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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number: 0-10736



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MGI PHARMA, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Minnesota                                                      |  | 41-1364647                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification number)



|                                                                   |  |                                                     
|------------------------------------------------------------------ |  | ----------------------------------------------------
|5775 West Old Shakopee Road Suite 100 Bloomington, Minnesota 55437 |  | (952) 346-4700                                      
|(Address of principal executive offices and zip code)              |  | (Registrants telephone number, including area code)



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Indicate by check mark, whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90
days.    Yes.  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    Yes.  x    No ̈



Indicate the number of shares outstanding of
each of the issuers classes of common stock, as of the latest practicable date.



|                             |  |                                
|---------------------------- |  | -------------------------------
|Common Stock, $.01 par value |  | 71,998,250 shares              
|(Class)                      |  | (Outstanding at August 5, 2005)



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MGI PHARMA, INC.



FORM 10-Q INDEX



|                                                                                                    |  |            
|--------------------------------------------------------------------------------------------------- |  | -----------
|                                                                                                    |  | Page Number
|PART I.
FINANCIAL INFORMATION                                                                       |  | 3          
|                                                                                                    | 
|Item 1.
Financial Statements (Unaudited)                                                            |  | 3          
|                                                                                                    | 
|Condensed Consolidated Balance Sheets  June 30, 2005 and December 31, 2004                         |  | 3          
|                                                                                                    | 
|Condensed Consolidated Statements of Operations  Three and Six Months Ended June 30, 2005 and 2004 |  | 4          
|                                                                                                    | 
|Condensed Consolidated Statements of Cash Flows  Six Months Ended June 30, 2005 and 2004           |  | 5          
|                                                                                                    | 
|Notes to Condensed Consolidated Financial Statements                                                |  | 6          
|                                                                                                    | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 16         
|                                                                                                    | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                  |  | 42         
|                                                                                                    | 
|Item 4.
Controls and Procedures                                                                     |  | 42         
|                                                                                                    | 
|PART II.
OTHER INFORMATION                                                                          |  | 43         
|                                                                                                    | 
|Item 5.
Submission of Matters to a Vote of Security Holders                                         |  | 43         
|                                                                                                    | 
|Item 6.
Exhibits                                                                                    |  | 44         
|                                                                                                    | 
|SIGNATURES                                                                                          |  | 45         



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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1. Financial Statements



MGI PHARMA, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | -------------------- | - | -------- | -
|                                                                                                                                               |  | June 30,2005(Unaudited) |          |   | December 31,2004 (*) |  
|ASSETS                                                                                                                                         |  |                         |          |   |                      |   |          |  
|                                                                                                                                               |  |                        
|Current assets:                                                                                                                                |  |                         |          |   |                      |   |          |  
|Cash and cash equivalents                                                                                                                      |  | $                       | 17,385   |   |                      | $ | 10,098   |  
|Short-term marketable investments                                                                                                              |  |                         | 201,460  |   |                      |   | 195,384  |  
|Restricted marketable investments                                                                                                              |  |                         | 5,825    |   |                      |   | 5,832    |  
|Receivables, less contractual allowances and allowance for bad debts of $23,901 and $12,227                                                    |  |                         | 130,620  |   |                      |   | 122,275  |  
|Inventories                                                                                                                                    |  |                         | 36,312   |   |                      |   | 8,408    |  
|Other current assets                                                                                                                           |  |                         | 629      |   |                      |   | 481      |  
|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|Total current assets                                                                                                                           |  |                         | 392,231  |   |                      |   | 342,478  |  
|                                                                                                                                               |  |                        
|Restricted cash                                                                                                                                |  |                         | 600      |   |                      |   | 600      |  
|Long-term marketable investments                                                                                                               |  |                         | 24,212   |   |                      |   | 66,848   |  
|Restricted marketable investments, less current portion                                                                                        |  |                         | 5,699    |   |                      |   | 8,519    |  
|Equipment, furniture and leasehold improvements, at cost less accumulated depreciation of $4,069 and $3,505                                    |  |                         | 3,217    |   |                      |   | 2,666    |  
|Debt issuance costs, less accumulated amortization of $1,550 and $969                                                                          |  |                         | 6,586    |   |                      |   | 7,167    |  
|Intangible assets, at cost less accumulated amortization of $6,321 and $5,239                                                                  |  |                         | 6,913    |   |                      |   | 7,995    |  
|Other assets                                                                                                                                   |  |                         | 62       |   |                      |   | 62       |  
|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|Total assets                                                                                                                                   |  | $                       | 439,519  |   |                      | $ | 436,335  |  
|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                           |  |                         |          |   |                      |   |          |  
|                                                                                                                                               |  |                        
|Current liabilities:                                                                                                                           |  |                         |          |   |                      |   |          |  
|Accounts payable                                                                                                                               |  | $                       | 7,649    |   |                      | $ | 14,831   |  
|Accrued expenses                                                                                                                               |  |                         | 30,083   |   |                      |   | 43,244   |  
|Deferred revenue                                                                                                                               |  |                         | 318      |   |                      |   | 624      |  
|Other current liabilities                                                                                                                      |  |                         | 79       |   |                      |   | 124      |  
|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|Total current liabilities                                                                                                                      |  |                         | 38,129   |   |                      |   | 58,823   |  
|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|Noncurrent liabilities:                                                                                                                        |  |                         |          |   |                      |   |          |  
|Senior subordinated convertible notes, face value of $348,000 net of unamortized discount of $87,828 as of June 30, 2005 and December 31,
2004 |  |                         | 260,172  |   |                      |   | 260,172  |  
|Deferred revenue                                                                                                                               |  |                         | 2,250    |   |                      |   | 1,951    |  
|Other noncurrent liabilities                                                                                                                   |  |                         | 878      |   |                      |   | 879      |  
|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|Total noncurrent liabilities                                                                                                                   |  |                         | 263,300  |   |                      |   | 263,002  |  
|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|Total liabilities                                                                                                                              |  |                         | 301,429  |   |                      |   | 321,825  |  
|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|Stockholders equity:                                                                                                                          |  |                         |          |   |                      |   |          |  
|Preferred stock, 10,000,000 authorized and unissued shares                                                                                     |  |                         |         |   |                      |   |         |  
|Common stock, $.01 par value, 140,000,000 authorized shares, 71,866,012 and 71,041,179 issued and outstanding shares                           |  |                         | 719      |   |                      |   | 710      |  
|Additional paid-in capital                                                                                                                     |  |                         | 425,827  |   |                      |   | 418,659  |  
|Unearned compensation - restricted stock                                                                                                       |  |                         | (1,860   | ) |                      |   | (3,216   | )
|Accumulated other comprehensive (loss) income                                                                                                  |  |                         | (3,834   | ) |                      |   | 5,428    |  
|Accumulated deficit                                                                                                                            |  |                         | (282,763 | ) |                      |   | (307,071 | )
|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|Total stockholders equity                                                                                                                     |  |                         | 138,090  |   |                      |   | 114,510  |  
|                                                                                                                                               |  |                         |          |   |                      |   |          |  
|Total liabilities and stockholders equity                                                                                                     |  | $                       | 439,519  |   |                      | $ | 436,335  |  
|                                                                                                                                               |  |                         |          |   |                      |   |          |  



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|(*) | The Balance Sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying Notes to Condensed Consolidated Financial Statements.



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MGI PHARMA, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share data)



|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|----------------------------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------- |  | - | ------
|                                                      |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                                                      |  | 2005                       |        | 2004                     |   | 2005   |  | 2004
|Revenues:                                             |  |                            |        |                          |   |        |  |      |         |  |   |       
|Product sales                                         |  | $                          | 65,318 |                          | $ | 46,862 |  | $    | 127,703 |  | $ | 72,696
|Licensing and other                                   |  |                            | 1,844  |                          |   | 1,077  |  |      | 2,694   |  |   | 2,112 
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|                                                      |  |                            | 67,162 |                          |   | 47,939 |  |      | 130,397 |  |   | 74,808
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Costs and expenses:                                   |  |                            |        |                          |   |        |  |      |         |  |   |       
|Cost of sales                                         |  |                            | 22,920 |                          |   | 14,142 |  |      | 44,836  |  |   | 21,767
|Selling, general and administrative                   |  |                            | 16,974 |                          |   | 16,683 |  |      | 35,590  |  |   | 34,148
|Research and development                              |  |                            | 14,248 |                          |   | 8,033  |  |      | 24,702  |  |   | 13,048
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|                                                      |  |                            | 54,142 |                          |   | 38,858 |  |      | 105,128 |  |   | 68,963
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Operating income                                      |  |                            | 13,020 |                          |   | 9,081  |  |      | 25,269  |  |   | 5,845 
|                                                      |  |                            |        |                         
|Interest income                                       |  |                            | 1,747  |                          |   | 1,375  |  |      | 3,104   |  |   | 2,191 
|Interest expense                                      |  |                            | 1,754  |                          |   | 1,754  |  |      | 3,510   |  |   | 2,480 
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Income before income taxes                            |  |                            | 13,013 |                          |   | 8,701  |  |      | 24,863  |  |   | 5,556 
|Provision for income taxes                            |  |                            | 305    |                          |   | 150    |  |      | 555     |  |   | 150   
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Net income                                            |  | $                          | 12,708 |                          | $ | 8,552  |  | $    | 24,308  |  | $ | 5,406 
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Net income per common share:                          |  |                            |        |                          |   |        |  |      |         |  |   |       
|Basic                                                 |  | $                          | 0.18   |                          | $ | 0.12   |  | $    | 0.34    |  | $ | 0.08  
|Diluted                                               |  | $                          | 0.17   |                          | $ | 0.11   |  | $    | 0.32    |  | $ | 0.07  
|                                                      |  |                            |        |                         
|Weighted average number of common shares outstanding: |  |                            |        |                          |   |        |  |      |         |  |   |       
|Basic                                                 |  |                            | 71,768 |                          |   | 70,450 |  |      | 71,558  |  |   | 69,498
|Diluted                                               |  |                            | 75,703 |                          |   | 75,944 |  |      | 75,691  |  |   | 74,777



See accompanying Notes to Condensed
Consolidated Financial Statements.





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MGI PHARMA, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)



|                                                                              |  |                           |            |   |      |   |            |  
|----------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                              |  | Six Months Ended June 30, |           
|                                                                              |  | 2005                      |            |   | 2004 |  
|OPERATING ACTIVITIES:                                                         |  |                           |            |   |      |   |            |  
|Net income                                                                    |  | $                         | 24,308     |   |      | $ | 5,406      |  
|Adjustments for non-cash items:                                               |  |                           |            |   |      |   |            |  
|Depreciation and intangible amortization                                      |  |                           | 1,670      |   |      |   | 1,276      |  
|Benefit plan contribution                                                     |  |                           | 226        |   |      |   | 451        |  
|Employee stock compensation expense                                           |  |                           | 1,784      |   |      |   | 871        |  
|Stock option term modification                                                |  |                           | 326        |   |      |   |           |  
|Amortization of non-cash financing charges                                    |  |                           | 581        |   |      |   | 500        |  
|Other                                                                         |  |                           | 20         |   |      |   | 26         |  
|Change in operating assets and liabilities:                                   |  |                           |            |   |      |   |            |  
|Receivables                                                                   |  |                           | (8,345     | ) |      |   | (33,400    | )
|Inventories                                                                   |  |                           | (27,904    | ) |      |   | 4,386      |  
|Other current assets                                                          |  |                           | (149       | ) |      |   | 473        |  
|Accounts payable and accrued expenses                                         |  |                           | (18,773    | ) |      |   | 2,935      |  
|Deferred revenue                                                              |  |                           | (7         | ) |      |   | (123       | )
|Other current liabilities                                                     |  |                           | (45        | ) |      |   | 85         |  
|                                                                              |  |                           |            |   |      |   |            |  
|Net cash used in operating activities                                         |  |                           | (26,308    | ) |      |   | (17,114    | )
|                                                                              |  |                           |            |   |      |   |            |  
|INVESTING ACTIVITIES:                                                         |  |                           |            |   |      |   |            |  
|Purchase of investments                                                       |  |                           | (1,063,537 | ) |      |   | (1,954,838 | )
|Maturity of investments                                                       |  |                           | 1,090,835  |   |      |   | 1,730,439  |  
|Purchase of equipment, furniture and leasehold improvements                   |  |                           | (1,139     | ) |      |   | (430       | )
|                                                                              |  |                           |            |   |      |   |            |  
|Net cash provided by (used in) investing activities                           |  |                           | 26,159     |   |      |   | (224,829   | )
|                                                                              |  |                           |            |   |      |   |            |  
|FINANCING ACTIVITIES:                                                         |  |                           |            |   |      |   |            |  
|Purchase of restricted marketable securities held by trustee for debt service |  |                           |           |   |      |   | (17,163    | )
|Maturity of restricted marketable securities held by trustee for debt service |  |                           | 2,827      |   |      |   |           |  
|Cash consideration from issuance of shares under stock plans                  |  |                           | 4,609      |   |      |   | 7,839      |  
|Proceeds of debt offering                                                     |  |                           |           |   |      |   | 260,172    |  
|Issuance costs of debt offering                                               |  |                           |           |   |      |   | (8,135     | )
|Issuance of shares through stock purchase warrant exercise                    |  |                           |           |   |      |   | 3,850      |  
|                                                                              |  |                           |            |   |      |   |            |  
|Net cash provided by financing activities                                     |  |                           | 7,436      |   |      |   | 246,563    |  
|                                                                              |  |                           |            |   |      |   |            |  
|Increase in cash and cash equivalents                                         |  |                           | 7,287      |   |      |   | 4,620      |  
|                                                                              |  |                          
|Cash and cash equivalents at beginning of period                              |  |                           | 10,098     |   |      |   | 5,491      |  
|                                                                              |  |                           |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                    |  | $                         | 17,385     |   |      | $ | 10,111     |  
|                                                                              |  |                           |            |   |      |   |            |  
|Supplemental disclosure of cash information:                                  |  |                           |            |   |      |   |            |  
|Cash paid for interest                                                        |  | $                         | 2,927      |   |      | $ | 81         |  
|Cash paid for taxes                                                           |  |                           | 214        |   |      |   |           |  



See accompanying Notes to Condensed
Consolidated Financial Statements.



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MGI PHARMA, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



(1) Basis of Presentation



In the
opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements (consolidated financial statements) of MGI PHARMA, INC. and its wholly owned subsidiaries (collectively, MGI, MGI
PHARMA, or Company) have been prepared on a consistent basis with the December 31, 2004 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly
present the information set forth therein. The consolidated financial statements have been prepared in accordance with the regulations of the SEC, and, therefore, omit certain information and footnote disclosure necessary to present the statements
in accordance with U.S. generally accepted accounting principles. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2004, which was filed with the SEC on March 11, 2005. Certain amounts reported in previous periods have been reclassified to conform to the current period presentation. The results of operations for the
first six months of 2005 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.



Accounting Policies:



In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make decisions that impact the reported amounts and the related disclosures. Such
decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgments based on its understanding and analysis of the
relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared. Note 1 to the consolidated financial statements in the
Companys 2004 Annual Report on Form 10-K provides a summary of the significant accounting policies followed in the preparation of the consolidated financial statements. Other footnotes in the Companys 2004 Annual Report on Form 10-K
describe various elements of the consolidated financial statements and the assumptions made in determining specific amounts.



The consolidated financial statements include the accounts of MGI and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.



