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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 September 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.    Yesx    No ̈



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



Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈Nox



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 |  | 77,466,263 shares                
|(Class)                      |  | (Outstanding at November 1, 2005)



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MGI PHARMA, INC.



FORM 10-Q INDEX



|                                                                                                          |  |           
|--------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                          |  | PageNumber
|PART I.
FINANCIAL INFORMATION                                                                             |  |           
|                                                                                                          | 
|Item 1.
Financial Statements (Unaudited)                                                                  |  |           
|                                                                                                          | 
|Condensed Consolidated Balance Sheets  September 30, 2005 and December 31, 2004                          |  | 3         
|                                                                                                          | 
|Condensed Consolidated Statements of Operations  Three and Nine Months Ended September 30, 2005 and 2004 |  | 4         
|                                                                                                          | 
|Condensed Consolidated Statements of Cash Flows  Nine Months Ended September 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             |  | 18        
|                                                                                                          | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                        |  | 49        
|                                                                                                          | 
|Item 4.
Controls and Procedures                                                                           |  | 49        
|                                                                                                          | 
|PART II.
OTHER INFORMATION                                                                                |  |           
|                                                                                                          | 
|Item 6.
Exhibits                                                                                          |  | 50        
|                                                                                                          | 
|SIGNATURES                                                                                                |  | 52        





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PART IFINANCIAL INFORMATION



Item 1. Financial Statements



MGI PHARMA, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | -------------------- | - | -------- | -
|                                                                                                                                                    |  | September 30,2005(Unaudited) |          |   | December 31,2004 (*) |  
|ASSETS                                                                                                                                              |  |                              |          |   |                      |   |          |  
|                                                                                                                                                    |  |                             
|Current assets:                                                                                                                                     |  |                              |          |   |                      |   |          |  
|Cash and cash equivalents                                                                                                                           |  | $                            | 83,206   |   |                      | $ | 10,098   |  
|Short-term marketable investments                                                                                                                   |  |                              | 78,233   |   |                      |   | 195,384  |  
|Restricted marketable investments                                                                                                                   |  |                              | 5,797    |   |                      |   | 5,832    |  
|Receivables, less contractual allowances and allowance for bad debts of $32,369 and $12,227                                                         |  |                              | 146,491  |   |                      |   | 122,275  |  
|Inventories                                                                                                                                         |  |                              | 40,435   |   |                      |   | 8,408    |  
|Other current assets                                                                                                                                |  |                              | 873      |   |                      |   | 481      |  
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|Total current assets                                                                                                                                |  |                              | 355,035  |   |                      |   | 342,478  |  
|                                                                                                                                                    |  |                             
|Restricted cash                                                                                                                                     |  |                              | 600      |   |                      |   | 600      |  
|Long-term marketable investments                                                                                                                    |  |                              | 29,329   |   |                      |   | 66,848   |  
|Restricted marketable investments, less current portion                                                                                             |  |                              | 2,844    |   |                      |   | 8,519    |  
|Equipment, furniture and leasehold improvements, at cost less accumulated depreciation of $4,378 and $3,505                                         |  |                              | 3,482    |   |                      |   | 2,666    |  
