, net of
offering costs of
$249,239.................... -- -- -- -- --
Exercise of warrants to
purchase 149,462 shares of
Series E Convertible
Preferred stock at $3.15 per
share....................... -- -- -- -- --
Exercise of warrants to
purchase 492 shares of
Series F Convertible
Preferred stock at $3.70 per
share....................... -- -- -- -- --
Cashless exercise of warrants
to purchase 2,476 shares of
Series E Convertible
Preferred Stock............. -- -- -- -- --
Exercise of options by
employees and directors at
$0.32 -- $0.50 per share.... 109,462 -- -- -- --
Issuance of Common Stock to
director at $3.70 per
share....................... 36,900 -- (37,000) -- --
Issuance of Common Stock to
consultant at $3.70 per
share....................... 36,900 -- -- -- --
Collection of stock
subscription receivable..... -- 3,121 -- -- --
Provision for redemption of
Redeemable Preferred Stock.. (74,000) -- -- -- --
Net loss...................... $ -- $ -- $ -- $ -- $ (10,296,912)
------------ ----------- -------- -------- -------------
</Table>

(continued)

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

F-9

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>

BALANCE, December 31, 1997..... $ -- 61,250 $ 1,092,000 10,968,387 $ 32,158,000 2,990,095 $ 29,901
Issuance of 4,645,879 shares
of Series G Convertible
Preferred Stock at $4.75 per
Share, net of offering costs
of $663,921................. -- -- -- 4,645,879 21,404,004 -- --
Exercise of warrants to
purchase 65,076 shares of
Series E Convertible
Preferred Stock at $3.15 per
share....................... -- -- -- 65,076 204,987 -- --
Exercise of options by
employees at $0.32 -- $8.09
per share................... -- -- -- -- -- 65,500 655
Redemption of Redeemable
Preferred Stock for $546,051
and 33,052 shares of Common
Stock....................... -- (61,250) (1,092,000) -- -- 33,052 331
Conversion of Preferred Stock
to Common Stock triggered by
the transaction with Tseng
Labs, Inc. ................. -- -- -- (15,679,342) (53,766,991) 15,679,342 156,793
Issuance of Common Stock in
exchange for the Common
Stock of Tseng Labs, Inc.,
net of transaction costs of
$1,907,354.................. -- -- -- -- -- 5,510,772 55,108
Exercise of Series F warrants
to purchase 150 shares of
Common Stock at $3.70 per
share....................... -- -- -- -- -- 150 2
Exercise of Series G warrants
to purchase 615 shares of
Common Stock at $4.75 per
share....................... -- -- -- -- -- 615 6
Non-employee stock option
expense..................... -- -- -- -- -- -- --
Net loss...................... $ -- -- $ -- -- $ -- -- $ --
----------- ------- ----------- ------------- ------------ ---------- -----------

BALANCE, December 31, 1997..... $ 455,864 $ -- $(37,000) $ -- $ (25,984,336)
Issuance of 4,645,879 shares
of Series G Convertible
Preferred Stock at $4.75 per
Share, net of offering costs
of $663,921................. -- -- -- -- --
Exercise of warrants to
purchase 65,076 shares of
Series E Convertible
Preferred Stock at $3.15 per
share....................... -- -- -- -- --
Exercise of options by
employees at $0.32 -- $8.09
per share................... 262,739 -- -- -- --
Redemption of Redeemable
Preferred Stock for $546,051
and 33,052 shares of Common
Stock....................... 545,618 -- -- -- --
Conversion of Preferred Stock
to Common Stock triggered by
the transaction with Tseng
Labs, Inc. ................. 53,610,198 -- -- -- --
Issuance of Common Stock in
exchange for the Common
Stock of Tseng Labs, Inc.,
net of transaction costs of
$1,907,354.................. 26,364,894 -- -- -- --
Exercise of Series F warrants
to purchase 150 shares of
Common Stock at $3.70 per
share....................... 553 -- -- -- --
Exercise of Series G warrants
to purchase 615 shares of
Common Stock at $4.75 per
share....................... 2,915 -- -- -- --
Non-employee stock option
expense..................... 13,313 -- -- -- --
Net loss...................... $ -- $ -- $ -- $ -- $ (19,345,436)
------------ ----------- -------- -------- -------------
</Table>

(continued)

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

F-10

CELL PATHWAYS, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>

BALANCE, December 31, 1998..... $ -- -- $ -- -- $ -- 24,279,526 $ 242,796
Exercise of options by
employees at
$0.32 -- $8.09.............. -- -- -- -- -- 48,061 481
Exercise of Series F warrants
to purchase 125,201 shares
of Common Stock at $3.70 per
share....................... -- -- -- -- -- 125,201 1,252
Exercise of Series G warrants
to purchase 79,378 shares of
Common Stock at $4.75 per
share....................... -- -- -- -- -- 79,378 793
Issuance of 1,555,000 shares
of Common Stock at $9.00 per
share, net of offering costs
of $415,855................. -- -- -- -- -- 1,555,000 15,550
Issuance of 18,728 shares of
Common Stock at $6.32 --
$9.67 under the Employee
Stock Purchase Plan......... -- -- -- -- -- 18,728 187
Non-employee stock option
expense..................... -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1999..... -- -- -- -- 26,105,894 261,059
Exercise of options by
employees at
$0.32 -- $24.10............. -- -- -- -- -- 324,202 3,242
Exercise of Common Stock
warrants to purchase
1,270,000 shares of Common
Stock at $6.60 and $14.00
per share................... -- -- -- -- -- 1,270,000 12,700
Exercise of Series G warrants
to purchase 147,800 shares
of Common Stock at $4.75 per
share....................... -- -- -- -- -- 147,800 1,478
Issuance of 3,200,000 shares
of Common Stock at $7.375
per share, net of offering
costs of $478,896........... -- -- -- -- -- 3,200,000 32,000
Issuance of 25,561 shares of
Common Stock at $7.92, $9.66
and $22.10 under the
Employee Stock Purchase
Plan........................ -- -- -- -- -- 25,561 255
Non-employee stock option
expense..................... -- -- -- -- -- -- --
Net loss...................... $ -- -- $ -- -- $ -- -- $ --
----------- ------- ----------- ------------- ------------ ---------- -----------