Recent Accounting Pronouncements:



In May 2005, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, which replaces Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. This Statement changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principles, as well as
changes required by an accounting pronouncement in the unusual instance it does not include specific transition provisions. Specifically, this Statement requires retrospective application to prior periods financial statements, unless it is
impracticable to determine the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the effects of the change, the new accounting principle must be applied to the balances of assets and liabilities as
of the beginning of the earliest period for which retrospective application is practicable and a corresponding adjustment must be made to the opening balance of retained earnings for that period rather than being reported in an income statement.
When it is impracticable to



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determine the cumulative effect of the change, the new principle must be applied as if it were adopted prospectively from the earliest date practicable. This
Statement is effective for the company for all accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. This Statement does not change the transition provisions of any existing pronouncements. The Company
does not believe that the adoption of SFAS No. 154 will have a significant impact on the Companys consolidated financial statements.



At its November 2003 and March 2004 meetings, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. The consensus reached requires companies to apply new guidance for evaluating whether an investment is other-than-temporarily impaired and also requires quantitative
and qualitative disclosure of debt and equity securities, classified as available-for-sale or held-to-maturity, that are determined to be only temporarily impaired at the balance sheet date. In September 2004, the adoption date of the consensus was
indefinitely delayed as it relates to the measurement and recognition of impairment losses for all securities in the scope of paragraphs 10-20 of Issue No. 03-1. The disclosures prescribed by Issue No. 03-1 and guidance related to impairment
measurement prior to the issuance of this consensus continue to remain in effect. Adoption did not have a material impact on the Companys condensed consolidated earnings, financial position or cash flows.



In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based
Payment. SFAS No. 123R is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. SFAS No.
123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for the
award of equity instruments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. In April 2005, the SEC issued a
new rule that allows companies to implement SFAS No. 123R at the beginning of the next fiscal year, instead of the next reporting period, that begins after June 15, 2005. As a result, we will implement SFAS No. 123R in the reporting period beginning
January 1, 2006. While the Company cannot precisely determine the impact on net earnings as a result of the adoption of SFAS No. 123R, estimated compensation expense related to prior periods can be found under the heading Stock Incentive
Plans in Note 2. The ultimate amount of increased compensation expense will be dependent on whether the Company adopts SFAS No.123R using the modified prospective or retrospective method, the number of option shares granted during the year,
their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.



At its October 2004 meeting, the EITF of the FASB reached a consensus on Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per
Share. The consensus requires contingently convertible instruments to be included in diluted earnings per share (if dilutive) regardless of whether the market price trigger has been met. The consensus is to be applied to contingently
convertible instruments in reporting periods beginning after December 15, 2004. The adoption of this consensus had no effect on the Companys consolidated financial statements as presented. The potential dilutive shares related to our senior
subordinated convertible notes issued in March 2004 are excluded from our diluted net income per share for the three and six months ended June 30, 2005 and 2004 because their inclusion in a calculation of net income per share would be antidilutive.
When dilutive, our diluted shares outstanding will be increased by up to 8.3 million shares and the net earnings used for earnings per share calculations would be adjusted, using the if-converted method. The Company estimates it would need to record
annual net income of approximately $64 million, or quarterly net income of approximately $16 million, in order for the effect of this pronouncement to be dilutive to earnings per share.



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(2) Stock Incentive Plans



Under stock incentive plans, designated persons (including officers, directors, employees and consultants) have been or may be granted
rights to acquire our common stock. These rights include stock options and other equity rights. At June 30, 2005, shares issued and shares available under stock incentive plans are as follows:



|                                               |  |                          |        |            |   |                   |  |   |       
|---------------------------------------------- |  | ------------------------ | ------ | ---------- | - | ----------------- |  | - | ------
|(in thousands, except exercise price)          |  | ShareholderApprovedPlans |        | OtherPlans |   | TotalFor AllPlans
|Shares issuable under outstanding options      |  |                          | 9,035  |            |   | 40                |  |   | 9,075 
|Shares available for future issuance           |  |                          | 2,086  |            |   |                  |  |   | 2,086 
|                                               |  |                          |        |            |   |                   |  |   |       
|Total                                          |  |                          | 11,121 |            |   | 40                |  |   | 11,161
|                                               |  |                          |        |            |   |                   |  |   |       
|Average exercise price for outstanding options |  | $                        | 14.55  |            | $ | 5.24              |  | $ | 14.51 



We account for stock-based
compensation arrangements in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and comply with the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation.
Under APB Opinion No. 25, compensation cost is recognized when the market value of the Companys stock exceeds the amount an employee must pay to acquire the stock at the date of grant. During the second quarter of 2004, a stock option grant
was made below market value and the aggregate amount of $284,800 is being expensed in accordance with APB Opinion No. 25 over a four-year vesting period. All other stock incentive awards were made at market value so no compensation expense has been
recognized for these awards. Had we determined compensation cost based on fair value at the grant date for our stock options and the fair value of the discount related to the employee stock purchase plan under SFAS 123, our net income (loss) would
have been reported as follows:



|                                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                                |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|(in thousands, except per share data)                                                                           |  | 2005                       |        |   | 2004                     |   |        | 2005 |  |   | 2004    |  
|Net income, as reported                                                                                         |  | $                          | 12,708 |   |                          | $ | 8,552  |      |  | $ | 24,308  |   |  | $ | 5,406  |  
|Add: Total stock-based employee compensation expense included in reported net income                            |  |                            | 37     |   |                          |   | 21     |      |  |   | 74      |   |  |   | 21     |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                            | (7,541 | ) |                          |   | (5,192 | )    |  |   | (15,765 | ) |  |   | (8,290 | )
|                                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Pro forma net income (loss)                                                                                     |  | $                          | 5,204  |   |                          | $ | 3,381  |      |  | $ | 8,617   |   |  | $ | (2,863 | )
|                                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss) per common share:                                                                             |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|As reported basic                                                                                               |  | $                          | 0.18   |   |                          | $ | 0.12   |      |  | $ | 0.34    |   |  | $ | 0.08   |  
|Pro forma basic                                                                                                 |  | $                          | 0.07   |   |                          | $ | 0.05   |      |  | $ | 0.12    |   |  | $ | (0.04  | )
|                                                                                                                |  |                            |        |  
|As reported diluted                                                                                             |  | $                          | 0.17   |   |                          | $ | 0.11   |      |  | $ | 0.32    |   |  | $ | 0.07   |  
|Pro forma diluted                                                                                               |  | $                          | 0.07   |   |                          | $ | 0.04   |      |  | $ | 0.11    |   |  | $ | (0.04  | )
|                                                                                                                |  |                            |        |  
|                                                                                                                |  | 2005                       |        |   | 2004                     |   |        | 2005 |  |   | 2004    |  
|Expected dividend yield                                                                                         |  |                            | 0      | % |                          |   | 0      | %    |  |   | 0       | % |  |   | 0      | %
|Risk-free interest rate                                                                                         |  |                            | 3.87   | % |                          |   | 3.73   | %    |  |   | 3.87    | % |  |   | 3.36   | %
|Annualized volatility                                                                                           |  |                            | 0.67   |   |                          |   | 0.90   |      |  |   | 0.72    |   |  |   | 0.90   |  
|Expected life, in years                                                                                         |  |                            | 4.8    |   |                          |   | 5.0    |      |  |   | 5.1     |   |  |   | 5.0    |  



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(3) Net Income Per Common Share



Net income per common share for the three-month and six-month periods ended June 30, 2005 and 2004 is based on weighted average shares
outstanding as summarized in the following table:



|                                            |  |                            |  |       
|------------------------------------------- |  | -------------------------- |  | ------
|                                            |  | Three Months EndedJune 30,
|(in thousands)                              |  | 2005                       |  | 2004  
|Weighted-average shares - basic             |  | 71,768                     |  | 70,450
|Effect of dilutive stock options            |  | 3,935                      |  | 5,494 
|Effect of convertible debt                  |  |                           |  |      
|                                            |  |                            |  |       
|Weighted-average shares - assuming dilution |  | 75,703                     |  | 75,944
|                                            |  |                            |  |       
|                                            | 
|                                            |  | Six Months EndedJune 30,  
|(in thousands)                              |  | 2005                       |  | 2004  
|Weighted-average shares - basic             |  | 71,558                     |  | 69,498
|Effect of dilutive stock options            |  | 4,133                      |  | 5,279 
|Effect of convertible debt                  |  |                           |  |      
|                                            |  |                            |  |       
|Weighted-average shares - assuming dilution |  | 75,691                     |  | 74,777
|                                            |  |                            |  |       



Weighted-average shares issuable upon
the exercise of stock options, which were not included in the diluted earnings per share calculation because they were not dilutive, were 5.1 million and 2.9 million for the three-month periods ended June 30, 2005 and 2004, respectively, and 4.9
million and 3.1 million for the six-month periods ended June 30, 2005 and 2004, respectively. In addition, 8.3 million shares issuable upon the conversion of our convertible debt were excluded from the diluted earnings per share calculation because
they were not dilutive for all periods presented.



(4) Marketable
Investments



Marketable investments consisted of held-to-maturity and
available-for-sale debt investments that are reported at amortized cost, which approximates fair market value and available-for-sale, publicly traded, equity securities that are reported at fair market value. Unrealized gains or losses from the
available-for-sale, marketable securities are included in Accumulated other comprehensive (loss) income, as a separate component of Stockholders equity. Short-term marketable investments as of June 30, 2005 and December
31, 2004 are summarized in the following table:



|                                                           |  |               |         |                  |   |        
|---------------------------------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|(in thousands)                                             |  | June 30, 2005 |         | December 31,2004
|Corporate notes (classified as held-to-maturity)           |  | $             | 7,163   |                  | $ | 33,071 
|Government agencies (classified as held-to-maturity)       |  |               | 30,185  |                  |   |       
|Auction rate securities (classified as available-for-sale) |  |               | 164,112 |                  |   | 162,313
|                                                           |  |               |         |                  |   |        
|Total                                                      |  | $             | 201,460 |                  | $ | 195,384
|                                                           |  |               |         |                  |   |        



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##### Table of Contents

Long-term marketable investments consist of publicly traded, equity securities as of June 30, 2005 and
publicly traded, equity securities, corporate notes and United States government agencies debt as of December 31, 2004. The corporate notes as of December 31, 2004 mature between January of 2006 and April of 2006. Long-term marketable securities are
summarized in the following table:



|                                                     |  |              |        |                  |   |       
|---------------------------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|(in thousands)                                       |  | June 30,2005 |        | December 31,2004
|Corporate notes (classified as held-to-maturity)     |  | $            |       |                  | $ | 3,184 
|Equity securities (classified as available-for-sale) |  |              | 24,212 |                  |   | 33,474
|Government agencies (classified as held-to-maturity) |  |              |       |                  |   | 30,190
|                                                     |  |              |        |                  |   |       
|Total                                                |  | $            | 24,212 |                  | $ | 66,848
|                                                     |  |              |        |                  |   |       



Restricted marketable investments of
$11.5 million and $14.4 million at June 30, 2005 and December 31, 2004, respectively, consist of United States government agency investments and relate to the issuance of convertible debt in March 2004.



In September 2004, we acquired four million shares of SuperGen, Inc. (SuperGen) as part of a
transaction that included obtaining the worldwide licensing rights for decitabine (Dacogen). The investment was accounted for as long-term available for sale marketable securities. As such, unrealized gains and losses have been reported as a
separate component of stockholders equity (Other Comprehensive Income or OCI). At the time of purchase, the fair value of the SuperGen securities was $24.4 million. As of June 30, 2005, the fair value of the MGI investment in
SuperGen was $19.8 million and has been impaired for less than 12 months. We believe the decline in fair value of the SuperGen investment is temporary.



In making this assessment, we take into consideration a wide range of objective and subjective information, including but not limited to the following: the magnitude and
duration of historical decline in market prices, credit rating activity, assessments of liquidity, public filings, analyst reports, the stocks volatility, the fair value of the investment after the balance sheet date but before the financial
statements are issued, and statements made by the issuer.



Actual losses, if
any, could ultimately differ from these estimates. Future adverse changes in market conditions or poor operating results of underlying investments could result in additional losses that may not be reflected in an investments current carrying
value, thereby possibly requiring an impairment charge in the future.



We own
an approximate 10 percent investment in MethylGene Inc. (MethylGene), a Canada-based biopharmaceutical company. MethylGene completed its initial public offering and began trading publicly on the Toronto Stock Exchange on June 29, 2004.
MGIs carrying value of the MethylGene investment prior to MethylGenes initial public offering was $3.6 million. As of June 30, 2005, the fair value of our MethylGene investment was $4.4 million.



The unrealized gains (losses) for available for sale equity securities reported in other
comprehensive income (loss) as of June 30, 2005 and December 31, 2004 are summarized as follows:



|                                                     |  |               |        |                      |   |                       |  |   |           |   |  |   |       
|---------------------------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | --------- | - |  | - | ------
|                                                     |  | June 30, 2005
|(in thousands)                                       |  | Cost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|Equity Securities (classified as available for sale) |  | $             | 28,046 |                      | $ | 806                   |  | $ | (4,640    | ) |  | $ | 24,212



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##### Table of Contents

|                                                     |  |                   |        |                      |   |                       |  |           |   |  |   |       
|---------------------------------------------------- |  | ----------------- | ------ | -------------------- | - | --------------------- |  | --------- | - |  | - | ------
|                                                     |  | December 31, 2004
|(in thousands)                                       |  | Cost              |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                                     |  |                   |        |                      |   |                       |  |          
|Equity Securities (classified as available for sale) |  | $                 | 28,046 |                      | $ | 5,428                 |  | $         |  |  | $ | 33,474



(5) Inventories



Inventories at June 30, 2005 and December 31, 2004 are summarized as follows:



|                                |  |              |        |                  |   |      
|------------------------------- |  | ------------ | ------ | ---------------- | - | -----
|(in thousands)                  |  | June 30,2005 |        | December 31,2004
|Raw materials and supplies      |  | $            | 15     |                  | $ | 328  
|Work in process                 |  |              | 356    |                  |   | 397  
|Finished products               |  |              | 35,941 |                  |   | 7,473
|Inventories consigned to others |  |              |       |                  |   | 210  
|                                |  |              |        |                  |   |      
|Total                           |  | $            | 36,312 |                  | $ | 8,408
|                                |  |              |        |                  |   |      



Inventories are stated at the lower of
cost or market. Cost is determined on a first-in, first-out basis.