|Debt issuance costs, less accumulated amortization of $1,841 and $969                                                                               |  |                              | 6,295    |   |                      |   | 7,167    |  
|Intangible assets, at cost less accumulated amortization of $6,862 and $5,239                                                                       |  |                              | 6,372    |   |                      |   | 7,995    |  
|Prepaid acquisition costs                                                                                                                           |  |                              | 61,106   |   |                      |   |         |  
|Other assets                                                                                                                                        |  |                              | 61       |   |                      |   | 62       |  
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|Total assets                                                                                                                                        |  | $                            | 465,124  |   |                      | $ | 436,335  |  
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                |  |                              |          |   |                      |   |          |  
|                                                                                                                                                    |  |                             
|Current liabilities:                                                                                                                                |  |                              |          |   |                      |   |          |  
|Accounts payable                                                                                                                                    |  | $                            | 11,378   |   |                      | $ | 14,831   |  
|Accrued expenses                                                                                                                                    |  |                              | 30,495   |   |                      |   | 43,244   |  
|Deferred revenue                                                                                                                                    |  |                              | 318      |   |                      |   | 624      |  
|Other current liabilities                                                                                                                           |  |                              | 591      |   |                      |   | 124      |  
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|Total current liabilities                                                                                                                           |  |                              | 42,782   |   |                      |   | 58,823   |  
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|Noncurrent liabilities:                                                                                                                             |  |                              |          |   |                      |   |          |  
|Senior subordinated convertible notes, face value of $348,000 net of unamortized discount of $87,828 as of September 30, 2005 and
December 31, 2004 |  |                              | 260,172  |   |                      |   | 260,172  |  
|Deferred revenue                                                                                                                                    |  |                              | 2,170    |   |                      |   | 1,951    |  
|Other noncurrent liabilities                                                                                                                        |  |                              | 870      |   |                      |   | 879      |  
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|Total noncurrent liabilities                                                                                                                        |  |                              | 263,212  |   |                      |   | 263,002  |  
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|Total liabilities                                                                                                                                   |  |                              | 305,994  |   |                      |   | 321,825  |  
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|Stockholders equity:                                                                                                                               |  |                              |          |   |                      |   |          |  
|Preferred stock, 10,000,000 authorized and unissued shares                                                                                          |  |                              |         |   |                      |   |         |  
|Common stock, $.01 par value, 140,000,000 authorized shares, 72,125,403 and 71,041,179 issued and outstanding shares                                |  |                              | 721      |   |                      |   | 710      |  
|Additional paid-in capital                                                                                                                          |  |                              | 430,759  |   |                      |   | 418,659  |  
|Unearned compensation                                                                                                                               |  |                              | (3,729   | ) |                      |   | (3,216   | )
|Accumulated other comprehensive income                                                                                                              |  |                              | 1,284    |   |                      |   | 5,428    |  
|Accumulated deficit                                                                                                                                 |  |                              | (269,905 | ) |                      |   | (307,071 | )
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|Total stockholders equity                                                                                                                          |  |                              | 159,130  |   |                      |   | 114,510  |  
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  
|Total liabilities and stockholders equity                                                                                                          |  | $                            | 465,124  |   |                      | $ | 436,335  |  
|                                                                                                                                                    |  |                              |          |   |                      |   |          |  