BALANCE, December 31, 1998..... $ 81,256,094 $ -- $(37,000) $ -- $ (45,329,772)
Exercise of options by
employees at
$0.32 -- $8.09.............. 276,260 -- -- -- --
Exercise of Series F warrants
to purchase 125,201 shares
of Common Stock at $3.70 per
share....................... 461,992 -- -- -- --
Exercise of Series G warrants
to purchase 79,378 shares of
Common Stock at $4.75 per
share....................... 376,252 -- -- -- --
Issuance of 1,555,000 shares
of Common Stock at $9.00 per
share, net of offering costs
of $415,855................. 13,563,595 -- -- -- --
Issuance of 18,728 shares of
Common Stock at $6.32 --
$9.67 under the Employee
Stock Purchase Plan......... 170,933 -- -- -- --
Non-employee stock option
expense..................... 97,051 -- -- -- --
Net loss...................... -- -- -- -- (19,633,722)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1999..... 96,202,177 -- (37,000) -- (64,963,494)
Exercise of options by
employees at
$0.32 -- $24.10............. 2,013,365 -- -- -- --
Exercise of Common Stock
warrants to purchase
1,270,000 shares of Common
Stock at $6.60 and $14.00
per share................... 17,730,300 -- -- -- --
Exercise of Series G warrants
to purchase 147,800 shares
of Common Stock at $4.75 per
share....................... 700,573 -- -- -- --
Issuance of 3,200,000 shares
of Common Stock at $7.375
per share, net of offering
costs of $478,896........... 23,089,104 -- -- -- --
Issuance of 25,561 shares of
Common Stock at $7.92, $9.66
and $22.10 under the
Employee Stock Purchase
Plan........................ 346,396 -- -- -- --
Non-employee stock option
expense..................... 153,563 -- -- -- --
Net loss...................... $ -- $ -- $ -- $ -- $ (26,916,808)
------------ ----------- -------- -------- -------------
</Table>

(continued)

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

F-11

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>

BALANCE, December 31, 2000..... $ -- -- $ -- -- $ -- 31,073,457 $ 310,734
Exercise of options by
employees and a director at
$0.32 -- $4.75.............. -- -- -- -- -- 31,979 320
Restricted stock award to
officer..................... -- -- -- -- -- 10,000 100
Amortization of deferred
compensation................ -- -- -- -- -- -- --
Issuance of 32,819 shares of
Common Stock at $5.19 and
$5.95 under the Employee
Stock Purchase Plan......... -- -- -- -- -- 32,819 328
Interest on promissory note
from director............... -- -- -- -- -- -- --
Non-employee stock option
expense..................... -- -- -- -- -- -- --
Settlement of litigation
through agreement to Issue
Common Stock (Note 14)...... -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 2001..... -- -- -- -- -- 31,148,255 311,482
Issuance of 89,335 shares of
Common Stock at $4.20 and
$.80 under the Employee
Stock Purchase Plan......... -- -- -- -- -- 89,335 893
Issuance of 2,390,107 shares
of Common Stock at $3.70 per
share, net of offering costs
of $840,436................. -- -- -- -- -- 2,390,107 23,901
Issuance of 4,036,001 shares
of Common Stock at $.70 per
share, net of offering costs
of $265,806................. -- -- -- -- -- 4,036,001 40,361
Amortization of deferred
compensation................ -- -- -- -- -- -- --
Non-employee stock option
expense..................... -- -- -- -- -- -- --
Issuance of warrant to
purchase 100,000 shares of
Common Stock to
consultants................. -- -- -- -- -- -- --
Payment by director of
promissory note............. -- -- -- -- -- -- --
Issuance of 1,700,000 shares
of Common Stock for
litigation settlement (Note
14)......................... -- -- -- -- -- 1,700,000 17,000
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 2002.... $ -- -- $ -- -- $ -- 39,363,698 $ 393,637
=========== ======= =========== ============= ============ ========== ===========

BALANCE, December 31, 2000..... $140,235,478 $ -- $(37,000) $ -- $ (91,880,302)
Exercise of options by
employees and a director at
$0.32 -- $4.75.............. 106,343 -- -- -- --
Restricted stock award to
officer..................... 74,800 -- -- (74,900) --
Amortization of deferred
compensation................ -- -- -- 1,248 --
Issuance of 32,819 shares of
Common Stock at $5.19 and
$5.95 under the Employee
Stock Purchase Plan......... 167,211 -- -- -- --
Interest on promissory note
from director............... -- -- (13,683) -- --
Non-employee stock option
expense..................... 210,399 -- -- -- --
Settlement of litigation
through agreement to Issue
Common Stock (Note 14)...... 7,837,000 -- -- -- --
Net loss...................... -- -- -- -- (31,404,435)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 2001..... 148,631,231 -- (50,683) (73,652) (123,284,737)
Issuance of 89,335 shares of
Common Stock at $4.20 and
$.80 under the Employee
Stock Purchase Plan......... 144,997 -- -- -- --
Issuance of 2,390,107 shares
of Common Stock at $3.70 per
share, net of offering costs
of $840,436................. 7,979,059 -- -- -- --
Issuance of 4,036,001 shares
of Common Stock at $.70 per
share, net of offering costs
of $265,806................. 2,519,034 -- -- -- --
Amortization of deferred
compensation................ -- -- -- 14,980 --
Non-employee stock option
expense..................... (52,552) -- -- -- --
Issuance of warrant to
purchase 100,000 shares of
Common Stock to
consultants................. 68,619 -- -- -- --
Payment by director of
promissory note............. -- -- 50,683 -- --
Issuance of 1,700,000 shares
of Common Stock for
litigation settlement (Note
14)......................... (6,766,000) -- -- -- --
Net loss...................... -- -- -- -- (17,871,222)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 2002.... $152,524,388 $ -- $ -- $(58,672) $(141,155,959)
============ =========== ======== ======== =============
</Table>

The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.