(6)
Accrued Expenses



Accrued expenses at June 30, 2005 and December
31, 2004 are summarized as follows:



|                                |  |              |        |                  |   |       
|------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|(in thousands)                  |  | June 30,2005 |        | December 31,2004
|Product rebate and other fees   |  | $            | 8,941  |                  | $ | 14,229
|License fees                    |  |              | 4,963  |                  |   | 4,576 
|Product return accrual          |  |              | 2,187  |                  |   | 2,448 
|Product development commitments |  |              | 2,331  |                  |   | 3,314 
|Field sales bonuses             |  |              | 610    |                  |   | 3,800 
|Other bonuses                   |  |              | 1,366  |                  |   | 3,512 
|Retirement plan accruals        |  |              | 985    |                  |   | 2,624 
|Interest                        |  |              | 1,951  |                  |   | 1,951 
|Other accrued expenses          |  |              | 6,749  |                  |   | 6,790 
|                                |  |              |        |                  |   |       
|Total                           |  | $            | 30,083 |                  | $ | 43,244
|                                |  |              |        |                  |   |       



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##### Table of Contents

(7) Stockholders Equity



Changes in selected stockholders equity accounts for the six months ended June 30, 2005 were as follows:



|                                                       |  |              |  |                          |     |                      |   |         |                                            |   |        |   |  |   |        |  
|------------------------------------------------------ |  | ------------ |  | ------------------------ | --- | -------------------- | - | ------- | ------------------------------------------ | - | ------ | - |  | - | ------ | -
|                                                       |  | Common Stock |  | Additionalpaid-incapital |     | Unearnedcompensation |   |         | Accumulatedothercomprehensiveincome (loss) |  
|(in thousands)                                         |  | Shares       |  | Par value                |     |                      |  
|Balance at December 31, 2004                           |  | 71,041       |  | $                        | 710 |                      | $ | 418,659 |                                            | $ | (3,216 | ) |  | $ | 5,428  |  
|Exercise of stock options                              |  | 711          |  |                          | 7   |                      |   | 3,800   |                                            |   |       |   |  |   |       |  
|Employee retirement plan contribution                  |  | 43           |  |                          | 1   |                      |   | 1,788   |                                            |   |       |   |  |   |       |  
|Shares issued pursuant to employee stock purchase plan |  | 62           |  |                          | 1   |                      |   | 808     |                                            |   |       |   |  |   |       |  
|Stock option term modification                         |  |             |  |                          |    |                      |   | 326     |                                            |   |       |   |  |   |       |  
|Restricted stock units                                 |  | 8            |  |                          |    |                      |   | 236     |                                            |   | 1,356  |   |  |   |       |  
|Unrealized loss on available for sale investments      |  |             |  |                          |    |                      |   |        |                                            |   |       |   |  |   | (9,262 | )
|Income tax benefit related to employee stock awards    |  |             |  |                          |    |                      |   | 190     |                                            |   |       |   |  |   |       |  
|Other issuances                                        |  | 1            |  |                          |    |                      |   | 20      |                                            |   |       |   |  |   |       |  
|                                                       |  |              |  |                          |     |                      |   |         |                                            |   |        |   |  |   |        |  
|Balance at June 30, 2005                               |  | 71,866       |  | $                        | 719 |                      | $ | 425,827 |                                            | $ | (1,860 | ) |  | $ | (3,834 | )
|                                                       |  |              |  |                          |     |                      |   |         |                                            |   |        |   |  |   |        |  



(8) Acquisitions



Zycos: On September 3, 2004, Zycos Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of MGI PHARMA merged with and into Zycos Inc. (Zycos), a Delaware corporation, with Zycos surviving as our wholly owned subsidiary. Through the merger, we acquired all of the ownership interests in Zycos from its
security holders. Zycos was a privately held, development stage company that focused on the creation and development of oncology and antiviral products. The transaction has been accounted for as a purchase of a development stage enterprise.
Commencing September 3, 2004, the results of Zycos operations have been included in our condensed consolidated financial statements.



As consideration for the acquisition of all ownership interests in Zycos, Inc., we paid $50 million in cash. In addition, we incurred $2.3 million in transaction fees,
including legal, valuation, investment banking and accounting fees.



Aesgen: On
September 28, 2004, MGIP Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of MGI PHARMA, merged with and into Aesgen, Inc., a Delaware corporation (Aesgen), with Aesgen surviving as our wholly owned subsidiary.
Aesgen, Inc. was a privately held company focused on developing therapies for treating side effects associated with cancer treatments. Aesgens lead product, SaforisTMoral suspension, is a phase 3 product candidate in development for treatment of oral mucositis. The transaction has been accounted for as a purchase business combination in
accordance with SFAS No. 141, Business Combinations. Commencing September 28, 2004, the results of Aesgens operations have been included in our consolidated financial statements.



As consideration for all of the ownership interests in Aesgen, we paid $32 million in cash at
the closing. In addition, we assumed $1.1 million in liabilities and incurred $1.9 million in transaction fees, including legal, valuation and accounting fees.



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The following is a summary of potential contingent consideration to Aesgens former security holders:



| |  |  | $33 million upon FDA approval of Saforis oral suspension;
| | - |  | ----------------------------------------------------------



| |  |  | $25 million in the event that net sales of Aesgen products containing L-Glutamine, including Saforis oral suspension, exceed $50 million in the second year after commercial launch
of Saforis oral suspension; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the ten-year period after commercialization begins, a 5 percent royalty on net sales of Saforis oral suspension after cumulative net sales exceed $50 million; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A payment equal to three times net sales in the tenth year after commercialization begins.
| | - |  | ------------------------------------------------------------------------------------------



If earned, contingent consideration would be considered goodwill. Goodwill represents the excess of the purchase price paid over the fair
value of tangible and identifiable intangible net assets acquired in business combinations. In accordance with SFAS No. 142, the Company has not amortized goodwill for business acquisitions consummated after June 30, 2001, and ceased amortization of
goodwill effective January 1, 2002 for business combinations consummated prior to July 1, 2001. Goodwill is reviewed annually and whenever events or circumstances occur which indicate that goodwill might be impaired.



No contingent consideration was paid or was payable as of June 30, 2005.



Pro forma results of operations: The following unaudited pro forma information for the three
and six months ended June 30, 2004, presents a summary of the combined results of MGI PHARMA, Aesgen and Zycos as if the acquisitions had occurred on January 1, 2004. The pro forma net income and income per share include the acquired IPR&D
charge noted above as if recognized in 2003. The pro forma information is not necessarily indicative of results that would have occurred had the acquisitions been consummated for the periods presented or indicative of results that may be achieved in
the future.



|                                   |  |                                 |        |                               |   |       
|---------------------------------- |  | ------------------------------- | ------ | ----------------------------- | - | ------
|(in thousands)                     |  | Three Months EndedJune 30, 2004 |        | Six Months EndedJune 30, 2004
|Total revenues                     |  | $                               | 48,159 |                               | $ | 75,747
|Net income                         |  |                                 | 5,408  |                               |   | 278   
|Pro forma income per common share: |  |                                 |        |                               |   |       
|Basic                              |  | $                               | 0.08   |                               | $ | 0.00  
|Diluted                            |  | $                               | 0.08   |                               | $ | 0.00  



(9) Research and Development
Expense



Research and development expense for the three-month and
six-month periods ended June 30, 2005 and 2004 consists of the following:



|                               |  |                            |        |      |   |      
|------------------------------ |  | -------------------------- | ------ | ---- | - | -----
|                               |  | Three Months EndedJune 30,
|(in thousands)                 |  | 2005                       |        | 2004
|License fees                   |  | $                          |       |      | $ | 2,550
|Other research and development |  |                            | 14,248 |      |   | 5,483
|                               |  |                            |        |      |   |      
|Total                          |  | $                          | 14,248 |      | $ | 8,033
|                               |  |                            |        |      |   |      



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|                               |  |                          |        |      |   |       
|------------------------------ |  | ------------------------ | ------ | ---- | - | ------
|                               |  | Six Months EndedJune 30,
|(in thousands)                 |  | 2005                     |        | 2004
|License fees                   |  | $                        |       |      | $ | 3,050 
|Other research and development |  |                          | 24,702 |      |   | 9,998 
|                               |  |                          |        |      |   |       
|Total                          |  | $                        | 24,702 |      | $ | 13,048
|                               |  |                          |        |      |   |       



(10) Comprehensive Income



Total comprehensive income consists of net income and other comprehensive
income, which consists of unrealized gains and losses on available-for-sale investments. Other comprehensive income has no impact on our net income but is reflected in our balance sheet through an adjustment to stockholders equity. The
components of comprehensive income are as follows:



|                                                                        |  |                            |        |   |      |   |       
|----------------------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------
|                                                                        |  | Three Months EndedJune 30,
|(in thousands)                                                          |  | 2005                       |        |   | 2004
|Net income, as reported                                                 |  | $                          | 12,708 |   |      | $ | 8,552 
|Unrealized gain (loss) from securities classified as available for sale |  |                            | (820   | ) |      |   | 2,556 
|                                                                        |  |                            |        |   |      |   |       
|Comprehensive income                                                    |  | $                          | 11,888 |   |      | $ | 11,108
|                                                                        |  |                            |        |   |      |   |       
|                                                                        | 
|                                                                        |  | Six Months EndedJune 30,  
|(in thousands)                                                          |  | 2005                       |        |   | 2004
|Net income, as reported                                                 |  | $                          | 24,308 |   |      | $ | 5,406 
|Unrealized gain (loss) from securities classified as available for sale |  |                            | (9,262 | ) |      |   | 2,556 
|                                                                        |  |                            |        |   |      |   |       
|Comprehensive income                                                    |  | $                          | 15,406 |   |      | $ | 7,962 
|                                                                        |  |                            |        |   |      |   |       



(11) Subsequent Events



Agreement and Plan of Merger



On July 20, 2005, MGI PHARMA, INC. (MGI PHARMA) and its wholly-owned subsidiary
Granite Acquisition, Inc. entered into an Agreement and Plan of Merger with Guilford Pharmaceuticals Inc. (Guilford), a Delaware corporation. The stock portion of the consideration is subject to a collar (as described below) such that,
if the average closing price of MGI PHARMAs common stock is between $23.4345 and $31.7055, MGI PHARMA will acquire all of the outstanding shares of Guilford for $3.75 per share in a transaction that is expected to be a taxable merger. The
consideration consists of a fractional share of MGI PHARMA common stock and $1.125 in cash. Assuming the five-day average closing price of MGI PHARMA



14



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##### Table of Contents

common stock three days prior to the closing of the merger equals the August 1, 2005, closing price of $26.99, MGI PHARMA would expect to issue approximately
4.6 million shares based on an estimated number of outstanding shares of Guilford common stock of 47.3 million. The total consideration of $3.75 per outstanding share of Guilford stock represents a fully diluted equity value of $177.5 million.



The stock portion of this consideration is subject to a collar such that, if
MGI PHARMAs average closing price, as determined over the five-day trading period ending three trading days prior to closing of the merger, is between $23.4345 and $31.7055, Guilford shareholders will receive total consideration with a fixed
value of $3.75 per share, consisting of a fractional share of MGI PHARMA common stock equal to $2.625 divided by the average closing price, plus $1.125 in cash. However, if the average closing price of MGI PHARMA common stock is equal to or more
than $31.7055, each share of Guilford common stock will be exchanged for 0.0828 of a share of MGI PHARMA common stock plus $1.125 in cash, and if the average closing price of MGI PHARMA stock is equal to or less than $23.4345, each share of Guilford
common stock will be exchanged for 0.1120 of a share of MGI PHARMA common stock plus $1.125 in cash.



MGI PHARMA intends to offer to redeem Guilfords convertible notes, which totaled $69.4 million as of March 31, 2005, within 60 days after the closing of this transaction. In addition, MGI PHARMA will extinguish
at closing an approximate $60 million obligation related to Guilfords revenue interest agreement with Paul Royalty, which is expected to be offset by any proceeds received from the planned divestiture of Aggrastat® injection and Guilfords available cash. MGI PHARMA may provide Guilford
with bridge financing pursuant to a credit agreement for up to $18 million if closing of this transaction occurs after October 1, 2005. Guilfords obligations under the bridge financing will be secured by certain intellectual property assets of
Guilford.



The merger is conditioned on and subject to the approval of
Guilfords stockholders, termination of the Hart-Scott-Rodino waiting period and other customary closing conditions, and is expected to close during the fourth quarter of 2005.



Acceleration of Vesting of Stock Option Awards



On July 26, 2005, pursuant to and in accordance with the recommendation of the Compensation Committee (the Committee), the Board
of Directors of MGI PHARMA, INC. (the Company) approved full acceleration of the vesting of each otherwise unvested stock option that had an exercise price of $26.21 or greater granted under the Companys Amended and Restated 1997
Stock Incentive Plan (the 1997 Plan) or Amended and Restated 1999 Non Employee Director Stock Option Plan (the 1999 Plan) that were held by employees, officers and non-employee directors. Options to purchase approximately 2.7
million shares of the Companys Common Stock (Common Shares), including approximately 842,500 options held by officers at or above the level of Vice President (including executive officers) and approximately 157,500 options held by
non-employee directors, are subject to this acceleration which was effective as of July 26, 2005.



The Committee also required that as a condition to the acceleration, each officer at or above the level of Vice President (including the executive officers) and each non-employee director agree to refrain from selling
Common Shares acquired upon the exercise of accelerated options (other than shares needed to cover the exercise price and satisfy withholding taxes) until the date on which the exercise would have been permitted under the options
pre-acceleration vesting terms or, if earlier, the officers or directors last day of employment or upon a change in control as defined in any Termination Agreement between the individual and the Company (the
Lock-Up).



The decision to accelerate vesting of these underwater
options was made primarily to minimize certain future compensation expense that the Company would otherwise recognize in its consolidated statements of operations with respect to these options pursuant to Financial Accounting Standards Board
Statement No. 123 (revised 2004), Share-Based Payment, which becomes effective as to the Company for reporting periods beginning after December 31, 2005. The Company believes that the aggregate future expense that will be eliminated as a
result of the acceleration of the vesting of these options is approximately $54.3 million (of which approximately $8.8 million is attributable to options held by executive officers and approximately $3.8 million is attributable to options held by
non-employee directors).



15



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##### Table of Contents

Item 2.



Managements Discussion and
Analysis of Financial Condition and Results of Operations



Business
Overview 



MGI PHARMA, INC. (including its subsidiaries,
MGI, we, or the Company) is an oncology and acute care focused biopharmaceutical company that acquires, develops and commercializes proprietary pharmaceutical products that address the unmet needs of patients. It
is our goal to become a leading oncology and acute care focused biopharmaceutical company through the application of our three core competencies of oncology and acute care product acquisition, development and commercialization, which we apply toward
our portfolio of oncology and acute care products and product candidates. We acquire intellectual property or product rights from others after they have completed the basic research to discover the compounds that will become our product candidates
or marketed products. This allows us to focus our skills on product development and commercialization rather than directly performing drug discovery. We have facilities in Bloomington, Minnesota; Lexington, Massachusetts; and Princeton, New Jersey.



We promote products directly to physician specialists in the United States
using our own sales force. Our products include Aloxi® (palonosetron hydrochloride) injection, Salagen® (pilocarpine hydrochloride) Tablets, Hexalen® (altretamine) capsules and Kadian® (morphine sulfate) sustained release capsules. In the third quarter of 2003, Aloxi injection was approved by the U.S. Food and Drug Administration (FDA) for the prevention of acute and delayed
chemotherapy-induced nausea and vomiting (CINV) and we began promoting it. Given the large market in which Aloxi injection competes and its favorable clinical profile, sales of Aloxi injection substantially exceeds sales of our other
products. We obtained exclusive U.S. and Canadian license and distribution rights to Aloxi injection for CINV from Helsinn Healthcare SA (Helsinn) in April 2001. In November 2003, we and Helsinn expanded the agreement to include rights
for the prevention of postoperative nausea and vomiting (PONV) application of Aloxi injection and an oral Aloxi formulation. Unless we meet certain minimum Aloxi product sales requirements under our license agreement with Helsinn, we
would be required to work with Helsinn to develop a remediation plan that if not successfully implemented could result in certain Aloxi product rights reverting to Helsinn. Our 2004 Aloxi product sales of $159.3 million substantially exceeded the
minimum requirement for 2004 of $25 million and our year-to-date sales of Aloxi injection have exceeded our minimum requirement for 2005. Our minimum Aloxi product sales requirement for all Aloxi applications is estimated to peak at approximately
$155 to $175 million, depending upon the timing of marketing approvals for Aloxi injection for PONV and Aloxi oral for CINV. Our sales of Aloxi injection for CINV (which does not include any sales of Aloxi injection for PONV or Aloxi oral for CINV)
for the six months ended June 30, 2005 and for the year ended December 31, 2004 were $117.9 million and $159.3 million, respectively, so we believe there is minimal risk that we will not achieve our future contractual sales minimums under the
Helsinn license agreement.



Salagen Tablets are approved in the United States
for two indications: the symptoms of dry mouth associated with radiation treatment in head and neck cancer patients and the symptoms of dry mouth associated with Sjögrens syndrome, an autoimmune disease that damages the salivary glands.
Beginning in November of 2004, generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen Tablets compete and we suspended direct promotion of Salagen Tablets. If the introduction of these competing
products adheres to the classic pattern of initial generic competition in a pharmaceutical class, we would expect Salagen Tablets sales to decline significantly from our 2004 sales of $29.3 million in the United States. Sales of Salagen Tablets were
$7.0 million and $15.3 million for the six months ended June 30, 2005 and 2004, respectively.