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|(*) | The Balance Sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and
footnotes required by U.S. 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 EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                      |  | 2005                            |        |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|Revenues:                                             |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Product sales                                         |  | $                               | 66,448 |   |                                | $ | 54,905  |      |  | $ | 194,152 |   |  | $ | 127,601 |  
|Licensing and other                                   |  |                                 | 1,410  |   |                                |   | 645     |      |  |   | 4,103   |   |  |   | 2,757   |  
|                                                      |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                      |  |                                 | 67,858 |   |                                |   | 55,550  |      |  |   | 198,255 |   |  |   | 130,358 |  
|                                                      |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Costs and expenses:                                   |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Cost of sales                                         |  |                                 | 23,432 |   |                                |   | 18,210  |      |  |   | 68,268  |   |  |   | 39,976  |  
|Selling, general and administrative                   |  |                                 | 16,725 |   |                                |   | 20,276  |      |  |   | 52,316  |   |  |   | 54,424  |  
|Research and development                              |  |                                 | 14,755 |   |                                |   | 22,952  |      |  |   | 39,457  |   |  |   | 36,001  |  
|Acquired in-process research and development          |  |                                 |       |   |                                |   | 83,094  |      |  |   |        |   |  |   | 83,094  |  
|                                                      |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                      |  |                                 | 54,912 |   |                                |   | 144,532 |      |  |   | 160,041 |   |  |   | 213,495 |  
|                                                      |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Operating income (loss)                               |  |                                 | 12,946 |   |                                |   | (88,982 | )    |  |   | 38,214  |   |  |   | (83,137 | )
|                                                      |  |                                 |        |  
|Interest income                                       |  |                                 | 1,963  |   |                                |   | 1,761   |      |  |   | 5,067   |   |  |   | 3,952   |  
|Interest expense                                      |  |                                 | (1,754 | ) |                                |   | (1,754  | )    |  |   | (5,263  | ) |  |   | (4,233  | )
|                                                      |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                     |  |                                 | 13,155 |   |                                |   | (88,975 | )    |  |   | 38,018  |   |  |   | (83,418 | )
|Provision for income taxes                            |  |                                 | 297    |   |                                |   | 310     |      |  |   | 852     |   |  |   | 460     |  
|                                                      |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income (loss)                                     |  | $                               | 12,858 |   |                                | $ | (89,285 | )    |  | $ | 37,166  |   |  | $ | (83,878 | )
|                                                      |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income (loss) per common share:                   |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                 |  | $                               | 0.18   |   |                                | $ | (1.26   | )    |  | $ | 0.52    |   |  | $ | (1.20   | )
|Diluted                                               |  | $                               | 0.17   |   |                                | $ | (1.26   | )    |  | $ | 0.49    |   |  | $ | (1.20   | )
|                                                      |  |                                 |        |  
|Weighted average number of common shares outstanding: |  |                                 |        |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                 |  |                                 | 72,007 |   |                                |   | 70,689  |      |  |   | 71,709  |   |  |   | 69,723  |  
|Diluted                                               |  |                                 | 76,030 |   |                                |   | 70,689  |      |  |   | 75,818  |   |  |   | 69,723  |  