F-12

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

OPERATING ACTIVITIES:
Net loss............................................ $(17,871,222) $(31,404,435) $(26,916,808) $(141,155,959)
Adjustments to reconcile net loss to net cash used in
operating activities-
Settlement of litigation through agreement to issue
Common Stock (Note 14)............................ (6,749,000) 7,837,000 -- 1,088,000
Depreciation expense and amortization............... 574,863 533,148 826,138 2,854,715
Loss on disposal of assets.......................... 503 19,152 -- 19,655
Interest income on notes receivable from officers,
net............................................... (55,317) (46,141) (9,302) (110,760)
Interest on promissory note from director........... (284) (13,683) -- (13,967)
Amortization of deferred compensation............... 14,980 1,248 -- 16,228
Issuance of Common Stock for services rendered...... -- -- -- 48,578
Issuance of Common Stock options and warrants for
services rendered................................. 16,067 210,399 153,563 490,393
Provision for redemption of Redeemable Preferred
Stock............................................. -- -- -- 1,017,387
Write-off of deferred offering costs................ -- -- -- 469,515
(Increase) decrease in accounts receivable.......... (153,562) 11,244 (329,694) (472,012)
Other............................................... -- -- -- 68,399
(Increase) decrease in prepaid and other current
assets............................................ 338,361 197,564 (453,102) (473,984)
(Increase) decrease in due from insurance company... 2,000,000 (2,000,000) -- --
(Increase) decrease in other assets................. 15,073 335,798 (162,543) 108,440
Increase in inventory............................... (2,140,615) -- -- (2,140,615)
Increase in deferred revenue........................ 1,492,346 -- -- 1,492,346
Increase in reserve for notes receivable from
officer........................................... 114,742 -- -- 114,742
Increase (decrease) in accounts payable and accrued
liabilities....................................... (884,849) 169,959 1,078,698 1,378,869
Increase (decrease) in accrued litigation
settlement........................................ (2,642,822) 2,642,822 -- --
------------ ------------ ------------ -------------
Net cash flows used in operating activities....... (25,930,736) (21,505,925) (25,813,050) (135,200,030)
------------ ------------ ------------ -------------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements.... (231,877) (236,188) (489,770) (5,876,205)
Purchase of marketing and distribution rights....... (1,000,000) -- -- (1,000,000)
Sale of leasehold improvements...................... -- -- -- 3,000,000
Increase in notes receivable from officers.......... (54,000) (256,000) (632,954) (942,954)
Cash paid for deposits.............................. -- -- -- (50,767)
(Purchase) sale of short-term investments........... 24,808,148 (24,808,148) -- --
------------ ------------ ------------ -------------
Net cash flows provided by (used in) investing
activities...................................... 23,522,271 (25,300,336) (1,122,724) (4,869,926)
------------ ------------ ------------ -------------
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net of
related offering costs............................ 10,562,355 -- 23,121,104 47,262,604
Proceeds from issuance of Common Stock under the
employee stock purchase plan...................... 145,891 167,539 346,651 831,202
Proceeds from issuance of Convertible Preferred
Stock, net of related offering costs.............. -- -- -- 47,185,046
Proceeds from the transaction with Tseng Labs,
Inc............................................... -- -- -- 27,966,372
Proceeds from exercise of Series E, F, G and Common
Stock warrants to purchase stock.................. -- -- 18,445,051 19,966,894
Decrease in stockholder receivable.................. 50,967 -- -- 74,593
Cash received for Common Stock options exercised.... -- 106,663 2,016,607 2,846,691
Redemption of Redeemable Preferred Stock............ -- -- -- (546,051)
Proceeds from bridge loan........................... -- -- -- 791,000
Partner cash contributions.......................... -- -- -- 5,312,355
(Increase) decrease in restricted cash.............. (4,734) 212,717 (36,106) (468,233)
Principal payments under capital lease
obligations....................................... (53,973) (61,386) (141,959) (412,512)
Proceeds from borrowings............................ -- -- 800,000 950,000
Repayment of borrowings............................. (277,473) (241,912) (100,285) (769,670)
------------ ------------ ------------ -------------
Net cash flows provided by financing activities... 10,423,033 183,621 44,451,063 150,990,291
------------ ------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents......................................... 8,014,568 (46,622,640) 17,515,289 10,920,335
CASH AND CASH EQUIVALENTS, beginning of period........ 2,905,767 49,528,407 32,013,118 --
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, end of period.............. $ 10,920,335 $ 2,905,767 $ 49,528,407 $ 10,920,335
============ ============ ============ =============
</Table>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-13

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002

1. ORGANIZATION AND BASIS OF PRESENTATION:

Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and as of November 3, 1998 successor to, a Delaware corporation
of the same name. As the context requires, "Company", is used herein to signify
the successor and/or the predecessor corporations (See Note 4).

The Company is a development stage pharmaceutical company focused on the
research and development of products to treat and prevent cancer, and the future
commercialization of such products. The Company also markets and sells
Gelclair(TM) Concentrated Oral Gel ("Gelclair(TM)") manufactured by Sinclair
Pharmaceuticals Ltd. of the United Kingdom ("Sinclair"). The Company has not
generated any revenues from the sale of its own products to date, nor is there
any assurance of any future product revenues from the development of its
products. The Company's intended products are subject to long development cycles
and there is no assurance the Company will be able to successfully develop,
manufacture, obtain regulatory approval for or market its products. During the
period required to develop its products, the Company had planned to continue to
finance operations through debt and equity financings, profits from the sale of
Gelclair(TM) and corporate alliances. The Company will continue to be considered
in the development stage until such time, if ever, as it generates significant
revenues from one or more of its product candidates. In October 2002, the
Company implemented a restructuring of its work force eliminating 20% of its
staff and reducing its efforts in research, discovery and pre-clinical
development of earlier-stage compounds, and subsequently, upon signing an
agreement with Celgene Corporation ("Celgene") to promote Gelclair(TM) in the
U.S. oncology market, eliminated its 16 person sales force and subsequently
terminated its agreement with Aventis Pharmaceuticals, Inc. ("Aventis") to
promote Nilandron(R)(nilutamide). Both the restructuring and elimination of the
sales force are expected to decrease expenses in the future.

On November 3, 1998, the Company completed a financing through the
acquisition of Tseng Labs, Inc. ("Tseng") (a publicly held company with no
continuing operations) in which the Company issued to Tseng stockholders
approximately 5.5 million shares of the Company's Common Stock and received net
proceeds of approximately $26.4 million (See Note 4). The accompanying
consolidated financial statements include the accounts of the Company from
inception (August 10, 1990) and the accounts of Tseng after November 3, 1998.

In July 2000, the Company entered into an exclusive marketing and promotion
agreement (the "Nilandron(R) Agreement") with Aventis to market Nilandron(R) to
urologists in the U. S. and Puerto Rico for use in patients who suffer from
prostate cancer. The Company began to market and promote Nilandron(R) in
September 2000 through the use of a dedicated third party sales force. Under the
terms of the Nilandron(R) Agreement, the Company was responsible for its
marketing and promotion expenses and received from Aventis a percentage of the
gross margin on Aventis' sales in excess of a pre-established gross margin
threshold, if any. The Company's agreement with Aventis terminated in October
2002.

In January 2002, the Company entered into a ten-year exclusive distribution
agreement (the "Gelclair(TM) Agreement") with Sinclair to promote and distribute
Gelclair(TM) in North America (U.S., Canada and Mexico). Gelclair(TM) is an oral
gel care formulation for the management and relief of pain associated with
inflammation and ulceration of the mouth caused by chemotherapy or radiotherapy
treatments and other causes. In June 2002, the Company began to promote
Gelclair(TM) in the oncology market. The Company purchases Gelclair(TM) from
Sinclair and resells to wholesale customers in the U.S.

In August 2002, the Company entered into a four-year marketing agreement
with John O. Butler Company ("Butler"). Butler markets Gelclair(TM) to the
dental market within the U.S. and will market in Canada if and when Gelclair(TM)
is approved for marketing in Canada. In October 2002, the Company entered

F-14

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

into a three-year agreement with Celgene for the promotion of Gelclair(TM) in
the U.S. oncology or other markets.

In January 2003, the Company received notification from Nasdaq that the
Company's stock would be delisted from the Nasdaq National Market because the
Company's stock price fell below the minimum bid requirements and thereby failed
to comply with Nasdaq marketplace rules. The Company has appealed the delisting
notification and has requested a hearing with Nasdaq which is scheduled for
February 2003.

In February 2003, the Company entered into an agreement and plan of merger
with OSI Pharmaceuticals, Inc. ("OSI Pharmaceuticals") whereby OSI
Pharmaceuticals would acquire the Company in a stock-for-stock transaction. If
approved by the Company's stockholders, OSI Pharmaceuticals will exchange .0567
shares of OSI Pharmaceuticals common stock for every share of Cell Pathways'
Common Stock upon closing of the transaction. OSI Pharmaceuticals will also
provide additional consideration in the form of a five-year contingent value
right ("CVR") through which each share of Cell Pathways' Common Stock held by
stockholders of record on the date of the merger closure will be eligible for an
additional .040 share of OSI Pharmaceuticals common stock in the event a new
drug application for either Aptosyn(R) (exisulind) or CP461 is accepted for
filing by the Food and Drug Administration ("FDA") within five years. If
approved by the Company's stockholders, it is anticipated that the merger will
be closed in the second quarter of 2003.