Hexalen capsules are an orally administered chemotherapeutic agent approved in the United States for treatment of refractory ovarian cancer patients.



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##### Table of Contents

The following table summarizes the principal indications and commercial rights for our currently marketable products.



|                 |  |                                                                                                                                                    |  |                    |  |                                                                                     
|---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ |  | ------------------------------------------------------------------------------------
|Products         |  | Principal Indications                                                                                                                              |  | Status             |  | Commercial Rights                                                                   
|Aloxi injection  |  | Chemotherapy-induced nausea and vomiting                                                                                                           |  | Currently marketed |  | U.S. & Canada: MGI                                                                  
|                 |  |                                                                                                                                                    | 
|Salagen Tablets  |  | Symptoms of radiation-induced dry mouth in head and neck cancer patients Dry mouth, plus dry eyes outside the U.S., in Sjögrens syndrome patients |  | Currently marketed |  | U.S.: MGI Europe: Novartis Canada: Pfizer Rest of World: Various other
collaborators
|                 |  |                                                                                                                                                    | 
|Hexalen capsules |  | Ovarian Cancer                                                                                                                                     |  | Currently marketed |  | U.S.: MGI Outside U.S.: Various
collaborators                                       
|                 |  |                                                                                                                                                    | 
|Kadian capsules  |  | Cancer related pain                                                                                                                                |  | Currently promoted |  | U.S.: MGI - Cancer Alpharma  all
other                                             



The following table summarizes the
principal indications and development status for our products under development.



|                          |  |                                 |  |                                   
|------------------------- |  | ------------------------------- |  | ----------------------------------
|Products                  |  | Principal Indications           |  | Status                            
|Dacogen injection         |  | MDS AML                         |  | FDA & EMEA review To begin Phase
3
|                          |  |                                
|Saforis oral suspension   |  | Oral mucositis                  |  | To submit NDA                     
|                          |  |                                
|ZYC101a                   |  | Cervical dysplasia              |  | Pivotal program ongoing           
|                          |  |                                
|Aloxi injection           |  | PONV                            |  | Phase 3                           
|                          |  |                                
|Aloxi capsules            |  | CINV                            |  | Phase 3                           
|                          |  |                                
|Irofulven *               |  | Monotherapy Combination Therapy |  | Phase 2 Phase 2                   
|                          |  |                                
|MG98                      |  | Renal cell cancer               |  | Phase 2                           
|                          |  |                                
|ZYC300                    |  | Solid tumors                    |  | Phase 1/2                         
|                          |  |                                
|Other acylfulvene analogs |  | Various Cancers                 |  | Preclinical                       

---

|* | includes National Cancer Institute trials
|- | -----------------------------------------



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Our goal is to become a leading oncology and acute care focused biopharmaceutical company serving well-defined markets.
The key elements of our strategy are to:



| |  |  | Maximize the commercial potential of Aloxi injection for prevention of chemotherapy-induced nausea and vomiting, or CINV, by marketing Aloxi injection as an enhanced alternative to
currently-marketed 5-HT3receptor antagonists;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In collaboration with SuperGen, Inc. pursue approval of the New Drug Application (NDA) and Marketing Authorization Application (MAA), for Dacogen injection at the FDA and the
European Medicines Agency (EMEA), while implementing United States commercial product launch activities in consideration with the September 1, 2005 Prescription Drug User Fee Act (PDUFA), goal date established by the FDA;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Complete the NDA submission for Saforis oral suspension during the third quarter of 2005 and initiate an additional phase 3 trial of Saforis oral suspension in patients with oral
mucositis after the NDA submission is completed;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Advance our predominately late-stage product candidate pipeline:
| | - |  | ----------------------------------------------------------------



| |  |  | Dacogen injection for the treatment of acute myeloid leukemia, or AML,
| | - |  | ----------------------------------------------------------------------



| |  |  | Aloxi injection for the prevention of post operative nausea and vomiting, or PONV, and Aloxi capsules for prevention of CINV, and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | ZYC101a for the treatment of cervical dysplasia;
| | - |  | ------------------------------------------------



| |  |  | Establish commercialization paths for our product candidates in territories outside of North America; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Selectively add to our product portfolio through various means, including product acquisition, in-licensing, co-promotion or business combinations, including:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Oncology and oncology-related products, and
| | - |  | -------------------------------------------



| |  |  | Acute care, hospital promoted products.
| | - |  | ---------------------------------------



Results of Operations



The three months and six months ended June 30, 2005 compared to the three months and six months ended June 30, 2004:



Revenues



Total revenues in the second quarter and first half of 2005 increased 40 percent and 74 percent, respectively, over total revenues in the corresponding periods of 2004.



|                    |  |                             |        |      |   |        |  |   |         |   |  |     |  
|------------------- |  | --------------------------- | ------ | ---- | - | ------ |  | - | ------- | - |  | --- | -
|                    |  | Three Months Ended June 30, |       
|(in thousands)      |  | 2005                        |        | 2004 |   | Change |  |   | %Change |  
|Product sales:      |  |                             |        |      |   |        |  |   |         |   |  |     |  
|Aloxi injection     |  | $                           | 60,755 |      | $ | 37,141 |  | $ | 23,614  |   |  | 64  | %
|Salagen Tablets     |  |                             | 3,339  |      |   | 8,573  |  |   | (5,234  | ) |  | (61 | )
|Other               |  |                             | 1,224  |      |   | 1,148  |  |   | 76      |   |  | 7   |  
|                    |  |                             |        |      |   |        |  |   |         |   |  |     |  
|Total product sales |  |                             | 65,318 |      |   | 46,862 |  |   | 18,456  |   |  | 39  |  
|                    |  |                             |        |     
|Licensing and other |  |                             | 1,844  |      |   | 1,077  |  |   | 767     |   |  | 71  |  
|                    |  |                             |        |      |   |        |  |   |         |   |  |     |  
|Total revenues      |  | $                           | 67,162 |      | $ | 47,939 |  | $ | 19,223  |   |  | 40  |  
|                    |  |                             |        |      |   |        |  |   |         |   |  |     |  



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|                    |  |                           |         |      |   |        |  |   |         |   |  |     |  
|------------------- |  | ------------------------- | ------- | ---- | - | ------ |  | - | ------- | - |  | --- | -
|                    |  | Six Months Ended June 30, |        
|(in thousands)      |  | 2005                      |         | 2004 |   | Change |  |   | %Change |  
|Product sales:      |  |                           |         |      |   |        |  |   |         |   |  |     |  
|Aloxi injection     |  | $                         | 117,909 |      | $ | 55,702 |  | $ | 62,207  |   |  | 112 | %
|Salagen Tablets     |  |                           | 6,972   |      |   | 15,290 |  |   | (8,318  | ) |  | (54 | )
|Other               |  |                           | 2,822   |      |   | 1,704  |  |   | 1,118   |   |  | 66  |  
|                    |  |                           |         |      |   |        |  |   |         |   |  |     |  
|Total product sales |  |                           | 127,703 |      |   | 72,696 |  |   | 55,007  |   |  | 76  |  
|                    |  |                           |         |     
|Licensing and other |  |                           | 2,694   |      |   | 2,112  |  |   | 582     |   |  | 28  |  
|                    |  |                           |         |      |   |        |  |   |         |   |  |     |  
|Total revenues      |  | $                         | 130,397 |      | $ | 74,808 |  | $ | 55,589  |   |  | 74  |  
|                    |  |                           |         |      |   |        |  |   |         |   |  |     |  



Sales: Product sales revenue in
the second quarter and first half of 2005 increased 39 percent and 76 percent, respectively, over sales revenue in the corresponding periods of 2004.



| |  |  | Sales of Aloxi injection are the primary reason for the increase in product sales revenue. Aloxi injection net sales revenue was $60.8 million or 93 percent of our sales revenue in
the second quarter of 2005 and $117.9 million or 92 percent of our sales revenue in the first half of 2005. Aloxi injection net sales revenue was $37.1 million or 79 percent of our sales revenue in the second quarter of 2004 and $55.7 million or 77
percent of our sales revenue in the first half of 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the second quarter of 2005 and 2004, we recognized $3.3 million of Salagen Tablets sales or 5 percent of our sales revenue and $8.6 million of Salagen Tablets sales or 18 percent
of our product sales revenue, respectively. In the first half of 2005 and 2004, we recognized $7.0 million of Salagen Tablets sales or 5 percent of our product sales revenue and $15.3 million of Salagen Tablets sales or 21 percent of our product
sales revenue, respectively. In November 2004, the FDA approved a competitors Abbreviated New Drug Application (ANDA) for a generic 5 milligram pilocarpine hydrochloride tablet and a second ANDA was approved in December 2004 and we
have suspended direct promotion of Salagen Tablets. If the introduction of these competing products adheres to the classic pattern of initial generic competition in a pharmaceutical product class, we would expect Salagen Tablet sales in 2005 to
decline significantly from 2004 levels.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | At June 30, 2005, we estimate there was approximately 30 days worth of sales in inventory in the wholesale distribution channel utilized by the company. This represented an increase
from an estimate of one to three weeks of inventory, varying by distributor, at March 31, 2005. These estimates are based on historical sales trends of our products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Licensing and other: Licensing and other revenue increased 71 percent to $1.8 million in the second quarter of 2005 from $1.1 million
in the second quarter of 2004 and increased 28 percent to $2.7 million in the first half of 2005 from $2.1 million in the first half of 2004. Licensing revenue is a combination of deferred revenue



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amortization that is recognized over the term of the underlying arrangement and royalties that are recognized when the related sales occur. Future licensing
revenue will fluctuate from quarter to quarter depending on the level of recurring royalty generating activities and changes in amortization of deferred revenue, including the initiation or termination of licensing arrangements.



Excluding the effects of the proposed merger with Guilford, as further described in Note 11,
we expect revenue for 2005 to be approximately $285 million, including estimated Aloxi injection sales of $260 million.



Costs and Expenses



|                                    |  |                             |         |      |   |        |  |         |        |  |     |  
|----------------------------------- |  | --------------------------- | ------- | ---- | - | ------ |  | ------- | ------ |  | --- | -
|                                    |  | Three Months Ended June 30, |        
|(in thousands)                      |  | 2005                        |         | 2004 |   | Change |  | %Change |       
|Costs and expenses:                 |  |                             |         |      |   |        |  |         |        |  |     |  
|Cost of sales                       |  | $                           | 22,920  |      | $ | 14,142 |  | $       | 8,778  |  | 62  | %
|Selling, general and administrative |  |                             | 16,974  |      |   | 16,683 |  |         | 291    |  | 2   |  
|Research and development            |  |                             | 14,248  |      |   | 8,033  |  |         | 6,215  |  | 77  |  
|                                    |  |                             |         |      |   |        |  |         |        |  |     |  
|Total                               |  | $                           | 54,142  |      | $ | 38,858 |  | $       | 15,284 |  | 39  |  
|                                    |  |                             |         |      |   |        |  |         |        |  |     |  
|                                    | 
|                                    |  | Six Months Ended June 30,   |        
|(in thousands)                      |  | 2005                        |         | 2004 |   | Change |  | %Change |       
|Costs and expenses:                 |  |                             |         |      |   |        |  |         |        |  |     |  
|Cost of sales                       |  | $                           | 44,836  |      | $ | 21,767 |  | $       | 23,069 |  | 106 | %
|Selling, general and administrative |  |                             | 35,590  |      |   | 34,148 |  |         | 1,442  |  | 4   |  
|Research and development            |  |                             | 24,702  |      |   | 13,048 |  |         | 11,654 |  | 89  |  
|                                    |  |                             |         |      |   |        |  |         |        |  |     |  
|Total                               |  | $                           | 105,128 |      | $ | 68,963 |  | $       | 36,165 |  | 52  |  
|                                    |  |                             |         |      |   |        |  |         |        |  |     |  



Cost of sales: Cost of sales
as a percentage of product sales was 35 percent for both the second quarter and first half of 2005 compared to 30 percent for both the second quarter and first half of 2004. The increase in cost of sales as a percentage of sales is a result of
increased sales of Aloxi injection, which has a lower gross margin than our other marketed products. If Aloxi injection sales continue to represent an increasing percentage of our sales revenue, cost of sales will increase as a percentage of sales.
Cost of sales may vary from quarter to quarter, depending on the product mix and production costs. Excluding the effects of the proposed merger with Guilford, as further described in Note 11, we believe that total cost of sales for 2005 will be
approximately $97 million.



Selling, general and administrative:
Selling, general and administrative expenses increased 2 percent to $17.0 million in the second quarter of 2005 from $16.7 million in the second quarter of 2004, and increased 4 percent to $35.6 million in the first half of 2005 from $34.1 million
in the first half of 2004. Excluding the effects of the proposed merger with Guilford, as further described in Note 11, we expect selling, general and administrative expense of approximately $80 million for 2005, which includes promotional expenses
related to Dacogen which we expect to incur in the fourth quarter of 2005.



Research and development: Research and development expense increased 77 percent to $14.2 million in the second quarter of 2005 from $8.0 million in the second quarter of 2004, and increased 89 percent to $24.7 million in the first
half of 2005 from $13.0 million in the first half of 2004. The increase primarily represents



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increased spending on development programs for the late-stage product candidates in our pipeline, including those acquired in 2004. Excluding the effects of
the proposed merger with Guilford, as further described in Note 11, we expect net research and development expense for 2005 to be approximately $46 million.



|                 |  |                             |        |   |      |   |        |        |  |   |         |   |  |     |   
|---------------- |  | --------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | ------- | - |  | --- | --
|                 |  | Three Months Ended June 30, |       
|(in thousands)   |  | 2005                        |        |   | 2004 |   |        | Change |  |   | %Change |  
|Interest income  |  | $                           | 1,747  |   |      | $ | 1,375  |        |  | $ | 372     |   |  | 27  | % 
|Interest expense |  |                             | (1,754 | ) |      |   | (1,755 | )      |  |   | 1       |   |  |    |   
|                 |  |                             |        |   |      |   |        |        |  |   |         |   |  |     |   
|Total            |  | $                           | (7     | ) |      | $ | (380   | )      |  | $ | 373     |   |  | (98 | )%
|                 |  |                             |        |   |      |   |        |        |  |   |         |   |  |     |   
|                 | 
|                 |  | Six Months Ended June 30,   |       
|(in thousands)   |  | 2005                        |        |   | 2004 |   |        | Change |  |   | %Change |  
|Interest income  |  | $                           | 3,104  |   |      | $ | 2,191  |        |  | $ | 913     |   |  | 42  | % 
|Interest expense |  |                             | (3,510 | ) |      |   | (2,480 | )      |  |   | (1,030  | ) |  | 42  |   
|                 |  |                             |        |   |      |   |        |        |  |   |         |   |  |     |   
|Total            |  | $                           | (406   | ) |      | $ | (289   | )      |  | $ | (117    | ) |  | 40  |   
|                 |  |                             |        |   |      |   |        |        |  |   |         |   |  |     |   



Interest Income



Interest income increased 27 percent to $1.7 million in the second
quarter of 2005 from $1.4 million in the second quarter of 2004, and increased 42 percent to $3.1 million in the first half of 2005 from $2.2 million in the first half of 2004. The increase is due to an increase in the effective interest rates
received on our cash and marketable investments, which more than offset the decrease in the average amount of funds available for investment. Interest income for 2005 will fluctuate depending on the timing of cash flows and changes in interest rates
for marketable investments.