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)



|                                                                                     |  |                                 |            |   |      |   |            |  
|------------------------------------------------------------------------------------ |  | ------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                     |  | Nine Months Ended September 30, |           
|                                                                                     |  | 2005                            |            |   | 2004 |  
|OPERATING ACTIVITIES:                                                                |  |                                 |            |   |      |   |            |  
|Net income (loss)                                                                    |  | $                               | 37,166     |   |      | $ | (83,878    | )
|Adjustments for non-cash items:                                                      |  |                                 |            |   |      |   |            |  
|Acquired in-process research and development                                         |  |                                 |           |   |      |   | 83,094     |  
|Depreciation and intangible amortization                                             |  |                                 | 2,520      |   |      |   | 1,937      |  
|Benefit plan contribution                                                            |  |                                 | 212        |   |      |   | 676        |  
|Employee stock compensation expense                                                  |  |                                 | 2,893      |   |      |   | 730        |  
|Stock option term modification                                                       |  |                                 | 326        |   |      |   |           |  
|Amortization of financing charges                                                    |  |                                 | 872        |   |      |   | 790        |  
|Other                                                                                |  |                                 | 21         |   |      |   | 27         |  
|Change in operating assets and liabilities (net of acquisitions):                    |  |                                 |            |   |      |   |            |  
|Receivables                                                                          |  |                                 | (24,216    | ) |      |   | (74,423    | )
|Inventories                                                                          |  |                                 | (32,027    | ) |      |   | 2,254      |  
|Other current assets                                                                 |  |                                 | (391       | ) |      |   | 174        |  
|Accounts payable and accrued expenses                                                |  |                                 | (14,619    | ) |      |   | 17,279     |  
|Deferred revenue                                                                     |  |                                 | (87        | ) |      |   | (184       | )
|Other current liabilities                                                            |  |                                 | 467        |   |      |   | 15,571     |  
|                                                                                     |  |                                 |            |   |      |   |            |  
|Net cash used in operating activities                                                |  |                                 | (26,863    | ) |      |   | (35,953    | )
|                                                                                     |  |                                 |            |   |      |   |            |  
|INVESTING ACTIVITIES:                                                                |  |                                 |            |   |      |   |            |  
|Purchase of held-to-maturity investments                                             |  |                                 | (38,399    | ) |      |   | (79,424    | )
|Maturity of held-to-maturity investments                                             |  |                                 | 67,536     |   |      |   | 70,107     |  
|Purchase of available-for-sale investments                                           |  |                                 | (1,551,918 | ) |      |   | (2,741,090 | )
|Maturity of available-for-sale investments                                           |  |                                 | 1,673,306  |   |      |   | 2,633,454  |  
|Purchase of certain net assets in connection with acquisitions, net of cash acquired |  |                                 |           |   |      |   | (86,051    | )
|Purchase of equipment, furniture and leasehold improvements                          |  |                                 | (1,714     | ) |      |   | (578       | )
|Prepaid acquisition costs                                                            |  |                                 | (61,106    | ) |      |   |           |  
|                                                                                     |  |                                 |            |   |      |   |            |  
|Net cash provided by (used in) investing activities                                  |  |                                 | 87,705     |   |      |   | (203,582   | )
|                                                                                     |  |                                 |            |   |      |   |            |  
|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        |  |                                 | 5,710      |   |      |   | 2,868      |  
|Cash consideration from issuance of shares under stock plans                         |  |                                 | 6,556      |   |      |   | 9,590      |  
|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                                            |  |                                 | 12,266     |   |      |   | 251,182    |  
|                                                                                     |  |                                 |            |   |      |   |            |  
|Increase in cash and cash equivalents                                                |  |                                 | 73,108     |   |      |   | 11,647     |  
|                                                                                     |  |                                
|Cash and cash equivalents at beginning of period                                     |  |                                 | 10,098     |   |      |   | 5,491      |  
|                                                                                     |  |                                 |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                           |  | $                               | 83,206     |   |      | $ | 17,138     |  
|                                                                                     |  |                                 |            |   |      |   |            |  
|Supplemental disclosure of cash information:                                         |  |                                 |            |   |      |   |            |  
|Cash paid for interest                                                               |  | $                               | 5,754      |   |      | $ | 3,008      |  
|Cash paid for taxes                                                                  |  | $                               | 502        |   |      | $ |           |  