2. GOING CONCERN:

The Company has incurred negative cash flows from operations since
inception and, as of December 31, 2002, the Company had a deficit accumulated
during the development stage of $141,155,959. Management believes that the
Company's existing cash and cash equivalents will be adequate to fund operations
through the second quarter of 2003, based on projected revenue and expenditure
levels. Should appropriate sources of funding not be available on terms
acceptable to the Company, management would take additional actions which could
include a further reduction in workforce, a reduction in overall expenditures
and the delay or elimination of certain clinical trials and research activities
until such time as appropriate sources of funding are available. In February
2003, the Company entered into an agreement and plan of merger with OSI
Pharmaceuticals whereby, if approved by the Company's stockholders, the Company
would be acquired by OSI Pharmaceuticals. There is no assurance, however, that
the transaction with OSI Pharmaceuticals will be approved by the Company's
stockholders. Should the transaction not be approved by the Company's
stockholders, there is no assurance that additional funding will be available on
terms acceptable to the Company, if at all, to enable the Company to continue
operations.

These factors raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All inter-company accounts and transactions
have been eliminated in consolidation.

MANAGEMENT'S USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of

F-15

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from such
estimates.

CASH, CASH EQUIVALENTS AND RESTRICTED CASH

For purposes of the statements of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents. As of December 31, 2002 and December 31, 2001,
approximately $468,000 and $463,000, respectively, of cash and cash equivalents
were restricted to secure letters of credit for security deposits on the
Company's leases.

SHORT-TERM INVESTMENTS

As of December 31, 2001 the Company had approximately $24.8 million in
short-term investments invested in U.S. government securities with original
maturities greater than three months at two financial institutions. The Company
classifies its short-term investments as held-to-maturity which are carried on
the accompanying balance sheet at amortized cost. As of December 31, 2001, the
fair value of these short-term investments was $24,905,000.

CUSTOMER CONCENTRATION OF CREDIT RISK

For the year ended December 31, 2002, five customers accounted for 93% of
product revenues. As of December 31, 2002, two wholesale customers represented
92% of accounts receivable due from shipments of Gelclair(TM). Credit risk is
controlled through the use of credit limits, credit approvals and periodic
credit evaluations of wholesale customers.

INVENTORY

Inventory is comprised solely of Gelclair(TM) and is stated at the lower of
cost or market, as determined using the first-in, first-out method.

EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS

Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation of equipment and furniture is provided on the straight-line method
over estimated useful lives of two to five years. Leasehold improvements are
amortized over the shorter of the useful life or the life of the related lease.

PRODUCT DISTRIBUTION RIGHTS

Product distribution rights represents a $1 million payment made to
Sinclair for the exclusive right to market and distribute Gelclair(TM) in North
America. The Company amortizes this up-front payment over the ten-year term of
the distribution agreement. Amortization expense was $91,667 during the year
ended December 31, 2002.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
accrued expenses and debt instruments. Management believes the carrying values
of these assets and liabilities are considered to be representative of their
respective fair values.

F-16

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE RECOGNITION

The Company recognized revenue for marketing services under the
Nilandron(R) Agreement in the period in which marketing services were performed
if Aventis' sales of Nilandron(R) for that period exceeded specified thresholds.
The Company's agreement with Aventis terminated in October 2002.

Product sales of Gelclair(TM) to the Company's wholesale customers were
initiated in the U.S. in June 2002. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return
Exists", given the limited sales history of Gelclair(TM), the Company, at this
time defers the recognition of revenue on product shipments of Gelclair(TM) to
wholesale customers until such time the product is prescribed to the end user.
At each reporting period, the Company monitors shipments from wholesale
customers to pharmacies and hospitals, wholesale customer reorder history and
prescriptions filled by pharmacies based on prescription data from external,
independent sources. When this data indicates a flow of product through the
supply chain, which indicates that returns are less likely to occur, product
revenue is recognized. For the year ended December 31, 2002, shipments to
wholesale customers were $2,099,277, of which $536,873 has been recognized as
product revenues with the balance recorded as deferred revenue in the
accompanying balance sheet. In addition, the related cost of the product shipped
to wholesale customers that has not been recognized as revenue has been
reflected as inventory subject to return (See Note 5).

RESEARCH AND DEVELOPMENT

Costs incurred in connection with research and development activities are
expensed as incurred.

SUPPLEMENTAL CASH FLOW INFORMATION

For the years ended December 31, 2002, 2001 and 2000, the Company paid
interest of $63,664, $103,883 and $48,592, respectively, and paid no income
taxes. During the year ended December 31, 2002, the Company financed
approximately $45,000 of equipment purchases through capital leases.

STOCK-BASED COMPENSATION

The Company accounts for stock option grants to employees in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Under the Company's stock option plans, options are
granted at the fair market value on the date of the grant, and therefore no
compensation expense is recognized for stock options granted to employees. The
Company uses fair value accounting for option grants to non-employees in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" and
Emerging Issues Task Force ("EITF") Issue 96-18, "Accounting For Equity
Instruments That Are Issued To Other Than Employees For Acquiring or in
Conjunction With Selling Goods or Services."

F-17

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company follows the disclosure provisions of SFAS No. 123. Had
compensation cost for option grants to employees been recognized in the
consolidated statements of operations under the fair value method as prescribed
in SFAS No. 123, the Company's net loss would have increased to the following
pro forma amounts:

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------

Net loss:
As reported.............................. $(17,871,222) $(31,404,435) $(26,916,808)
Add: Stock-based employee compensation
included in net loss............. 14,980 1,248 --
Deduct: Total stock-based employee
compensation expense determined
under fair-value based method for
all awards....................... (4,277,353) (4,867,077) (3,503,529)
------------ ------------ ------------
Pro forma.................................. $(22,133,595) $(36,270,264) $(30,420,337)
============ ============ ============
Basic and diluted net loss per Common
Share:
As reported.............................. $ (0.51) $ (1.01) $ (0.96)
============ ============ ============
Pro forma................................ $ (0.64) $ (1.17) $ (1.09)
============ ============ ============
</Table>

DEFINED CONTRIBUTION PLAN

The Company maintains a defined contribution plan under Section 401(k) of
the Internal Revenue Code which allows for the deferral of up to 15% of eligible
employee salaries. Employee contributions are made at the election of the
participants on a semi-monthly basis. The Company does not make any
contributions towards the plan.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", if indicators of impairment exist, the Company assesses
the recoverability of the affected long-lived assets, which include fixed assets
and intangible assets, by determining whether the carrying value of such assets
can be recovered through the sum of the undiscounted future operating cash flows
and eventual disposition of the asset. If impairment is indicated, the Company
measures the amount of such impairment by comparing the carrying value of the
assets to the fair value of these assets, generally determined based on the
present value of the expected future cash flows associated with the use of the
asset. Management believes the future cash flows to be received from long-lived
assets will exceed the assets' carrying value, and accordingly the Company has
not recognized any impairment losses through December 31, 2002 (See Note 2).