Interest Expense



Interest expense of $1.8 million in the second quarter of 2005 remained consistent with
interest expense in the second quarter of 2004, and increased 42 percent to $3.5 million in the first half of 2005 from $2.5 million in the first half of 2004. The increase is due to our issuance of convertible debt in March 2004. Excluding the
effects of the proposed merger with Guilford, as further described in Note 11, we expect interest expense for 2005 to be approximately $7 million, of which $5.9 million will be paid using cash. The non-cash portion of interest expense is primarily
related to the amortization of issuance costs incurred and capitalized in conjunction with the issuance of convertible debt in March 2004.



Provision for Income Taxes



Tax expense for the second quarter and first half of 2005 of $0.3 million and $0.6 million, respectively, represents federal alternative minimum taxes. Our ability to
achieve profitable operations is dependent upon our successful commercialization of Aloxi injection, among other things, and therefore, we continue to maintain a valuation allowance against our deferred tax assets. If and when it is judged to be
more-likely-than-not that we will be able to utilize some or all of our deferred tax assets, the related valuation allowance will be reduced and



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a tax benefit will be recorded, and the portion of the allowance pertaining to the exercise of stock options will increase additional paid-in capital. The
benefits realized from the use of acquired net operating losses and credits will first reduce to zero the intangible assets related to the acquisitions and then reduce tax expense. Then, for subsequent tax periods, our tax provision would likely
reflect normal statutory tax rates, and utilization of our deferred tax attributes would reduce our deferred tax asset balance. The timing of this valuation allowance adjustment is primarily dependent upon continued growth in sales of Aloxi
injection and the demonstration of consecutive quarters of profitability.



Net Income



We reported net income of $12.7 million and
$8.6 for the second quarter of 2005 and 2004, respectively. We reported net income of $24.3 million and $5.4 for the first half of 2005 and 2004, respectively. The increase in net income in the second quarter of 2005 compared to the second quarter
of 2004 reflects a 40 percent increase in revenues from 2004 to 2005, and a 39 percent increase in costs and expenses from 2004 to 2005. Excluding the impact of the proposed merger with Guilford, as further described in Note 11, we expect operating
income for 2005 to be approximately $62 million.



Liquidity and Capital
Resources



At June 30, 2005, we had cash, cash equivalents and
unrestricted marketable debt investments of $219 million and working capital of $354 million, compared with $239 million and $284 million, respectively, at December 31, 2004. A majority of the decrease in cash and cash equivalents was to fund
working capital requirements for inventory in the first half of 2005.



Net Cash Used in Operating Activities



Net cash used in
operations was $26.3 million and $17.1 million for the six months ended June 30, 2005 and 2004, respectively. The increase in cash use was primarily due to an increase in accounts receivable and inventories, and a decrease in accounts payable and
accrued expenses, offset by an increase in net income. The $27.9 million increase in inventories reflects inventory build to support Aloxi injection sales. Effective July 1, 2005, our terms for Aloxi injection sales to specialty distributors are 90
days, a decrease from our previous terms of 150 days, which we anticipate will contribute to cash flow from operations in the fourth quarter. The $8.3 million increase in accounts receivable is a result of increased Aloxi injection sales from the
first half of 2005 compared to sales in the second half of 2004. The primary reason for the decrease in accounts payable and accrued expenses is a decrease in bonus accruals of $6 million and a decrease in product rebate and other fees of $5
million.



Net Cash Provided by (Used in) Investing Activities



Net cash provided by investing was $26.2 million for the six months
ended June 30, 2005 and net cash used in investing was $225 million for the six months ended June 30, 2004. The 2005 amount provided by investing was the result of maturing investments. The 2004 amount used in investing activities was a result of
investing proceeds from the issuance of convertible debt in March 2004. Cash provided by or used in investing activities will fluctuate due to the timing of purchases and maturities of investments.



Net Cash Provided by Financing Activities



Net cash provided by financing was $7.4 million and $247 million for the six months ended
June 30, 2005 and 2004, respectively. The 2005 amount provided by financing activities was the result of the maturing of restricted investments and issuance of shares under stock plans. The 2004 amount was due to net proceeds of $252.1 million
received from the issuance of convertible debt in March 2004, $7.8 million from issuance of shares under stock award plans, and $3.9 million upon the exercise of warrants and issuance of shares. This total was reduced by the purchase of $17.2
million of restricted marketable securities, which were pledged as security for the first six scheduled interest payments related to the issuance of convertible debt.



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Cash Management and Requirements



Our cash use in 2005 will depend in part upon the pattern of Aloxi injection sales. We expect the Aloxi injection sales to increase for
2005. As sales increase we expect our operations to generate positive cash flow. Excluding the effects of the proposed merger with Guilford, as further described in Note 11, we expect cash provided by operations in 2005 to be approximately $60
million. Our overall change in cash position in 2005 will be positive or negative depending on our investing and financing activities.



Substantial amounts of capital are required for our pharmaceutical development and commercialization efforts. For continued development and commercialization of our
product candidates and marketed products, and the acquisition and development of additional product candidates, we plan to utilize cash provided from product sales, collaborative arrangements and existing liquid assets: we may seek other sources of
funding, including additional equity or debt issuances as appropriate. We have no arrangements or operating covenants that would trigger acceleration of our lease obligations or long-term liabilities.



Our liquidity is affected by a variety of factors, including sales of our products, the pace
of our research and development programs, the out-licensing of our products, the in-licensing of new products and our ability to raise additional debt or equity capital. As identified in our risk factors, adverse changes that affect our future
demand for our marketed products, continued access to the capital markets, and continued development and expansion of our product candidates would affect our longer-term liquidity. We believe we have sufficient liquidity and capital resources to
fund operations to positive cash flow. The following table summarizes our contractual obligations at June 30, 2005 and the effect these obligations are expected to have on our liquidity and cash flow in future periods:



|                                     |  |                  |       |      |   |       |  |      |       |      |   |            |  |       |       |  |   |         |  |   |        
|------------------------------------ |  | ---------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | ----- | ----- |  | - | ------- |  | - | -------
|(in thousands)                       |  | Remainder of2005 |       | 2006 |   | 2007  |  | 2008 |       | 2009 |   | Thereafter |  | Total
|Operating lease payments             |  | $                | 1,343 |      | $ | 2,568 |  | $    | 2,605 |      | $ | 1,720      |  | $     | 1,126 |  | $ | 559     |  | $ | 9,921  
|Convertible debt                     |  |                  |      |      |   |      |  |      |      |      |   |           |  |       |      |  |   | 348,000 |  |   | 348,000
|Helsinn minimum sales obligation (a) |  |                  |      |      |   | 5,181 |  |      | 6,120 |      |   | 5,554      |  |       | 4,795 |  |   | 11,465  |  |   | 33,115 
|                                     |  |                  |       |      |   |       |  |      |       |      |   |            |  |       |       |  |   |         |  |   |        
|Total                                |  | $                | 1,343 |      | $ | 7,749 |  | $    | 8,725 |      | $ | 7,274      |  | $     | 5,921 |  | $ | 360,024 |  | $ | 391,036
|                                     |  |                  |       |      |   |       |  |      |       |      |   |            |  |       |       |  |   |         |  |   |        

---

|(a) | In connection with the April 2001 in-licensing agreement with Helsinn Healthcare SA where we obtained the exclusive U.S. and Canadian license and distribution rights for Aloxi
injection, we agreed to pay minimum payments over the first ten years following commercialization. The minimum is only payable to the extent that it exceeds the actual payments that would otherwise be payable under the agreement. Minimum sales
targets of Aloxi injection for prevention of CINV peak at approximately $90 million in the fourth year of commercialization.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We expect to make additional payments to Helsinn related to Aloxi product candidates totaling $22.5 million, to SuperGen related to Dacogen injection totaling $32.5
million and to Aesgen former security holders related to Saforis oral suspension totaling $33 million over the course of the next several years upon achievement of certain development milestones.



As further described in Note 11, on July 20, 2005, we entered into an Agreement and Plan of
Merger dated July 20, 2005 with Guilford Pharmaceuticals Inc. Associated with this agreement, we expect to incur a cash outflow of $192.3 million upon close of the acquisition and $0.6 million in the months following the close of the acquisition
relating to professional services.



Off Balance Sheet Arrangements



We do not have any off-balance sheet arrangements (as
such term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.



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Application of Critical Accounting Policies and Estimates



There were no significant changes to our critical accounting policies during the six months
ended June 30, 2005. See our most recent Annual Report filed on Form 10-K for the year ended December 31, 2004 for a discussion of our critical accounting policies.



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Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995



The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements to encourage companies to provide prospective information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. We desire to take advantage of these safe harbor provisions and accordingly, we
hereby identify the following important factors which could cause our actual results to differ materially from any such results which may be projected, forecasted, estimated or budgeted by us in forward-looking statements made by us from time to
time in reports, proxy statements, registration statements and other written communications, or in oral forward-looking statements made from time to time by the Companys officers and agents. We do not intend to update any of these
forward-looking statements after the date of this Form 10-Q to conform them to actual results.



RISKS RELATED TO OUR BUSINESS



Sales
of Aloxi injection account for a significant and growing portion of our product revenues. Our business is dependent on the commercial success of Aloxi injection. If any factor adversely affects sales of Aloxi injection, we may be unable to continue
our operations as planned.



Aloxi injection sales represented 92 percent
and 77 percent of our total product sales and 90 and 81 percent of our total revenue for the six months ended June 30, 2005 and year ended December 31, 2004, respectively. Any factor adversely affecting sales of Aloxi injection could cause our
product revenues to decrease and our stock price to decline significantly.



The
success of our business is dependent on the continued successful commercialization of Aloxi injection. Aloxi injection is relatively new to the market and its long-term acceptance by the oncology community will depend largely on our ability to
demonstrate the efficacy and safety of Aloxi injection as an alternative to other therapies. We cannot be certain that Aloxi injection will provide benefits considered adequate by providers of oncology services or that enough providers will use the
product to ensure its continued commercial success.



The FDA subjects an
approved product and its manufacturer to continual regulatory review. After approval and use in an increasing number of patients, the discovery of previously unknown problems with a product, such as unacceptable toxicities or side effects, may
result in restrictions or sanctions on the product or manufacturer that could affect the commercial viability of the product or could require withdrawal of the product from the market. Further, we must continually submit any labeling, advertising
and promotional material to the FDA for review. There is risk that the FDA will prohibit use of the marketing material in the form we desire.



Unfavorable outcomes resulting from factors such as those identified above could limit sales of Aloxi injection or cause sales of Aloxi injection to decline. In those
circumstances, our stock price would decline and we may have to find additional sources of funding or scale back or cease operations.



We have a history of net losses. If we do not have net income in the future, we may be unable to continue our operations.



We expect to incur significant expenses over the next several years as we devote substantial
resources to 1) support of the development efforts of Aloxi products through milestone payments to Helsinn, 2) the continued development of other product candidates, including ZYC101a, Saforis oral suspension, Dacogen injection and



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irofulven, 3) continued commercialization of Aloxi injection and our other marketed products and 4) acquire additional product candidates or companies.
Therefore, we may not reliably generate net income unless we are able to increase sales of Aloxi injection or other products compared to our current sales, and we may be unable to fund development of our product candidates or to continue our
business operations as planned.



Generic pilocarpine hydrochloride tablets
were introduced into the United States in November 2004. Our sales of Salagen Tablets (pilocarpine hydrochloride) in the United States are likely to decline significantly for subsequent periods.



Beginning in November 2004 generic 5 milligram pilocarpine hydrochloride tablets entered the
United States markets where Salagen Tablets (pilocarpine hydrochloride) competes. We expect our annual sales of Salagen Tablets beginning in 2005 to decline significantly from our 2004 sales of $29.3 million in the United States. Salagen Tablets net
sales revenue was $7.0 million and $15.3 million for the first half of 2005 and the first half of 2004, respectively.



Our operating results may fluctuate significantly, which may adversely affect our stock price.



If our operating results do not meet the expectations of investors or securities analysts, our stock price may decline. Our operating
results may fluctuate significantly from period to period due to a variety of factors including:



| |  |  | the acceptance of, and demand for, Aloxi injection;
| | - |  | ---------------------------------------------------



| |  |  | changing demand for our other products;
| | - |  | ---------------------------------------



| |  |  | third parties introducing competing products;
| | - |  | ---------------------------------------------



| |  |  | the pace and breadth of our development programs;
| | - |  | -------------------------------------------------



| |  |  | expenditures we incur to acquire, license, develop or promote additional products;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | expenditures we incur and assume in business acquisitions;
| | - |  | ----------------------------------------------------------



| |  |  | availability of product supply from third-party manufacturers;
| | - |  | --------------------------------------------------------------



| |  |  | changes in sales and marketing expenditures; and
| | - |  | ------------------------------------------------



| |  |  | the timing of licensing and royalty revenues.
| | - |  | ---------------------------------------------



For the first six months of 2005, we reported net income of $24.3 million. For the year ended December 31, 2004, we reported a net loss of $85.7 million inclusive of
$83.1 million of acquired in-process research and development expense related to acquisitions, compared to net losses of $61.9 million and $36.1 million for each of the years ended December 31, 2003 and December 31, 2002, respectively. Variations in
the timing of our future revenues and expenses could cause significant fluctuations in our operating results from period to period and may result in unanticipated earnings shortfalls or losses.



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Our effective tax rate, if any, may vary significantly from period to period, especially within the first few years of
becoming profitable. Increases in our effective tax rate would have a negative effect on our results of operations.



We have had no or minimal provision for income tax expense for a number of years due to a history of incurring significant losses. Our ability to achieve profitable
operations is dependent upon our continued successful commercialization of Aloxi injection, and therefore we continue to maintain a valuation allowance against our deferred tax assets. If and when it is judged to be more-likely-than-not that we will
be able to utilize our deferred tax assets, the valuation allowance will be reduced and a tax benefit will be recorded. For subsequent tax periods, our tax provision would likely approximate normal statutory tax rates. A transition to an effective
tax rate that approximates statutory tax rates could result in an increase in effective tax rate from less than 5 percent to approximately 35 percent. An increase of this magnitude would result in a significant reduction in our net income and net
income per share beginning with the quarter of implementation.



Even if we
begin reporting an effective tax rate that approximates statutory tax rates, various factors may continue to have favorable or unfavorable effects on our effective tax rate. These factors include, but are not limited to, changes in overall levels of
income before taxes, interpretations of existing tax laws, changes in tax laws and rates, future levels of research and development spending, future levels of capital expenditures, and changes in the mix of activity in the various tax jurisdictions
in which we operate. An increase in our effective tax rate would reduce our net income and net income per share.



Clinical trials are complex and unpredictable and may be difficult to complete or produce unexpected results that could delay or prevent our ability to commercialize
our product candidates.



Before obtaining regulatory approvals for the
commercial sale of any product under development, including Dacogen injection, Saforis oral suspension, ZYC101a, irofulven, and ZYC300, we, or our strategic collaborators, must demonstrate through preclinical studies and clinical trials that the
product is safe and effective for use in each target indication. We depend on collaboration with Helsinn Healthcare SA, SuperGen, Inc., medical institutions and laboratories to conduct our clinical and preclinical testing in compliance with good
clinical and laboratory practices as required by the FDA. We, or our strategic collaborators, may depend on contract research organizations to manage a substantial portion of the medical institutions utilized to conduct clinical testing. The results
from preclinical animal studies and human clinical trials may not be predictive of the results that will be obtained in large-scale testing. Some of the results reported from clinical trials are interim results and may not be predictive of future
results, including final results from such trials, because, among other factors, patient enrollment and the time period for evaluating patient results are not complete. If we, or our strategic collaborators, fail to adequately demonstrate the safety
and efficacy of a product candidate, the FDA would not provide regulatory approval of the product. The appearance of unacceptable toxicities or side effects during clinical trials could interrupt, limit, delay or abort the development of a product.
A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after experiencing promising results in previous animal and human studies.