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 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 nine 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 PHARMA 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.



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 Emerging Issues Task Force 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 nine months ended
September 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.



(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, restricted stock units and other equity rights. At September 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 awards       |  |                          | 9,805  |            |   | 40                |  |   | 9,845 
|Shares available for future issuance           |  |                          | 1,091  |            |   |                  |  |   | 1,091 
|                                               |  |                          |        |            |   |                   |  |   |       
|Total                                          |  |                          | 10,896 |            |   | 40                |  |   | 10,936
|                                               |  |                          |        |            |   |                   |  |   |       
|Average exercise price for outstanding options |  | $                        | 15.90  |            | $ | 5.24              |  | $ | 15.86 



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##### Table of Contents

As part of the Guilford acquisition (see Note 11), MGI PHARMA assumed Guilford Pharmaceuticals, Inc. 2002 Stock Award and
Incentive Plan (the 2002 Plan). At the time MGI PHARMA assumed the 2002 Plan, no outstanding stock awards were outstanding and 818,349 MGI PHARMA shares were available under the 2002 Plan of which 627,950 stock awards were granted at an
average price of $23.01.



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. Restricted stock units are granted at market value and are expensed over the 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 EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|(in thousands, except per share data)                                                                           |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|Net income, as reported                                                                                         |  | $                               | 12,858  |   |                                | $ | (89,285 | )    |  | $ | 37,166  |   |  | $ | (83,878 | )
|Add: Total stock-based employee compensation expense included in reported net income                            |  |                                 | 1,049   |   |                                |   | 165     |      |  |   | 2,643   |   |  |   | 270     |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                                 | (43,362 | ) |                                |   | (7,245  | )    |  |   | (60,657 | ) |  |   | (15,619 | )
|                                                                                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Pro forma net income (loss)                                                                                     |  | $                               | (29,455 | ) |                                | $ | (96,365 | )    |  | $ | (20,848 | ) |  | $ | (99,227 | )
|                                                                                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income (loss) per common share:                                                                             |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|As reported basic                                                                                               |  | $                               | 0.18    |   |                                | $ | (1.26   | )    |  | $ | 0.52    |   |  | $ | (1.20   | )
|Pro forma basic                                                                                                 |  | $                               | (0.41   | ) |                                | $ | (1.36   | )    |  | $ | (0.29   | ) |  | $ | (1.42   | )
|                                                                                                                |  |                                 |         |  
|As reported diluted                                                                                             |  | $                               | 0.17    |   |                                | $ | (1.26   | )    |  | $ | 0.49    |   |  | $ | (1.20   | )
|                                                                                                                |  |                                 |         |  
|Pro forma diluted                                                                                               |  | $                               | (0.41   | ) |                                | $ | (1.36   | )    |  | $ | (0.29   | ) |  | $ | (1.42   | )
|                                                                                                                |  |                                 |         |  
|                                                                                                                |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|Expected dividend yield                                                                                         |  |                                 | 0       | % |                                |   | 0       | %    |  |   | 0       | % |  |   | 0       | %
|Risk-free interest rate                                                                                         |  |                                 | 4.03    | % |                                |   | 3.51    | %    |  |   | 3.93    | % |  |   | 3.41    | %
|Annualized volatility                                                                                           |  |                                 | 0.64    |   |                                |   | 0.80    |      |  |   | 0.69    |   |  |   | 0.80    |  
|Expected life, in years                                                                                         |  |                                 | 4.79    |   |                                |   | 5.25    |      |  |   | 4.99    |   |  |   | 5.25    |  



On July 26, 2005, pursuant to and
in accordance with the recommendation of the Compensation Committee (the Committee), the Board of Directors of 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) and was held by an
employee, officer or non-employee director of the Company. 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, were subject to this acceleration which was effective as of July 26, 2005.



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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 SFAS No. 123R, which becomes effective as to the Company for reporting periods beginning after December 31, 2005. The Company believes that the aggregate future expense that was eliminated as a
result of the acceleration of the vesting of these options is approximately $35 million.



The pro forma amounts stated above are not likely to be representative of the effect on reported results for future years due to, among other things, the number of stock options granted, the vesting period of the
stock options and the fair value of options to be granted in future years. Due to the uncertainty of realization of certain tax benefits, the Company did not reverse the portion of the valuation allowance established for the net operating loss
carryforwards that are related to the exercise of stock options and, therefore, the stock-based employee compensation expense deducted above is not shown net of tax.



(3) Net Income Per Common Share



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



|                                            |  |                                  |  |       
|------------------------------------------- |  | -------------------------------- |  | ------
|                                            |  | Three Months Ended September 30,
|(in thousands)                              |  | 2005                             |  | 2004  
|Weighted-average shares  basic             |  | 72,007                           |  | 70,689
|Effect of dilutive stock options            |  | 4,023                            |  |      
|Effect of convertible debt                  |  |                                 |  |      
|                                            |  |                                  |  |       
|Weighted-average shares - assuming dilution |  | 76,030                           |  | 70,689
|                                            |  |                                  |  |       



|                                            |  |                                 |  |       
|------------------------------------------- |  | ------------------------------- |  | ------
|                                            |  | Nine Months Ended September 30,
|(in thousands)                              |  | 2005                            |  | 2004  
|Weighted-average shares  basic             |  | 71,709                          |  | 69,723
|Effect of dilutive stock options            |  | 4,109                           |  |      
|Effect of convertible debt                  |  |                                |  |      
|                                            |  |                                 |  |       
|Weighted-average shares - assuming dilution |  | 75,818                          |  | 69,723
|                                            |  |                                 |  |       



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##### Table of Contents

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 5.8 million and 9.6 million for the three-month periods ended September 30, 2005 and 2004, respectively, and 5.7 million and 9.6 million for the nine-month periods ended
September 30, 2005 and 2004, respectively. The 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 any period presented.



(4) Marketable Investments



Marketable investments consisted of held-to-maturity and available-for-sale debt investments
(reported at amortized cost, which approximates fair market value) and available-for-sale, publicly traded, equity securities (reported at fair market value). Unrealized gains or losses from the available-for-sale, marketable securities have been
reported as a separate component of Stockholders equity (Accumulated Other Comprehensive Income).