NET INTEREST INCOME (EXPENSE)

For the years ended December 31, 2002, 2001 and 2000, the Company earned
interest income of $364,501, $1,770,588 and $2,306,477, respectively. For the
years ended December 31, 2002, 2001 and 2000, the Company incurred interest
expense of $63,664, $103,883 and $48,592, respectively.

F-18

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

The Company accounts for income taxes under the asset and liability method
in accordance with SFAS No. 109, "Accounting for Income Taxes." 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.

BASIC AND DILUTED NET LOSS PER COMMON SHARE

The Company presents basic and diluted net loss per Common share pursuant
to SFAS No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation
of basic and diluted net loss per Common share. "Basic" net loss per Common
share equals net loss divided by the weighted average Common shares outstanding
during the period. "Diluted" net loss per Common share equals net loss divided
by the sum of the weighted average Common shares outstanding during the period
plus Common Stock equivalents. The Company's basic and diluted net loss per
share amounts are the same since the assumed exercise of stock options and
warrants are anti-dilutive due to the Company's losses (See Note 11).

COMPREHENSIVE INCOME

The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting and display of
comprehensive income (loss) in a full set of general-purpose financial
statements. Comprehensive income (loss) is defined as the total of net income
(loss) and all other non-owner changes in equity. For all years presented, the
Company's comprehensive loss consists only of the Company's net loss.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires
the Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development, and/or normal use of the assets. The Company also
records a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption
of SFAS No. 143 is not expected to have a material effect on the Company's
financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends SFAS
No. 13 to require sale-leaseback accounting for certain lease modifications that
have economic effects similar to sale-leaseback transactions. The adoption of
SFAS No. 145 is not expected to have a material effect on the Company's
financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination

F-19

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Benefits and Other Costs to Exit an Activity." The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not
expected to have a material effect on the Company's financial statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123." This Statement amends FASB 9 Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51". This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements.

4. TRANSACTION WITH TSENG:

In June 1998, Cell Pathways, Inc., a Delaware corporation, and Tseng, a
Utah corporation, entered into an agreement and plan of reorganization (the
"Reorganization Agreement"). The Reorganization Agreement provided for (i) the
formation of Cell Pathways Holding, Inc., a Delaware corporation ("CPHI"), (ii)
the merger of Tseng Sub, Inc., a wholly-owned subsidiary of CPHI, with and into
Tseng, (iii) the merger of CPI Sub, Inc., a wholly-owned subsidiary of CPHI,
with and into Cell Pathways, Inc. and (iv) the issuance of approximately 23% of
the then outstanding shares of the Common Stock of CPHI to the Tseng
stockholders and approximately 77% of the then outstanding shares of the Common
Stock of CPHI to the Cell Pathways, Inc. stockholders. In connection with this
transaction, the Company raised net proceeds of approximately $26.4 million (See
Note 1). As a result of the aforementioned transactions, Tseng and Cell
Pathways, Inc., subsequently renamed Cell Pathways Pharmaceuticals, Inc.
("CPP"), became wholly-owned subsidiaries of CPHI, subsequently renamed Cell
Pathways, Inc. ("CPI"). The transaction closed November 3, 1998 and was
accounted for as a reorganization of CPP into CPI with the sale of approximately
23% of CPI Common Stock in exchange for Tseng's net assets. The historical
financial statements of the combined Company are the historical financial
statements of CPP.

F-20

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INVENTORY:

Inventory, comprised solely of Gelclair(TM), consisted of the following as
of December 31, 2002:

Finished goods on hand...................................... $1,632,149
Inventory subject to return................................. 508,466
----------
$2,140,615
==========
</Table>

Inventory subject to return represents the amount of Gelclair(TM) shipped
to wholesale customers which has not been recognized as revenue (See Note 3).

6. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:

Equipment, furniture and leasehold improvements consisted of the following:

<Table>
<Caption>
DECEMBER 31,
-------------------------
2002 2001
----------- -----------

Furniture and fixtures..................................... $ 336,645 $ 331,316
Computer equipment and software............................ 566,206 527,873
Laboratory equipment....................................... 1,555,084 1,379,704
Leasehold improvements..................................... 236,759 194,727
----------- -----------
2,694,694 2,433,620
Less accumulated depreciation and amortization............. (1,908,928) (1,440,764)
----------- -----------
$ 785,766 $ 992,856
=========== ===========
</Table>

Depreciation expense was $483,677, $533,148 and $826,138 for 2002, 2001,
and 2000 respectively.

7. NOTES RECEIVABLE FROM OFFICERS:

During the years ended December 31, 2002, 2001 and 2000, the Company made
loans of $54,000, $256,000 and $632,954, respectively, to two of its officers
that were outstanding as of December 31, 2002. The loans are evidenced by
promissory notes which bear interest at a rate of 6% annually; principal and
interest are repayable five years from date of issuance. The loans, including
accrued interest, are secured by subordinate mortgages on real property and are
reviewed periodically to assess their realizable value. During 2002, the Company
recorded an allowance of $114,742 against one of the officer's loans. The
officer loans and accrued interest of $110,760 as of December 31, 2002, are
presented net of the allowance on the accompanying consolidated balance sheet.

F-21

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. OTHER ACCRUED LIABILITIES:

Other accrued liabilities consisted of the following:

<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------

Accrued research materials.................................. $ -- $ 170,000
Accrued consultant fees..................................... 220,619 278,727
Accrued research expenses................................... 1,419,759 967,713
Accrued sales contract and taxes............................ 59,954 399,095
Accrued insurance........................................... 80,000 365,444
Customer deposit............................................ 350,000 --
Other....................................................... 952,663 1,091,335
---------- ----------
$3,082,995 $3,272,314
========== ==========
</Table>

9. STOCKHOLDERS' EQUITY:

In September 2002, the Company sold 4,036,001 shares of Common Stock in a
registered direct offering at the price of $0.70 per share, resulting in net
proceeds of approximately $2.6 million. In addition to a placement fee, the
placement agent received warrants to purchase 80,720 shares of Common Stock at a
price of $0.84. The warrants are exercisable until September 2008.

In March 2002, the Company sold 2,390,107 shares of Common Stock in a
private placement, mainly to institutional investors, at a price of $3.70 per
share, resulting in net proceeds of approximately $8.0 million. With each four
shares of Common Stock purchased, the Company issued a warrant to purchase one
share of the Company's Common Stock at $4.74 per share. The warrants are
exercisable until March 2006.

In November 2000, the Company sold 3,200,000 shares of Common Stock in a
private placement, mainly to institutional investors at a price of $7.375 per
share, resulting in net proceeds of approximately $23,116,000. With each share
of Common Stock purchased, the Company issued a warrant to purchase one and
thirty five one-hundredths (1.35) shares of the Company's Common Stock at $12.00
per share. The warrants expired on June 30, 2002. The Company paid one of the
placement agents a fee of $413,800 and another placement agent 73,750 warrants,
which expired on June 30, 2002, to purchase shares of Common Stock at an
exercise price of $12.00 per share, as a fee.