The time required to complete clinical trials is dependent upon, among other factors, the
rate of patient enrollment. Patient enrollment is a function of many factors, including:



| |  |  | the size of the patient population;
| | - |  | -----------------------------------



| |  |  | the nature of clinical protocol requirements;
| | - |  | ---------------------------------------------



| |  |  | the diversion of patients to other trials or marketed therapies;
| | - |  | ----------------------------------------------------------------



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| |  |  | our ability to recruit and manage clinical centers and associated trials;
| | - |  | -------------------------------------------------------------------------



| |  |  | the proximity of patients to clinical sites; and
| | - |  | ------------------------------------------------



| |  |  | the patient eligibility criteria for the trial.
| | - |  | -----------------------------------------------



Other factors, such as lack of efficacy and unacceptable toxicities, may result in increased costs and delays or termination of clinical trials prior to completion. In
addition, delays in manufacturing of product for our clinical trials could impact our ability to complete our clinical trials as planned. Any failure to meet expectations related to our product candidates could adversely affect our stock price.



Since our product candidates such as Dacogen injection, Saforis oral
suspension, ZYC101a, ZYC300 and irofulven may have alternative development paths and we have limited resources, our focus on a particular development path for these product candidates may result in our failure to capitalize on more profitable areas
and may not result in viable products.



We have limited financial and
product development resources. This requires us to focus on product candidates in specific areas and forego opportunities with regard to other product candidates or development paths. For example, one of our product candidates, irofulven, is in
clinical and preclinical trials for a number of indications. We expect that a portion of our product development efforts over the next several years will be devoted to further development of irofulven, including its application to the treatment of
cancers or sub-populations of certain types of cancers with limited therapeutic options such as refractory cancers, for which we believe irofulven could most quickly be developed and approved for marketing. We are also investigating the efficacy of
irofulven in combination with other cancer therapies. While some of these trials have indicated some effectiveness in relation to the target medical conditions, additional clinical trials must be conducted before product registration may be
requested. Alternative examples of resource trade offs also exist for our other product candidates.



If we fail to identify, develop and successfully commercialize applications for our product candidates, we may not achieve expectations of our future performance and our stock price may decline. For example, in April
2002 we stopped enrollment in our phase 3 trial of irofulven in advanced-stage, gemcitabine-refractory pancreatic cancer patients and our stock price declined significantly. In addition, we may focus our development on a particular application that
may result in our failure to capitalize on another application or another product candidate. Our decisions impacting resource allocation may not lead to the development of viable commercial products and may divert resources away from more profitable
market opportunities.



We depend on a single supplier to provide us with the
finished drug product for Aloxi injection and a single supplier to provide us with the active ingredient for the production of Salagen Tablets. If either supplier terminates its relationship with us, or is unable to fill our demand for the
ingredients or products, we may be unable to sell those products.



We rely
on Helsinn Birex Pharmaceuticals Ltd. as our sole and exclusive supplier of the Aloxi injection finished drug product. In addition, we rely on Merck KGaA as our sole and exclusive supplier of oral-grade pilocarpine hydrochloride, the active
ingredient in Salagen Tablets. The refined raw material for Salagen Tablets is a semi-synthetic salt of an extract from plants grown and processed exclusively on Mercks plantations in South America. To our knowledge, there is currently no
other producer of oral-grade pilocarpine hydrochloride that is capable of meeting our commercial needs. If our relationship with Helsinn Birex Pharmaceuticals Ltd. or Merck KGaA terminates, or Helsinn Birex Pharmaceuticals Ltd. or Merck KGaA is
unable to meet our needs for any reason, we will need to find an alternative source of the active ingredients and products supplied by those companies. If we are unable to identify an alternative source, we may be unable to continue offering Aloxi



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injection or Salagen Tablets for commercial sale. Even if we were able to procure adequate supplies of Aloxi injection finished drug product or pilocarpine
hydrochloride from an alternative source, any disruption in supply could have a material adverse effect on our ability to meet customer demand for Aloxi injection or Salagen Tablets for commercial sale, which would cause our product revenues to
decrease and our stock price to decline.



We depend on a single supplier to
provide us with the finished drug product for Dacogen injection and single suppliers to provide us with the active ingredients for other product candidates. If a sole or exclusive supplier of finished drug product for our product candidates
terminates its relationship with us, or is unable to meet our demand, the development of our product candidates could be delayed or if a product candidate is approved, the commercial launch could be delayed.



We rely on Pharmachemie BV as our sole supplier of the Dacogen injection finished drug
product. In addition, we rely on other sole or exclusive suppliers for other product candidates finished drug products. If our relationship with Pharmachemie BV or another sole or exclusive supplier terminates or if the supplier is unable to
meet our needs for any reason, we will need to find an alternative source of the products supplied by those companies. If we are unable to identify an alternative source, we may have to suspend development of our product candidates or delay
commercial launch of an approved product candidate. Even if we were able to procure drug product from an alternative source, any disruption in supply could have a material adverse effect on our ability to meet our development goals or our ability to
provide the commercial supply of an approved product candidate, which would cause our future product revenues to decrease and our stock price to decline.



Our customer base is highly concentrated. Bankruptcy of any of our customers would adversely affect our financial condition and fluctuations in their purchases of our
products would cause volatility in our results of operations.



Our
principal customers, specialty distributors and wholesalers, comprise a significant part of the distribution network for oncology injectables and pharmaceutical products in the United States. If any of these customers becomes insolvent or disputes
payment of the amount it owes us, it would adversely affect our results of operations and financial condition. Further, fluctuations in customer buying patterns and their amount of inventory of our products could cause volatility in our results of
operations and materially, adversely impact our results of operations.



The
timing of customer purchases and the resulting product shipments has a significant impact on the amount of revenue from product sales that the Company recognizes in a particular period.



The majority of our sales are made to independent pharmaceutical wholesalers, including
specialty oncology distributors, which, in turn, resell the product to an end user (normally a clinic, hospital, alternative healthcare facility or an independent pharmacy). Inventory in the distribution channel consists of inventory held by
independent pharmaceutical wholesalers, who are the Companys principal customers. The Companys revenue from product sales in a particular period is impacted by increases or decreases in the distribution channel inventory levels. If
distribution channel inventory levels increase materially, the Company could experience reduced sales revenue in subsequent periods due to low patient demand.



We cannot significantly control or influence the purchasing patterns of independent pharmaceutical wholesalers or end users. These are highly sophisticated customers
that purchase our products in a manner consistent with their industry practices and, presumably based upon their projected demand levels. From time to time, we offer sales incentives in the ordinary course of business. These incentives may impact
the level of inventory held by wholesalers. Additionally, the buying practices of the wholesalers include occasional speculative purchases of product in excess of the current market demand, at their discretion, in anticipation of future price
increases.



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Purchases by any given customer, during any given period, may be above or below actual patient demand of any of our products during the same period,
resulting in fluctuations in product inventory in the distribution channel. If distribution channel inventory levels substantially exceed patient demand, we could experience reduced revenue from sales in subsequent periods due to low patient demand.



If the third-party manufacturer of Aloxi injection or Salagen Tablets or
any of our other products ceases operations or fails to comply with applicable manufacturing regulations, we may not be able to meet customer demand in a timely manner, if at all.



We rely on Helsinn Birex Pharmaceuticals Ltd. for the production of Aloxi injection, Patheon Inc. for the production of Salagen Tablets, and
other third-party manufacturers for our other products. We intend to continue to rely on others to manufacture future products, including any products that we may acquire or license. Our dependence on third parties for the manufacture of our
products may adversely affect our ability to develop and deliver such products.



The manufacture of our products is, and will be, subject to current good manufacturing practices regulations enforced by the FDA or other standards prescribed by the appropriate regulatory agency in the country of use. There is
a risk that the manufacturers of our products, including the current manufacturers of Aloxi injection and Salagen Tablets, will not comply with all applicable regulatory standards, and may not be able to manufacture Aloxi injection, Salagen Tablets,
or any other product for commercial sale. If this occurs, we might not be able to identify another third-party manufacturer on terms acceptable to us, or any other terms.



Material changes to an approved product, such as manufacturing changes or additional labeling claims, require further FDA review and
approval. Even after approval is obtained, the FDA may withdraw approval if previously unknown problems are discovered. Further, if we, our corporate collaborators or our contract manufacturers fail to comply with applicable FDA and other regulatory
requirements at any stage during the regulatory or manufacturing process, the FDA may impose sanctions, including:



| |  |  | marketing or manufacturing delays;
| | - |  | ----------------------------------



| |  |  | warning letters;
| | - |  | ----------------



| |  |  | fines;
| | - |  | ------



| |  |  | product recalls or seizures;
| | - |  | ----------------------------



| |  |  | injunctions;
| | - |  | ------------



| |  |  | refusal of the FDA to review pending market approval applications or supplements to approval applications;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | total or partial suspension of production;
| | - |  | ------------------------------------------



| |  |  | civil penalties;
| | - |  | ----------------



| |  |  | withdrawals of previously approved marketing applications; or
| | - |  | -------------------------------------------------------------



| |  |  | criminal prosecutions.
| | - |  | ----------------------



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Our business strategy depends on our ability to identify, acquire, license and develop product candidates and
identify, acquire or license approved products.



As part of our business
strategy we plan to identify, acquire, license and develop product candidates and identify, acquire and license approved products for markets that we can reach through our marketing and distribution channels. If we are unsuccessful in our
acquisition strategy, our stock price could decline. If we fail to obtain, develop and successfully commercialize additional products, we may not achieve expectations of our future performance and our stock price could decline. Because we do not
materially engage in basic research or drug discovery, we must rely upon third parties to sell or license product opportunities to us. Other companies, including some with substantially greater financial, marketing and sales resources, are competing
with us to acquire or license such products or product candidates. We may not be able to acquire or license rights to additional products or product candidates on acceptable terms, if at all. Furthermore, we may not be able to successfully develop
any product candidates we acquire or license. In addition, we may acquire or license new products with different marketing strategies, distribution channels and bases of competition than those of our current products. Therefore, we may not be able
to compete favorably in those product categories.



We may not realize all of
the anticipated benefits of our recent and future acquisitions.



Any
acquisition strategy is subject to inherent risk and we cannot guarantee that we will be able to complete any acquisition, including the ability to identify potential partners, successfully negotiate economically beneficial terms, successfully
integrate such business, retain its key employees and achieve the anticipated revenue, cost benefits or synergies.



We review the records of companies we plan to acquire, however, even an in-depth review of records may not reveal existing or potential problems or permit us to become
familiar enough with a business to assess fully its capabilities and deficiencies. As a result, we may assume unanticipated liabilities, or an acquisition may not perform as well as expected. We also face the risk that the returns on acquisitions
will not support the expenditures or indebtedness incurred to acquire such businesses, or the capital expenditures needed to develop such businesses.



As further described in Note 11, on July 21 2005, we entered into an Agreement and Plan of Merger dated July 20, 2005 with Guilford Pharmaceuticals Inc. During the third
quarter of 2004, we acquired Zycos, Inc. and Aesgen, Inc. and we may acquire other companies in the future as a part of our business strategy.



The integration of independent companies is a complex, costly and time-consuming process. The difficulties of combining the operations of the companies include, among
others:



| |  |  | Retaining key employees;
| | - |  | ------------------------



| |  |  | Coordinating research and development activities;
| | - |  | -------------------------------------------------



| |  |  | Consolidating corporate and administrative functions;
| | - |  | -----------------------------------------------------



| |  |  | Minimizing the diversion of managements attention from ongoing business concerns; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Coordinating geographically separate organizations.
| | - |  | ---------------------------------------------------



In addition, even if we are able to successfully integrate, the integrations may not result in the realization of the full benefits of development and growth
opportunities that we currently expect or that these benefits will be achieved within the anticipated time frame. Our failure to achieve these benefits could have a material adverse effect on our results of operations.



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We may need to obtain additional capital to grow our business and complete our product portfolio development and
expansion plans. Issuance of new securities may dilute the interests of our stockholders and constrain our operating flexibility.



We may need to raise additional funds for various reasons including the following:



| |  |  | to expand our portfolio of marketed products and product candidates;
| | - |  | --------------------------------------------------------------------



| |  |  | to develop products we have acquired or licensed;
| | - |  | -------------------------------------------------



| |  |  | to obtain necessary working capital; and
| | - |  | ----------------------------------------



| |  |  | to fund operating losses.
| | - |  | -------------------------



Adequate funds for these purposes may not be available when needed or on terms acceptable to us. Insufficient funds may cause us to delay, scale back, or abandon some or all of our product acquisition and licensing
programs and product development programs. We may seek additional funding through public and private financing, including equity and debt financing or enter into collaborative arrangements. Any sale of additional convertible debt securities or
equity securities may result in additional dilution to our stockholders and any debt financing may require us to pledge our assets and enter into restrictive covenants. Entry into collaborative arrangements may require us to give up rights to some
of our products or to some potential markets or to enter into licensing arrangements on unfavorable terms.



If we are unable to maintain relationships with strategic collaborators or enter into new relationships, we may not be able to develop any of our product candidates or commercialize our products in a timely manner,
if at all.



Our continued success will depend in large part upon the
efforts of third parties. For the research, development, manufacture and commercialization of our products, we currently have, and will likely continue to enter into, various arrangements with other corporations, licensors, licensees, outside
researchers, consultants and others. However, we cannot be certain of the actions these parties will take, and there is a risk that:



| |  |  | we will be unable to negotiate acceptable collaborative arrangements to develop or commercialize our products;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | any arrangements with third-parties will not be successful;
| | - |  | -----------------------------------------------------------



| |  |  | strategic collaborators will not fulfill their obligations to us under any arrangements entered into with them;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | strategic collaborators, including Helsinn Healthcare SA, will terminate their relationship with us; or
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | current or potential collaborators will pursue treatments for other diseases or seek alternative means of developing treatments for the diseases targeted by our programs or
products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our strategic collaborators include public research
institutions, research organizations, teaching and research hospitals, community-based clinics, testing laboratories, contract product formulation organizations, contract



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packaging and distribution companies, manufacturers, suppliers and license collaborators. We consider our arrangements with Helsinn Healthcare SA, Patheon
Inc., Merck KGaA, and SuperGen, Inc. to be significant. If any of our collaborators breaches or terminates its agreement with us, or otherwise fails to conduct its collaborative activities in a timely manner, we may experience significant delays in
the development or commercialization of the products or product candidates or the research program covered by the agreement and we may need to devote additional funds or other resources to these activities. If we are unable to enter into new or
alternative arrangements to continue research and development activities, or are unable to continue these activities on our own, we may have to terminate the development program. As a consequence, we may experience a loss of future commercial
product potential and a decline in our stock price.



We have licensed the
right to promote, sell and distribute Aloxi products in the United States and Canada from a Helsinn Healthcare S/A. We are particularly dependent on Helsinn for our ability to commercialize Aloxi products.



We have entered a license agreement with Helsinn Healthcare SA under which we have acquired
a license to sell and distribute Aloxi products in the United States and Canada through December 31, 2015. Furthermore, under the terms of our license, we are required to purchase all of our Aloxi products from Helsinn Birex Pharmaceutical, Ltd. The
license agreement may be terminated for specified reasons, including if the other party is in substantial or persistent breach of the agreement, if we have experienced a change of control and the acquiring entity has competing products or our
marketing and sales related commitments to the licensor are not maintained by the acquiring entity, or if either party has declared bankruptcy. Although we are not currently in breach of the license, and we believe that Helsinn Healthcare SA is not
currently in breach of the license, there is a risk that either party could breach the license in the future. In addition, if we were to breach the supply agreement with Helsinn Birex Pharmaceutical Ltd. contemplated by the license, Helsinn
Healthcare SA would be permitted to terminate the license.