Short-term marketable investments as of September 30, 2005 and December 31, 2004 are summarized in the following table:



|                                                           |  |                   |        |                  |   |        
|---------------------------------------------------------- |  | ----------------- | ------ | ---------------- | - | -------
|(in thousands)                                             |  | September 30,2005 |        | December 31,2004
|Corporate notes (classified as held-to-maturity)           |  | $                 | 7,175  |                  | $ | 33,071 
|Government agencies (classified as held-to-maturity)       |  |                   | 30,133 |                  |   |       
|Auction rate securities (classified as available-for-sale) |  |                   | 40,925 |                  |   | 162,313
|                                                           |  |                   |        |                  |   |        
|Total                                                      |  | $                 | 78,233 |                  | $ | 195,384
|                                                           |  |                   |        |                  |   |        



Long-term marketable investments
consist of publicly traded, equity securities, corporate notes and United States government agencies debt. The corporate notes and the government agencies debt 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)                                       |  | September 30,2005 |        | December 31,2004
|Corporate notes (classified as held-to-maturity)     |  | $                 |       |                  | $ | 3,184 
|Equity securities (classified as available-for-sale) |  |                   | 29,329 |                  |   | 33,474
|Government agencies (classified as held-to-maturity) |  |                   |       |                  |   | 30,190
|                                                     |  |                   |        |                  |   |       
|Total                                                |  | $                 | 29,329 |                  | $ | 66,848
|                                                     |  |                   |        |                  |   |       



Restricted marketable investments of
$8.6 million and $14.4 million at September 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 Accumulated Other Comprehensive Income. At the time of purchase, the fair value of the SuperGen securities was $24.4 million. As of September 30, 2005, the fair value of the MGI PHARMAs investment in SuperGen was $25.2
million.



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##### Table of Contents

In addition to our investment in SuperGen, we also 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 September 30, 2005, the fair value of our MethylGene investment was $4.1 million.



(5) Inventories



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



|                                |  |                   |        |                  |   |      
|------------------------------- |  | ----------------- | ------ | ---------------- | - | -----
|(in thousands)                  |  | September 30,2005 |        | December 31,2004
|Raw materials and supplies      |  | $                 | 15     |                  | $ | 328  
|Work in process                 |  |                   | 233    |                  |   | 397  
|Finished products               |  |                   | 40,187 |                  |   | 7,473
|Inventories consigned to others |  |                   |       |                  |   | 210  
|                                |  |                   |        |                  |   |      
|Total                           |  | $                 | 40,435 |                  | $ | 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 September 30, 2005 and
December 31, 2004 are summarized as follows:



|                                      |  |                   |        |                  |   |       
|------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|(in thousands)                        |  | September 30,2005 |        | December 31,2004
|Product administrative and other fees |  | $                 | 11,677 |                  | $ | 14,229
|License fees                          |  |                   | 5,110  |                  |   | 4,576 
|Product return accrual                |  |                   | 1,505  |                  |   | 2,448 
|Product development accrual           |  |                   | 2,000  |                  |   | 3,314 
|Field sales bonuses                   |  |                   | 600    |                  |   | 3,800 
|Other bonuses                         |  |                   | 2,082  |                  |   | 3,512 
|Retirement plan accrual               |  |                   | 1,327  |                  |   | 2,624 
|Interest                              |  |                   | 488    |                  |   | 1,951 
|Other accrued expenses                |  |                   | 5,706  |                  |   | 6,790 
|                                      |  |                   |        |                  |   |       
|Total                                 |  | $                 | 30,495 |                  | $ | 43,244
|                                      |  |                   |        |                  |   |       



