payments of $130 million could potentially be made to Rigel based upon development stages, clinical trials, regulatory approvals and the successful commercialization of a product.

In October 2003, we announced a global agreement to collaborate with Organon for asenapine, a treatment for schizophrenia and bipolar disorder. Under the terms of the agreement, we expensed a payment of $100 million made in the fourth quarter of 2003, which was included in Research and development expenses. Additional milestone payments of $270 million could potentially be made to Organon based upon regulatory approvals and launch of asenapine in the U.S., E.U., and Japan, as well as the attainment of certain agreed-upon sales levels.

In December 2002, we announced an agreement with Neurocrine for indiplon, for the treatment of insomnia. Under the terms of the agreement, we expensed a payment of $100 million made in the first quarter of 2003, which was included in Research and development expenses. Additional milestone payments of $300 million could potentially be made to Neurocrine based on worldwide regulatory submissions and approvals. In 2005 and 2004, we expensed $70 million and $21 million in milestone payments (of the $300 million), which were included in Research and development expenses.

Also in December 2002, we announced an agreement with Eyetech Pharmaceuticals, Inc. (Eyetech) for Macugen (pegaptanib sodium), a treatment for AMD, which was approved by the FDA in December 2004 and by the E.U. in January 2006, and diabetic macular edema (DME), both leading causes of blindness. Eyetech was subsequently acquired by OSI. Under the terms of the agreement we expensed a payment of $100 million in the first quarter of 2003, which was included in Research and development expenses. Additional milestone payments up to $195.5 million could potentially be made to OSI based on worldwide regulatory submissions and approvals. OSI also has the potential to receive an additional $450 million in milestone payments, which are contingent upon successful commercialization of Macugen and attainment of agreed-upon sales levels. In 2004, based on certain regulatory submissions and approvals, we expensed $16 million in milestone payments, which were included in Research and development expenses and in connection with the approval, we capitalized as an intangible asset, a $90 million milestone payment (all amounts were included in the $195.5 million).

Additional product-related programs are in various stages of discovery and development.

Costs and Expenses

Cost of Sales

Cost of sales increased 13% in 2005 and decreased 21% in 2004 while revenues decreased 2% in 2005 and increased 17% in 2004.

Cost of sales in 2005 compared to 2004 increased as a result of:

• unfavorable geographic, segment and product mix, and adverse changes in production volume, among other factors, which reflect the loss of U.S. exclusivity for certain of our pharmaceutical products and the uncertainty regarding the selective COX-2 inhibitors;

• $124 million related to implementation costs of our new AtS productivity initiative; and

• $73 million in write-offs of inventory and exit costs related to