In connection with the settlement of litigation, the Company issued 1.7
million shares of Common Stock in 2002 (Note 14).

10. STOCKHOLDERS' RIGHTS PLAN:

On December 3, 1998, the Company's Board of Directors authorized the
adoption of a stockholders' rights plan. Under the plan, rights to purchase
stock, at a rate of one right for each share of Common Stock held, were
distributed to holders of record on December 15, 1998 and automatically attach
to shares issued thereafter. Under the plan, the rights attach to the Common
Stock and are not represented by separate rights certificates until, and
generally become exercisable only after, a person or group (i) acquires 15% or
more of the Company's outstanding Common Stock or (ii) commences a tender offer
that would result in such a person or group owning 15% or more of the Company's
Common Stock. When the rights first become exercisable, a holder will be
entitled to buy from the Company a unit consisting of one one-hundredth of a
share of Series A Junior Participating Preferred Stock of the Company at a
purchase price of $90. However, if any person acquires 15% or more of the
Company's Common Stock other than pursuant to a qualified offer,

F-22

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

each right not owned by a 15% or more stockholder would become exercisable for
Common Stock of the Company (or in certain circumstances, other consideration)
having a market value equal to twice the exercise price of the right. The rights
expire on December 14, 2008, except as otherwise provided in the plan. The
stockholder rights plan was amended in February 2003 to make it inapplicable to
OSI Pharmaceuticals in connection with the proposed merger.

11. STOCK OPTIONS, WARRANTS AND PURCHASE PLAN:

STOCK OPTIONS

The Company's 1993 Stock Option Plan, which was amended in 1997 and renamed
the 1997 Equity Incentive Plan (the "Plan") and subsequently amended in 2000,
authorizes the Company to grant to eligible employees, directors and consultants
Common Stock, stock appreciation rights, or options to purchase shares of Common
Stock, not to exceed 5.6 million shares in the aggregate, including all grants
since inception of the Plan in 1993. As of December 31, 2002, 1,884,256 shares
of Common Stock remained eligible for future grants under the Plan. The Board of
Directors sets the rate at which the options become exercisable and determines
when the options expire, subject to the limitations described below. Options
granted through June 1999 may, to the extent vested, be exercised up to ten
years following the date of grant. Options granted after June 1999 may, to the
extent vested, be exercised up to the earlier of ten years from the date of
grant or 90 days after termination of services. All options held by persons
continuing in the employ of the Company will generally become exercisable in the
event the Company is sold or has other significant changes in ownership.
Generally, options to employees vest ratably over a four-year or 50-month
period. Options granted under the Plan through July 1997 may be immediately
exercisable, but any unvested shares exercised are held by the Company and are
subject to reacquisition by the Company should employment terminate prior to
completion of applicable vesting periods.

In October 1997, the Board of Directors adopted and the stockholders
approved the 1997 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"), which was amended and approved by the Company's stockholders in May
2002. The Directors' Plan, as amended, increased the shares authorized to
903,925 shares of Common Stock, increased the automatic non-discretionary
inaugural grant of options to new non-employee directors to 50,000 shares (the
"Inaugural Grant"), increased the automatic non-discretionary anniversary grant
of options to continuing non-employee directors to 10,000 shares (the
"Anniversary Grant") and provided a one-time grant of options, vesting over
three years, for 31,843 shares to each current non-employee director who
continued in service beyond the 2002 annual stockholder meeting. The Company
granted options to purchase 27,235 shares of Common Stock at the inception of
the Directors' Plan in October 1997. Options subject to an Inaugural Grant under
the Directors' Plan will vest in three equal, annual installments commencing on
the first anniversary of the date of the grant of the option. Options subject to
an Anniversary Grant under the Directors' Plan will vest in full on the first
anniversary of the grant date of the option. In addition, certain grants made at
the inception of the Directors' Plan vested on March 31, 1998. The vesting of
all options under the Directors' Plan is conditioned on the continued service of
the recipient as a director, employee or consultant of the Company or any
affiliate of the Company. As of December 31, 2002, 514,985 shares of Common
Stock remained eligible for future option grants under the Directors' Plan.

Outstanding options held by directors, officers and employees of the
Company that are unvested as of the date of stockholder approval of the
acquisition of the Company by OSI Pharmaceuticals will become immediately vested
and exercisable upon such stockholder approval. Options that are not exercised
will terminate in accordance with the terms of the Company's option plans.

The Company accounts for stock options granted to employees in accordance
with the intrinsic value method provided for under APB Opinion No. 25. Under the
Plan, options may be granted at the fair market value on the date of the grant
and therefore no compensation expense is, or has been, recognized in respect of
F-23

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock options awarded to employees. In accordance with the provisions of SFAS
No. 123, the Company discloses fair value compensation cost in respect of
employee stock options using the Black-Scholes option pricing model (See Note
3).

The weighted average fair value of the stock options granted during 2002,
2001 and 2000 was $1.61, $5.02 and $10.01, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:

<Table>
<Caption>
2002 2001 2000
------- ------- -------

Risk-free interest rate................................... 2.93% 4.31% 5.22%
Expected dividend yield................................... 0% 0% 0%
Expected life............................................. 6 years 6 years 6 years
Expected volatility....................................... 75% 75% 195%
</Table>

Information relative to the Company's stock options under all plans is as
follows:

<Table>
<Caption>
WEIGHTED
AVERAGE
EXERCISE PRICE EXERCISE PRICE PROCEEDS
OPTIONS (PER SHARE) (PER SHARE) UPON EXERCISE
--------- -------------------- -------------- -------------

Balance as of December 31,
1999.......................... 1,893,667 $0.32 -- 24.10 $ 6.03 $11,416,993
Granted....................... 1,919,682 5.45 -- 49.88 10.26 19,700,719
Exercised..................... (324,202) 0.32 -- 24.10 6.24 (2,021,610)
Forfeited..................... (56,501) 4.13 -- 25.94 10.54 (595,571)
--------- -------------- -----------
Balance as of December 31,
2000.......................... 3,432,646 0.32 -- 49.88 8.30 28,500,531
Granted....................... 807,695 3.29 -- 8.16 7.16 5,783,877
Exercised..................... (31,979) 0.32 -- 4.75 3.34 (106,663)
Forfeited..................... (385,462) 0.32 -- 36.25 10.65 (4,105,264)
--------- -------------- -----------
Balance as of December 31,
2001.......................... 3,822,900 0.32 -- $49.88 7.87 30,072,481
Granted....................... 588,582 0.46 -- 6.91 2.41 1,419,270
Exercised..................... -- -- -- --
Forfeited..................... (887,686) 0.99 -- 38.38 7.19 (6,382,814)
--------- -------------- -----------
Balance as of December 31,
2002.......................... 3,523,796 $0.32 -- $49.88 $ 7.13 $25,108,937
========= ============== ===========
</Table>

The weighted average remaining contractual life of all options outstanding
at December 31, 2002 is 7.0 years.