If the license
agreement were terminated, we would lose all of our rights to sell and distribute Aloxi products, as well as all of the related intellectual property and all regulatory approvals. In addition, Helsinn Healthcare SA holds the rights to palonosetron
(the active ingredient in Aloxi products) through an agreement with Syntex (U.S.A.) Inc. and F. Hoffmann-La Roche AG. We cannot be certain of the actions that these parties will take, and there is a risk that these third parties will end their
relationship with us, which would leave us without rights to the pharmaceutical preparations, products and know-how required to produce Aloxi products. As a consequence of such a termination, we would lose all of our rights to sell and distribute
Aloxi products, which would harm our business and could cause our stock price to decline significantly.



We rely on multinational and foreign pharmaceutical companies to develop and commercialize our products and product candidates in markets outside the United States.



With respect to products in which we own rights outside the United States, we have entered
into alliances with various multinational and foreign pharmaceutical companies related to the development and commercialization of our products and product candidates in markets outside the United States. Our continued relationships with strategic
collaborators are dependent in part on the successful achievement of development milestones. If we or our collaborators do not achieve these milestones, or we are unable to enter into agreements with our collaborators to modify their terms, these
agreements could terminate, which could cause a loss of licensing revenue, a loss of future commercial product potential and a decline in our stock price.



We recognize licensing revenue from our strategic collaborators as a portion of our total revenue. Future licensing revenues from these collaborators will likely
fluctuate from quarter-to-quarter and year-to-year depending on:



| |  |  | the achievement of milestones by us or our collaborators;
| | - |  | ---------------------------------------------------------



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| |  |  | the amount of product sales and royalty-generating activities;
| | - |  | --------------------------------------------------------------



| |  |  | the timing of initiating additional licensing relationships; and
| | - |  | ----------------------------------------------------------------



| |  |  | our continuing obligation related to license payments.
| | - |  | ------------------------------------------------------



If we fail to compete successfully with our competitors, our product revenues could decrease and our stock price could decline.



Competition in the pharmaceutical industry is intense. Most of our competitors are large,
multinational pharmaceutical companies that have considerably greater financial, sales, marketing and technical resources than we do. Most of our present and potential competitors also have dedicated research and development capabilities that may
allow them to develop new or improved products that compete with our products. Currently, Aloxi injection competes with three other products from the 5-HT3receptor antagonist class of compounds, as well as products from other chemical classes that are also used for the prevention of chemotherapy-induced nausea and vomiting. These products are marketed
by GlaxoSmithKline, Roche, Sanofi-Aventis and Merck, large multinational competitors. If Aloxi injection does not compete successfully with existing products on the market, our stock price could decline significantly. Additionally, MedImmune, Inc.,
Daichi Pharmaceutical, and two U.S. generic manufacturers have drugs that are approved for sale and compete in the same markets as Salagen Tablets.



Other pharmaceutical companies are developing products, which, if approved by the FDA, will compete directly with our products. Our competitors could also develop and
introduce generic drugs comparable to our products, or drugs or other therapies that address the underlying causes of the symptoms that our products treat. If a product developed by a competitor is more effective than our product, or priced lower
than our product, then our product revenue could decrease and our stock price could decline.



We are dependent on our key personnel. If we are not able to attract and retain key employees and consultants, our product development, marketing and commercialization plans could be harmed.



We are highly dependent on the members of our scientific, commercial and management staff.
If we are not able to retain any of these persons, our product development, marketing and commercialization plans may suffer and our stock price could decline. None of our executive officers has an employment agreement with us. If we are unable to
retain our scientific, commercial and management staff, we will need to hire additional qualified personnel for us to pursue our product acquisition, development, marketing and commercialization plans.



We may not be able to attract and retain personnel on acceptable terms, given the competition
for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. If we are not able to attract and retain qualified personnel, our product acquisition, development, marketing and
commercialization plans will suffer and our stock price could decline.



If
we are unable to keep up with rapid technological changes in the pharmaceutical or biotechnology industries, we may be unable to continue our operations.



The pharmaceutical and biotechnology industries have experienced rapid and significant technological change. We expect that pharmaceutical technology and biotechnology
will continue to develop rapidly. Our future success will depend, in large part, on our ability to develop and maintain technology that is competitive. If other



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companies achieve technological advances with their products or obtain FDA approval before we are able to obtain such approval, our products may become
obsolete before they are marketed or before we recover any of our development and commercialization expenses incurred with respect to such products. In addition, alternative therapies or new medical treatments could alter existing treatment
regimens, and thereby reduce the need for one or more of our products, which could result in the termination of the development in one or more of our product candidates, or in the decline in sales of one of our approved products, which could cause
our stock price to decline.



RISKS RELATED TO OUR INDUSTRY



If we do not receive regulatory approvals for our product candidates, or if regulatory
approval is delayed for any reason, we will be unable to commercialize and sell our products as we expect.



Prior to marketing, each of our product candidates must undergo an extensive regulatory approval process conducted by the FDA in the United States and by comparable
agencies in other countries. The product development and approval process can take many years and require the expenditure of substantial resources. There is risk that the FDA or a foreign regulatory authority will not approve in a timely manner, if
at all, any product we develop. Generally, the FDA approves for sale only a very small percentage of newly discovered pharmaceutical compounds that enter preclinical development. We may encounter delays or denials in regulatory approvals due to
changes in FDA policy during the period of development, or changes in the requirements for regulatory review of each submitted new drug application, or NDA.



There is also risk that regulatory authorities in the United States and elsewhere may not allow us to conduct planned additional clinical testing of any of our product
candidates, including irofulven, Dacogen injection, Saforis oral suspension, ZYC101a, ZYC300 or Aloxi products, or that, if permitted, this additional clinical testing will not prove that these product candidates are safe and effective to the extent
necessary to permit us to obtain marketing approvals from regulatory authorities.



Except for Dacogen injection, Saforis oral suspension, ZYC101a and our products already approved, none of our product candidates are currently being tested in phase 3 or registration clinical trials. We cannot apply for a regulatory
approval to market a product candidate until we successfully complete phase 3 or registration clinical trials for that product.



If we are unable to obtain intellectual property protection, or protect our proprietary technology, we may be unable to compete effectively.



The FDA awarded us orphan drug status for Salagen Tablets in 1994 as a treatment for the
symptoms of xerostomia, or severe dry mouth, induced by radiation therapy in head and neck cancer patients and in 1998 for the symptoms of dry mouth associated with Sjögrens syndrome. An orphan drug designation entitles us to marketing
exclusivity of the protected drug for the stated condition for a period of seven years. Our orphan drug protection for Salagen Tablets expired in March 2001 for the treatment of symptoms of radiation-induced xerostomia in head and neck cancer
patients and expired in February 2005 for the Sjögrens syndrome indication. Beginning in November 2004, generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen Tablets compete and we have
suspended direct promotion of Salagen Tablets. If the introduction of these competing products adheres to the classic pattern of initial generic competition in a pharmaceutical product class, we would expect Salagen Tablets sales to decline
significantly from our 2004 sales of $29.3 million in the United States. Salagen Tablets net sales revenue was $7.0 million and $15.3 million for the first half of 2005 and the first half of 2004, respectively.



We hold an exclusive license in the United States and Canada on patents covering Aloxi
injection. In addition,



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we hold an exclusive, worldwide license on patents and patent applications covering acylfulvene proprietary rights, including irofulven. The license
applicable to these technologies is subject to certain statutory rights held by the U.S. government. Even though we have licensed these patents, we may not have exclusive rights to all possible acylfulvene analogs, all possible methods of using
acylfulvene analogs to treat tumors or all possible synthetic methods for preparing acylfulvenes. In addition, we licensed rights to patents and patent applications covering MG98. Protection of these rights and creation of additional rights involve
joint responsibilities between us and the respective license party. We have recently acquired rights to patents and patent applications covering technologies that were owned by or licensed to Zycos, Inc., and Aesgen, Inc., and those rights that were
licensed from third parties were assigned to us in those transactions. We have also recently obtained a worldwide, exclusive license of certain rights to patents and patent applications covering technologies that are owned by SuperGen, Inc., or
licensed to SuperGen, Inc., from third parties.



Our pending patent
applications, those we may file in the future, or those we license from third parties, may not result in patents being issued. Patents, if issued, may be challenged, invalidated or circumvented. In addition, other entities may develop similar
technologies that fall outside the scope of our patents. Thus, any patent rights that we own or license from third parties may not provide sufficient protection against potential competitors.



In the event that our technologies or methods used in the course of developing or selling our
products infringe the patents or violate other proprietary rights of third parties, we and our strategic collaborators may be prevented from pursuing product development or commercialization.



In addition to patents, we rely on trade secrets and proprietary know-how. We protect our
proprietary technology and processes in part by confidentiality agreements with our collaborators, employees and consultants. There is a risk that:



| |  |  | these confidentiality agreements will be breached;
| | - |  | --------------------------------------------------



| |  |  | we will not have adequate remedies for any breach of these agreements;
| | - |  | ----------------------------------------------------------------------



| |  |  | our trade secrets will otherwise become known; or
| | - |  | -------------------------------------------------



| |  |  | our trade secrets will be independently discovered and used by competitors.
| | - |  | ---------------------------------------------------------------------------



The biotechnology and pharmaceutical industries have been characterized by litigation regarding patents and other intellectual property rights. If we become involved in
any litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts of our technical and management personnel will be diverted. An adverse determination may subject us to significant liabilities or
require us to cease using the technology or to seek licenses that may not be available from third parties on commercially favorable terms, if at all, or to cease manufacturing and selling our products. This could cause us to terminate the
development of one or more of our product candidates, to discontinue marketing an existing product, or to pay royalties to a third party. Any of these events could result in a decline in the price of our stock.



If the use of one of our products is alleged to be harmful, we may be subject to costly
and damaging product liability claims.



We face exposure to product
liability claims in the event that the use of any of our products is alleged to have harmed someone. Although we have taken, and continue to take, what we believe are appropriate precautions, there is a risk that we will not be able to avoid
significant product liability exposure. We currently have product liability insurance in the amount of $30 million per occurrence and in the aggregate for the year. There is a risk that our insurance will not be sufficient to cover claims. There is
also a risk that adequate insurance coverage



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will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim
against us could cause us to incur a significant expense to pay such a claim, could adversely affect our product development and could cause a decline in our product revenue and the price of our stock.



In addition to product liability risks associated with sales of our products, we may be
liable to the claims of individuals who participate in clinical trials of our products. A number of patients who participate in trials are already critically ill when they enter a trial. The waivers we obtain may not be enforceable and may not
protect us from liability or the costs of product liability litigation. Our product liability insurance may not provide adequate protection against potential liabilities. Moreover, we may not be able to maintain our insurance on acceptable terms. As
a result of these factors, a product liability claim, even if successfully defended, could cause us to incur a significant expense to defend such a claim, could adversely affect our product development and could cause a decline in our product
revenue and the price of our stock.



We could become the subject of legal
proceedings or investigations that could result in substantial fines, penalties, injunctive or administrative penalties and criminal charges, which would increase our expenses and redirect managements attention away from business operations.



Our business operations are subject to a wide range of laws and
regulations. Other pharmaceutical companies have been the subjects of legal proceedings or investigations related to pricing, marketing, promotional and clinical trial practices. If we become the subject of legal proceedings or investigations, our
expenses would increase and commercialization of our products could be adversely affected. Further, managements attention would be diverted from our business operations.



If we issue a product recall, we may not sell as much of our products in the future and we may incur significant expenses.



The FDA or other government agencies having regulatory authority over
product sales may request product recalls or we may independently issue product recalls. These product recalls may occur due to manufacturing issues, safety concerns or other reasons. We do not carry any insurance to cover the risk of a product
recall. Any product recall could have a material adverse effect on our product revenue and could cause the price of our stock to decline.



If we or patients using our products are unable to obtain adequate reimbursement from government health administration authorities, private health insurers and other
organizations, our product sales and price of our stock could decline.



There is uncertainty about the reimbursement status of healthcare products. Our profitability will depend in part on: (1) the price we are able to charge for our products, and (2) the availability of adequate reimbursement for our products
to providers from third-party payors, such as government entities, private health insurers and managed care organizations. Federal and state regulations govern or influence the reimbursement status of healthcare products in many situations and
third-party payors are increasingly challenging the pricing of medical products and services.



The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 together with rulemaking by the Centers for Medicare and Medicaid Services (CMS) require a number of changes in Medicare practices, including
reimbursement. The changes made to date are not expected to have an adverse affect on our operations, sales or the price of our stock, but we cannot predict the impact, if any, of future provider reimbursement changes.



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Salagen Tablets and Aloxi injection generally have been eligible for reimbursement to providers from third-party payors
and we have applied for, or in certain cases already received confirmation of, reimbursement eligibility for providers for Aloxi injection. Third-party reimbursement is important to the commercialization of our products. If government entities and
other third-party payors do not provide adequate reimbursement levels to providers for our products, our product and license revenues would be materially and adversely affected and our stock price could decline.



In recent years, various parties have proposed a number of legislative and regulatory
proposals aimed at changing national healthcare systems. In the United States, we expect that there will continue to be a number of federal and state proposals to implement government control of pricing and profitability of prescription
pharmaceuticals. Cost controls, if mandated by a government agency, could decrease the price that we receive for our current or future products. These proposals, if enacted, could have a material adverse effect on our product and license revenues
and could cause our stock price to decline. In certain countries, regulatory authorities must also approve the sales price of a product after they grant marketing approval. There is a risk that we will not be able to obtain satisfactory prices in
foreign markets even if we obtain marketing approval from foreign regulatory authorities.



Our operations, and the operations of our third-party contractors, involve hazardous materials that could expose us to liability if environmental damage occurs.



Our operations and the operations of our third-party contractors involve the controlled use
of hazardous materials. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, third parties may hold us liable for any resulting damages, which may exceed our
financial resources and may have a material adverse effect on our ability to fund our operations.



RISKS RELATED TO OUR OUTSTANDING SECURITIES



Our stock price is volatile, which may result in significant losses to stockholders and holders of our convertible notes.



The market price for our convertible notes is significantly impacted by the price of our common stock, which has historically been volatile. There has been significant
volatility in the market prices of pharmaceutical and biotechnology companies securities. Various factors and events may have a significant impact on the market price of our common stock, and some of these factors are beyond our control. These
factors include:



| |  |  | fluctuations in our operating results;
| | - |  | --------------------------------------



| |  |  | announcements of technological innovations or acquisitions or licensing of therapeutic products or product candidates by us or our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | published reports by securities analysts;
| | - |  | -----------------------------------------



| |  |  | positive or negative progress with our clinical trials;
| | - |  | -------------------------------------------------------



| |  |  | governmental regulation, including healthcare reimbursement policies;
| | - |  | ---------------------------------------------------------------------



| |  |  | developments in patent or other proprietary rights;
| | - |  | ---------------------------------------------------



| |  |  | developments in our relationship with collaborators and suppliers, and announcements of new strategic collaborations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



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| |  |  | public concern as to the safety and efficacy of our products; and
| | - |  | -----------------------------------------------------------------



| |  |  | general market conditions.
| | - |  | --------------------------



The trading price of our common stock has been, and could continue to be, subject to wide fluctuations in response to these factors, including the sale or attempted sale of a large amount of our common stock into the
market. Our stock price ranged from $2.34 to $34.49 per share during the three-year period ended June 30, 2005. Broad market fluctuations may also adversely affect the market price of our common stock.



In the past, following large falls in the price of a companys shares, securities class
action litigation has often been initiated against that company. Litigation of this type could result in substantial costs and diversion of managements attention and resources, which could harm our business. Any adverse determination in
litigation could subject us to significant liabilities.



We have outstanding
options and convertible notes that have the potential to dilute stockholder value and cause our stock value to decline.