F-24

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about the Company's stock
options outstanding and exercisable at December 31, 2002:

<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
NUMBER OF WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE AT DECEMBER 31, CONTRACTUAL PRICE AT DECEMBER 31, PRICE
PRICES 2002 LIFE IN YEARS (PER SHARE) 2002 (PER SHARE)
- --------------- --------------- ------------- ----------- --------------- -----------

$ 0.32 -- $ 2.00 499,707 7.8 $ 1.45 148,125 $ 0.69
3.29 -- 3.90 299,454 4.3 3.71 294,404 3.71
4.15 -- 5.45 1,053,288 7.6 5.35 608,713 5.31
6.22 -- 6.91 638,853 5.6 6.57 593,973 6.59
7.49 -- 9.03 602,472 8.2 7.68 234,854 7.90
9.25 -- 12.13 243,261 7.0 11.87 183,911 11.85
24.69 -- 31.75 133,261 6.8 25.96 95,181 25.43
$36.25 -- $49.88 53,500 7.2 46.44 35,840 46.59
--------- ---------
3,523,796 $ 7.13 2,195,001 $ 7.50
========= =========
</Table>

In accordance with the terms of the Plan, in December 2001 one of the
Company's officers was granted 10,000 shares of restricted Common Stock. Under
the terms of the restricted stock agreement, the shares of restricted Common
Stock do not vest until the earlier of FDA approval of one of the Company's drug
candidates or five years from the date of grant. The Company has recorded the
fair value of the restricted Common Stock as deferred compensation in the
stockholders' equity section of the consolidated balance sheet which is being
amortized over the five year vesting period of the award. The Company recognized
compensation expense of $14,980 and $1,248 in its consolidated statements of
operations for the year ended December 31, 2002 and 2001, respectively, related
to amortization of this restricted stock grant.

EMPLOYEE STOCK PURCHASE PLAN

In October 1997, the Board of Directors adopted and the stockholders
approved the Employee Stock Purchase Plan (the "ESPP") covering an aggregate of
544,710 shares of Common Stock. Under the ESPP, the Board of Directors may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the ESPP. The offering period for any
offering will be no longer than 27 months.

Employees who participate in an offering can have up to 15% of their
earnings withheld pursuant to the ESPP and applied, on specified dates
determined by the Board of Directors, to the purchase of shares of Common Stock.
The price of Common Stock purchased under the ESPP will be not less than 85% of
the lower of the fair market value of the Common Stock on the commencement date
of each offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
The ESPP will terminate at the Board of Directors' direction. As of December 31,
2002, the Company has issued 166,443 shares under the ESPP.

WARRANTS

In September 2002, the Company, in conjunction with a registered direct
offering of Common Stock, issued warrants to purchase 80,720 shares of Common
Stock at an exercise price of $0.84, which expire in September 2008. Also, in
September 2002, the Company issued, pursuant to a consulting agreement, warrants

F-25

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to purchase 100,000 shares of Common Stock at an exercise price of $1.00, which
expire in September 2007. The estimated fair value of the warrant, estimated
using the Black-Scholes option pricing model, of $68,619 was recorded as expense
in the accompanying 2002 consolidated statement of operations. As of December
31, 2002, both of the warrants issued in September 2002 were still outstanding.
In March 2002, in conjunction with the private placement of Common Stock, the
Company issued warrants, expiring in March 2006, to purchase 597,529 shares of
Common Stock at an exercise price of $4.74 per share. As of December 31, 2002,
these warrants were still outstanding.

12. DEBT:

During 2000, the Company financed certain fixed asset purchases with a note
payable of $800,000, secured by certain laboratory and office equipment. The
note bears interest at 13.8% and is repayable in monthly payments of principal
and interest of $26,959 over 36 months, through July 2003. As of December 31,
2002, remaining principal payments to be made in 2003 were $180,330.

13. INCOME TAXES:

As of December 31, 2002, the Company had approximately $83 million of net
operating loss carryforwards ("NOLs") for income tax purposes available to
offset future federal income tax, subject to limitations for alternative minimum
tax. The NOLs are subject to examination by the tax authorities and expire
between 2008 and 2020.

Prior to its conversion into corporate form, the business had accumulated
losses totaling approximately $3,900,000. For tax purposes these losses were
distributed to the partners in accordance with the provisions of the partnership
agreement of the Company's predecessor partnership. Thus, these losses, while
included in the financial statements of the Company, are not available to offset
future taxable income, if any, of the Company.

The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company of greater than 50% within a three-year period results in an annual
limitation on the Company's ability to utilize its NOLs from tax periods prior
to the ownership change. The Company believes that the transaction with Tseng
(See Note 3) triggered such limitation. In addition, the proposed acquisition of
the Company by OSI Pharmaceuticals (see Note 1) would trigger an additional
limitation. The annual limitation triggered by the proposed OSI Pharmaceuticals
transaction could result in a significant portion of the Company's NOLs
expiring.

The components of the net deferred income tax asset were as follows:

<Table>
<Caption>
DECEMBER 31,
---------------------------
2002 2001
------------ ------------

Gross deferred tax asset:
Net operating loss carryforwards......................... $ 32,167,000 $ 32,978,000
Capitalized research and development expenditures........ 6,193,000 1,752,000
Capitalized start-up costs............................... 17,451,000 10,913,000
Litigation settlement and expense........................ -- 2,665,000
Accruals not currently deductible........................ 476,000 560,000
Other.................................................... 3,433,000 2,961,000
------------ ------------
59,720,000 51,829,000
Less valuation allowance................................. (59,720,000) (51,829,000)
------------ ------------
$ -- $ --
============ ============
</Table>

F-26

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has not yet achieved profitable operations. Accordingly,
management believes the deferred tax assets as of December 31, 2002 do not
satisfy the realization criteria set forth in SFAS No. 109 and, therefore, the
Company has recorded a full valuation allowance for the entire net tax asset.

14. COMMITMENTS AND CONTINGENCIES:

LEASES

In June 1998, the Company entered into a ten-year lease for office and
laboratory space in Horsham, Pennsylvania. This lease contains two five-year
renewal terms.

In May 2001, the Company also entered into a 36-month capital lease
agreement to lease equipment to be used in the research and development
activities of the Company. The equipment acquired under the lease at a cost of
$125,681, less accumulated amortization of $66,332, is included in equipment in
the accompanying consolidated balance sheets as of December 31, 2002. The
interest rate on this capital lease is 8.2%.

In January 2002, the Company entered into a 36-month capital lease
agreement to lease equipment to be used in the research and development
activities of the Company. The equipment acquired under the lease at a cost of
$45,201, less accumulated amortization of $6,782, is included in equipment in
the accompanying consolidated balance sheets as of December 31, 2002. The
interest rate on this capital lease is 11.0%.