We routinely grant stock options to our employees and other individuals. At June 30, 2005, we had options outstanding at option prices ranging from $1.81 to $33.22 for
9.1 million shares of our common stock that have been registered for resale. We have also issued convertible debt that is convertible into 8.3 million shares of common stock at an initial conversion price of $31.46 per share of common stock.
Conversion is contingent on a number of factors that have not yet been satisfied. Consequently, we are not able to estimate when, if ever, the convertible debt will be converted into common stock, but any such conversion would almost certainly
dilute stockholder value.



If some or all of such shares are sold into the
public market over a short time period, the value of our stock is likely to decline, as the market may not be able to absorb those shares at the prevailing market prices. Such sales may also make it more difficult for us to sell equity securities in
the future on terms that we deem acceptable.



Our convertible notes are
subordinated and we may incur additional debt.



Our
convertible notes are subordinated in right of payment to all of our senior indebtedness. As a result, in the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default under the indenture
governing the notes and in certain other events, our assets will be available to pay obligations on the notes only after all senior indebtedness has been paid in full. In addition, payments on the notes will be blocked in the event of a payment
default on certain senior indebtedness and may be blocked for up to 179 of 365 consecutive days in the event of certain nonpayment defaults on such debt. After retiring our senior indebtedness, we may not have sufficient assets remaining to pay
amounts due on any or all of the notes then outstanding.



The notes are
exclusively obligations of MGI PHARMA, INC., are not guaranteed by any subsidiaries and will not be guaranteed by any of our future subsidiaries. Subsidiaries are and would be separate legal entities and would have no obligation to make any payments
on the notes or to make any funds available for payment on the notes. Our right to receive assets of any such subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of the notes to participate in those assets)
would be effectively subordinated to the claims of such subsidiaries creditors (including trade creditors), except to the extent that we are reorganized as a creditor of such subsidiary, in which case our claims would still be subordinate to
any security interests in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by us.



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The indenture does not prohibit or limit us and would not limit any of our subsidiaries from incurring senior
indebtedness or incurring other indebtedness and other liabilities. As of June 30, 2005, we do not have senior indebtedness outstanding, and have no senior subordinated indebtedness other than the notes. We anticipate that from time to time we will
incur additional senior indebtedness and other additional liabilities.



There is no public market for the notes, which could limit their market price or the ability to sell them for their inherent value.



We cannot provide any assurances that a market will be available for the notes or that holders of our notes will be able to sell their notes. If there is an available
market, future trading prices of the notes will depend on many factors, including prevailing interest rates, the market for similar securities, general economic conditions and our financial condition, performance and prospects. Historically, the
market for convertible debt has been subject to disruptions that have caused substantial fluctuations in the prices of the securities. Accordingly, holders of our notes may be required to bear the financial risk of an investment in the notes for an
indefinite period of time.



Although the notes have been registered for resale
under the Securities Act, we have the right, pursuant to the registration rights agreement, to suspend the use of the shelf registration statement in certain circumstances. In the event of such a suspension, note holders would not be able to sell
the notes or associated common stock under the registration statement.



Our
convertible notes are not protected by restrictive covenants.



The
indenture governing the notes does not contain any financial or operating covenants or restrictions on the payment of dividends, the incurrence of indebtedness, the granting of security to other creditors, the movement of assets to subsidiaries
which incur debt or the issuance or repurchase of securities by us or any subsidiaries that we may acquire in the future.



We may not have the ability to purchase notes at the option of the holders or upon a change in control or to raise the funds necessary to finance the purchases.



Each holder of the notes may require us to purchase all or a portion of
their notes for cash on the following dates and purchase prices, plus accrued and unpaid interest and liquidating damages, if any:



| |  |  | March 2, 2011 - $747.62 per $1,000 of principal amount;
| | - |  | -------------------------------------------------------



| |  |  | March 2, 2014 - $799.52 per $1,000 of principal amount;
| | - |  | -------------------------------------------------------



| |  |  | March 2, 2019 - $894.16 per $1,000 of principal amount.
| | - |  | -------------------------------------------------------



However, it is possible that we would not have sufficient funds at that time to make the required purchase of notes or would otherwise be prohibited under future debt
instruments from making such payments in cash. We may only pay the purchase price in cash and not in shares of our common stock.



In addition, upon the occurrence of certain specific kinds of change in control events, holders may require us to purchase for cash all or any portion of their notes.
However, it is possible that, upon a change in control, we may not have sufficient funds at that time to make the required purchase of notes, and we may be unable to raise the funds necessary.



The terms of future indebtedness we incur may restrict our ability to fund the purchase of
notes upon a change in control or if we are otherwise required to purchase notes at the option of the holder. If such restrictions exist, we would have to seek the consent of the lenders or repay those borrowings. If we were unable to obtain the
necessary consent or unable to repay those borrowings, we would be unable to purchase the notes and, as a result, would be in default under the notes.



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The holders of our notes could receive less than the value of the shares of common stock into which the notes are
convertible as a result of the conditional conversion feature of the notes or as a result of optional redemption of the notes by us.



The notes are convertible into shares of common stock only if specified conditions are met. If the specified conditions for conversion are not met, holders of our notes
will not be able to convert the notes, and may not be able to receive the value of the shares of common stock into which the notes would otherwise be convertible.



The notes are convertible at the option of the holders into shares of our common stock, after June 30, 2004, only under the following
circumstances: (1) if the closing sale price of our common stock was more than 120% of the then current conversion price of the notes for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the
previous calendar quarter (once the forgoing condition is satisfied for any one quarter, then the notes will thereafter be convertible at any time at the option of the holder, through maturity), (2) if we elect to redeem the notes, (3) upon the
occurrence of specified corporate transactions or significant distributions to holders of our common stock occur or (4) subject to certain exceptions, for the five consecutive business day period following any five consecutive trading day period in
which, for each day of that period, the trading price of the notes was less than 98% of the sale price of our common stock multiplied by the notes then current conversion rate. Subject to the above conditions, the notes are convertible into an
aggregate of 8,269,942 shares of common stock at an initial conversion price of $31.46 per share of common stock.



At our election, any time after March 1, 2007, we may redeem some or all of the notes for cash at a redemption price equal to the following, plus accrued and unpaid
interest and liquidating damages, if any:



| |  |  | March 2, 2007 through March 1, 2008: 101.286% of the note issue price;
| | - |  | ----------------------------------------------------------------------



| |  |  | March 2, 2008 through March 1, 2009: 100.964% of the note issue price;
| | - |  | ----------------------------------------------------------------------



| |  |  | March 2, 2009 through March 1, 2010: 100.643% of the note issue price;
| | - |  | ----------------------------------------------------------------------



| |  |  | March 2, 2010 through March 1, 2011: 100.321% of the note issue price;
| | - |  | ----------------------------------------------------------------------



| |  |  | On or after March 2, 2011: 100% of the accreted principal amount of the notes.
| | - |  | ------------------------------------------------------------------------------



Our charter documents, our stockholder rights plan and Minnesota law contain provisions that could delay or prevent an acquisition of our company.



Our charter documents contain provisions that may discourage third parties from seeking
to acquire our company. These provisions include:



| |  |  | advance notice requirements for stockholder proposals and nominations; and
| | - |  | --------------------------------------------------------------------------



| |  |  | the authority of the board of directors to issue, without stockholder approval, preferred stock with such terms as the board of directors may determine.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, our board of directors has adopted a stockholder rights plan, or poison pill,
which enables our board of directors to issue preferred stock purchase rights that would be triggered by an acquisition of 15 percent or more of the outstanding shares of our common stock. These provisions and specific provisions of Minnesota law
relating to business combinations with interested stockholders may have the effect of delaying, deterring or preventing a merger or change in control. Some of these provisions may discourage a future acquisition of our company even if stockholders
would receive an attractive value for their shares or if a significant number of our stockholders believed such a proposed transaction to be in their best interests. As a result, stockholders who desire to participate in such a transaction may not
have the opportunity to do so.



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Item 3.



Quantitative and Qualitative
Disclosure About Market Risk



Our operations are not subject to risks of
material foreign currency fluctuations, nor do we use derivative financial instruments in our treasury practices. We place our marketable investments in instruments that meet high credit quality standards, as specified in our investment policy
guidelines. We do not expect material losses with respect to our investment portfolio or exposure to market risks associated with interest rates. The impact on our net income as a result of a 25, 50 or 100 basis point (where 100 basis points equals
1%) change in short-term interest rates would be approximately $0.5 million, $1 million or $2 million annually based on our cash, cash equivalents, marketable investment and restricted marketable investment balances at June 30, 2005.



Item 4.



Controls and Procedures



(a) Evaluation of Disclosure Controls and Procedures



Under the supervision and with the participation of our management, including our President
and Chief Executive Officer, Leon O. Moulder, Jr., and our Senior Vice President and Chief Financial Officer, James C. Hawley, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.



(b) Changes in Internal
Controls Over Financial Reporting



During the most recent fiscal quarter
covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonable likely to materially affect, our internal control
over financial reporting.



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##### Table of Contents

PART II  OTHER INFORMATION



Item 5.



Submission of Matters to a
Vote of Security Holders



The Company held its Annual Meeting of
Shareholders on May 10, 2005, and sufficient favorable votes were cast to approve all management proposals as follows:



Election of managements entire slate of seven directors by the following vote tallies:



|                        |  |            |  |          
|----------------------- |  | ---------- |  | ---------
|                        |  | For        |  | Withhold 
|Andrew J. Ferrara       |  | 62,572,334 |  | 49,575   
|Edward W. Mehrer        |  | 62,577,844 |  | 44,065   
|Hugh E. Miller          |  | 58,080,745 |  | 4,541,164
|Leon O. Moulder, Jr.    |  | 62,578,334 |  | 43,575   
|David B. Sharrock       |  | 62,547,849 |  | 74,060   
|Waneta C. Tuttle, Ph.D. |  | 62,572,944 |  | 48,965   
|Arthur Weaver           |  | 59,643,806 |  | 2,978,103



Ratification of the
independent auditors by a vote of 60,864,567 for, 1,740,686 against, 16,656 abstaining, and 0 broker non-votes.



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Item 6. Exhibits



|              |  |                                                                                                                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                   
|3.1           |  | Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).                                                                                                          
|              | 
|3.2           |  | Articles of Amendment to the Second Amended and Restated Articles of Incorporation, filed June 2, 2004 (Incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2004).                                                         
|              | 
|3.3           |  | Restated Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).                                                                                                             
|              | 
|3.4           |  | Amendment dated May 10, 2004 to Restated Bylaws (Incorporated by reference to Exhibit 3.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30,
2004).                                                                                                           
|              | 
|4.1           |  | Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Companys Annual Report on Form 10-K for the year ended December 31,
2004).                                                                                                   
|              | 
|4.2           |  | Rights Agreement, dated as of July 14, 1998, between the Company and Norwest Bank, Minnesota, N.A. (including the form of Rights Certificate attached as Exhibit B thereto) (Incorporated by
reference to Exhibit 1 to the Companys Registration Statement on Form 8-A, filed July 15, 1998).
|              | 
|4.3           |  | First Amendment to Rights Agreement, dated March 14, 2000, between the Company and Norwest Bank, Minnesota, N.A. (Incorporated by reference to Exhibit 2 to the Companys Registration
Statement on Form 8-A/A-1, filed March 20, 2000).                                                      
|              | 
|4.4           |  | Form of Convertible Subordinated Promissory Notes issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on December 4, 2002).                                
|              | 
|4.5           |  | Form of Common Stock Purchase Warrants issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed on December 4, 2002).                                           
|              | 
|4.6           |  | Senior Subordinated Convertible Notes Purchase Agreement, dated February 25, 2004, by and between MGI PHARMA, INC. and Merrill Lynch, Pierce, Fenner & Smith (Incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K filed on March 4, 2004).                   
|              | 
|4.7           |  | Senior Subordinated Convertible Notes Indenture, dated March 2, 2004, by and between MGI PHARMA, INC. and Wells Fargo Bank, National Association, as Trustee (Incorporated by reference to
Exhibit 4.2 to the Companys Current Report on Form 8-K filed March 4, 2004).                      
|              | 
|4.8           |  | Registration Rights Agreement dated March 2, 2004, between MGI PHARMA, INC. and Merrill Lynch & Co. (Incorporated by reference to Exhibit 4.3 to the Companys Current Report on Form
8-K filed March 4, 2004).                                                                               
|              | 
|31.1          |  | Certification of Leon O. Moulder, Jr. Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                             
|              | 
|31.2          |  | Certification of James C. Hawley Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                                  
|              | 
|32.1          |  | Certification of Leon O. Moulder, Jr. Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   
|              | 
|32.2          |  | Certification of James C. Hawley Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                        



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |                  |  |                                                           
|-------------------- |  | ---------------- |  | ----------------------------------------------------------
|                     |  | MGI PHARMA, INC.
|                     |  |                 
|Date: August 9, 2005 |  | By:              |  | /s/ James C. Hawley                                       
|                     |  |                  |  | James C. Hawley                                           
|                     |  |                  |  | Senior Vice President and Chief Financial Officer         
|                     |  |                  |  | (principal financial officer, and duly authorized
officer)



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##### Table of Contents

MGI PHARMA, INC. AND SUBSIDIARIES



Quarterly Report on Form 10-Q

for the

Quarter Ended June 30, 2005



EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                   
|3.1           |  | Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).                                                                                                          
|              | 
|3.2           |  | Articles of Amendment to the Second Amended and Restated Articles of Incorporation, filed June 2, 2004 (Incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2004).                                                         
|              | 
|3.3           |  | Restated Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).                                                                                                             
|              | 
|3.4           |  | Amendment dated May 10, 2004 to Restated Bylaws (Incorporated by reference to Exhibit 3.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30,
2004).                                                                                                           
|              | 
|4.1           |  | Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Companys Annual Report on Form 10-K for the year ended December 31,
2004).                                                                                                   
|              | 
|4.2           |  | Rights Agreement, dated as of July 14, 1998, between the Company and Norwest Bank, Minnesota, N.A. (including the form of Rights Certificate attached as Exhibit B thereto) (Incorporated by
reference to Exhibit 1 to the Companys Registration Statement on Form 8-A, filed July 15, 1998).
|              | 
|4.3           |  | First Amendment to Rights Agreement, dated March 14, 2000, between the Company and Norwest Bank, Minnesota, N.A. (Incorporated by reference to Exhibit 2 to the Companys Registration
Statement on Form 8-A/A-1, filed March 20, 2000).                                                      
|              | 
|4.4           |  | Form of Convertible Subordinated Promissory Notes issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on December 4, 2002).                                
|              | 
|4.5           |  | Form of Common Stock Purchase Warrants issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed on December 4, 2002).                                           
|              | 
|4.6           |  | Senior Subordinated Convertible Notes Purchase Agreement, dated February 25, 2004, by and between MGI PHARMA, INC. and Merrill Lynch, Pierce, Fenner & Smith (Incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K filed on March 4, 2004).                   
|              | 
|4.7           |  | Senior Subordinated Convertible Notes Indenture, dated March 2, 2004, by and between MGI PHARMA, INC. and Wells Fargo Bank, National Association, as Trustee (Incorporated by reference to
Exhibit 4.2 to the Companys Current Report on Form 8-K filed March 4, 2004).                      
|              | 
|4.8           |  | Registration Rights Agreement dated March 2, 2004, between MGI PHARMA, INC. and Merrill Lynch & Co. (Incorporated by reference to Exhibit 4.3 to the Companys Current Report on Form
8-K filed March 4, 2004).                                                                               
|              | 
|31.1          |  | Certification of Leon O. Moulder, Jr. Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                             
|              | 
|31.2          |  | Certification of James C. Hawley Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                                  
|              | 
|32.1          |  | Certification of Leon O. Moulder, Jr. Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   
|              | 
|32.2          |  | Certification of James C. Hawley Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                        



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