Aggregate minimum annual payments under the Company's lease commitments are
as follows as of December 31, 2002:

<Table>
<Caption>
CAPITAL OPERATING
LEASES LEASES
------- ----------

2003........................................................ $63,385 $ 972,000
2004........................................................ 34,418 978,000
2005........................................................ 3,997 995,100
2006........................................................ -- 1,022,400
2007........................................................ -- 1,053,000
Thereafter.................................................. -- 534,300
------- ----------
Total minimum lease payments................................ 101,800 $5,554,800
==========
Less: Interest.............................................. (8,046)
-------
Present value of net minimum lease payments................. $93,754
=======
</Table>

Rental expense under the operating leases and other month-to-month leases
entered into by the Company totaled $975,270, $1,051,191 and $1,118,166 for the
years ended December 31, 2002, 2001 and 2000, respectively.

CONTRACTS

In January 2002, the Company entered into a ten-year exclusive distribution
agreement with Sinclair to promote and distribute Gelclair(TM) in North America.
In June 2002, the Company began to promote Gelclair(TM) in the U.S. oncology
market. Under the Gelclair(TM) Agreement, the Company paid Sinclair $1 million
for the exclusive right to market and distribute Gelclair(TM) in North America,
which amount has been capitalized and is being amortized over the ten-year term
of the Gelclair(TM) Agreement. The Company is committed to additional inventory
purchases of $4.7 million and $5.0 million in 2003 and 2004, respectively, and
annual marketing expenditures of $750,000, $500,000 and $250,000 for 2003
through 2006, 2007 through 2008 and 2009 through 2011, respectively. In
addition, the Company is obligated to spend $1.3 million annually for

F-27

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

direct sales force efforts. As described below, the Company has agreements with
Celgene and Butler that satisfy this obligation through 2006. The Company could
be responsible for milestone payments totaling $3 million related to the
achievement of certain sales, patent and clinical trial milestones. The Company
purchases Gelclair(TM) from Sinclair and resells to wholesale customers in the
United States.

In August 2002, the Company entered into a four-year marketing agreement
with Butler to market, and to a limited extent, distribute Gelclair(TM). Butler
will receive a marketing fee based on the amount of product sold in the dental
market.

In October 2002, the Company entered into a three-year agreement with
Celgene for the promotion of Gelclair(TM) in the U.S. oncology market. The
Company is committed to annual marketing expenditures of $1 million, $2 million
and $2 million for 2003, 2004 and 2005, respectively. These marketing
expenditures satisfy the Company's marketing obligations under the Gelclair(TM)
Agreement described above. Celgene will receive a marketing fee based on a fixed
percent of net sales of Gelclair(TM) in the oncology market.

The Company contracts with a number of university-based researchers and
commercial vendors who provide various research, clinical and product
development activities. Such arrangements are generally cancelable at any time.

In March 2001, the Company entered into a clinical research agreement with
a clinical research organization ("CRO") in which the Company may be
responsible, from time to time, to make milestone payments to the CRO based on
the achievement of pre-agreed recruitment goals. The Company records the expense
of such milestone payments on the date that the milestone objective is achieved.

PROPOSED MERGER WITH OSI PHARMACEUTICALS

If the Company's Board of Directors withdraws, modifies or changes its
recommendation to the Company's stockholders to approve the proposed merger, the
Company will owe a termination fee of $1,250,000 to OSI Pharmaceuticals.

LITIGATION

In March, April and May of 2001, eleven stockholder class actions were
filed in the United States District Court for the Eastern District of
Pennsylvania against the Company and certain of its officers and directors
seeking unspecified damages. The lawsuits alleged that the Company and its
officers made false and misleading statements about the Company's drug
candidate, Aptosyn(R), which caused artificial inflation of the Company's stock
price during the class period of October 27, 1999 to September 22, 2000, when
the Company announced that the FDA had informed the Company that it would be
receiving a "not approvable" letter for its new drug application for Aptosyn(R).
In February 2002, a stipulation of settlement was agreed to. Pursuant to this
stipulation of settlement, and following a preliminary order by the court, the
Company's insurance carrier paid $2.0 million into escrow and the Company issued
1.7 million shares into escrow. On September 23, 2002, following a hearing, the
Court entered a final order approving the settlement and dismissing the action
at which time the $2.0 million and 1.7 million shares were released from escrow.
The time to appeal therefrom has expired. As of December 31, 2001, the Company
recorded the fair value of the 1.7 million shares of Common Stock of $7,837,000,
as an increase to additional paid-in capital and recorded a charge to litigation
settlement expense for the then fair value of the Common Stock. For the year
ended December 31, 2002, the fair value of the 1.7 million shares was adjusted
to $1,088,000 based on the final fair value of the shares as of September 23,
2002, which resulted in a $6,749,000 reduction to the litigation settlement
expense and a decrease to additional paid-in capital during the year ended
December 31, 2002.

F-28

CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):

Summarized quarterly financial data for the years ended December 31, 2002
and 2001 is as follows:

<Table>
<Caption>
2002
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------

REVENUES:
Product sales.................... $ -- $ -- $ 88,267 $ 448,606
Marketing services............... -- 303,578 307,686 --
----------- ----------- ----------- -----------
-- 303,578 395,953 448,606
----------- ----------- ----------- -----------
EXPENSES:
Cost of products sold............ -- -- 28,542 191,164
Research and development......... 4,311,246 4,116,395 4,659,505 4,057,963
Selling, general and
administrative................. 2,259,476 2,513,794 1,957,829 1,973,282
Litigation settlement and
expense(1)..................... (850,000) (4,437,000) (1,462,000) --
----------- ----------- ----------- -----------
5,720,722 2,193,189 5,183,876 6,222,409
----------- ----------- ----------- -----------
Operating loss................. (5,720,722) (1,889,611) (4,787,923) (5,773,803)
Interest income, net............. 88,821 101,928 64,696 45,392
----------- ----------- ----------- -----------
Net loss......................... $(5,631,901) $(1,787,683) $(4,723,227) $(5,728,411)
=========== =========== =========== ===========
Basic and diluted net loss per
Common share................... $ (0.18) $ (0.05) $ (0.14) $ (0.15)
=========== =========== =========== ===========
</Table>

<Table>
<Caption>
2001
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ ------------

REVENUES:
Marketing services.............. $ 316,973 $ -- $ 306,808 $ 318,450
----------- ----------- ----------- ------------
EXPENSES:
Research and development........ 3,782,214 3,415,882 5,210,684 5,356,463
Selling, general and
administrative................ 1,942,632 1,920,761 1,723,016 2,169,719
Litigation settlement and
expense(1).................... -- -- -- 8,492,000
----------- ----------- ----------- ------------
5,724,846 5,336,643 6,933,700 16,018,182
----------- ----------- ----------- ------------
Operating loss................ (5,407,873) (5,336,643) (6,626,892) (15,699,732)
Interest income, net............ 641,006 459,129 378,021 188,549
----------- ----------- ----------- ------------
Net loss........................ $(4,766,867) $(4,877,514) $(6,248,871) $(15,511,183)
=========== =========== =========== ============
Basic and diluted net loss per
Common share.................. $ (0.15) $ (0.16) $ (0.20) $ (0.50)
=========== =========== =========== ============
</Table>

(1) See Note 14.

F-29