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(7) Stockholders Equity



Changes in selected Stockholders equity accounts for the nine months ended September 30, 2005 were as follows:



|                                                       |  |              |  |           |     |                          |   |                      |  |   |                                            |   |  |   |        |  
|------------------------------------------------------ |  | ------------ |  | --------- | --- | ------------------------ | - | -------------------- |  | - | ------------------------------------------ | - |  | - | ------ | -
|                                                       |  | Common Stock |  |           |     |                          |   |                      |  |  
|(in thousands)                                         |  | Shares       |  | Par value |     | Additionalpaid-incapital |   | Unearnedcompensation |  |   | Accumulatedothercomprehensiveincome (loss) |  
|Balance at December 31, 2004                           |  | 71,041       |  | $         | 710 |                          | $ | 418,659              |  | $ | (3,216                                     | ) |  | $ | 5,428  |  
|Exercise of stock options                              |  | 936          |  |           | 10  |                          |   | 5,745                |  |   |                                           |   |  |   |       |  
|Employee retirement plan contribution                  |  | 73           |  |           | 1   |                          |   | 2,011                |  |   |                                           |   |  |   |       |  
|Shares issued pursuant to employee stock purchase plan |  | 43           |  |           |    |                          |   | 800                  |  |   |                                           |   |  |   |       |  
|Stock option term modification                         |  |             |  |           |    |                          |   | 326                  |  |   |                                           |   |  |   |       |  
|Restricted stock units                                 |  | 32           |  |           |    |                          |   | 2,938                |  |   | (513                                       | ) |  |   |       |  
|Unrealized loss on available for sale investments      |  |             |  |           |    |                          |   |                     |  |   |                                           |   |  |   | (4,144 | )
|Income tax benefit related to employee stock awards    |  |             |  |           |    |                          |   | 250                  |  |   |                                           |   |  |   |       |  
|Other issuances                                        |  |             |  |           |    |                          |   | 30                   |  |   |                                           |   |  |   |       |  
|                                                       |  |              |  |           |     |                          |   |                      |  |   |                                            |   |  |   |        |  
|Balance at September 30, 2005                          |  | 72,125       |  | $         | 721 |                          | $ | 430,759              |  | $ | (3,729                                     | ) |  | $ | 1,284  |  
|                                                       |  |              |  |           |     |                          |   |                      |  |   |                                            |   |  |   |        |  



(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
and assumed $1.1 million in liabilities at closing. In addition, we incurred $1.9 million in transaction fees, including legal, valuation and accounting fees.



12



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##### Table of Contents

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 the amount by which net sales exceed $50 million 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 September 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 September 30, 2005.



Pro forma results of
operations: The following unaudited pro forma information for the three and nine months ended September 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 in-process research and development charge of $89.1 million, 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 and does not include the impact of the October 3, 2005 acquisition of Guilford Pharmaceuticals, Inc. (see Note
11).



|                                 |  |                                      |         |   |                                     |   |         |  
|-------------------------------- |  | ------------------------------------ | ------- | - | ----------------------------------- | - | ------- | -
|(in thousands)                   |  | Three Months EndedSeptember 30, 2004 |         |   | Nine Months EndedSeptember 30, 2004 |  
|Total revenues                   |  | $                                    | 55,692  |   |                                     | $ | 131,428 |  
|Net loss                         |  |                                      | (10,083 | ) |                                     |   | (9,413  | )
|Pro forma loss per common share: |  |                                      |         |   |                                     |   |         |  
|Basic and diluted                |  | $                                    | (0.14   | ) |                                     | $ | (0.13   | )



13



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##### Table of Contents

(9) Research and Development Expense



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



|                               |  |                                 |        |      |   |       
|------------------------------ |  | ------------------------------- | ------ | ---- | - | ------
|                               |  | Three Months EndedSeptember 30,
|(in thousands)                 |  | 2005                            |        | 2004
|License fees                   |  | $                               | 50     |      | $ | 16,786
|Other research and development |  |                                 | 14,705 |      |   | 6,166 
|                               |  |                                 |        |      |   |       
|Total                          |  | $                               | 14,755 |      | $ | 22,952
|                               |  |                                 |        |      |   |       



|                               |  |                                |        |      |   |       
|------------------------------ |  | ------------------------------ | ------ | ---- | - | ------
|                               |  | Nine Months EndedSeptember 30,
|(in thousands)                 |  | 2005                           |        | 2004
|License fees                   |  | $                              | 50     |      | $ | 19,286
|Other research and development |  |                                | 39,407 |      |   | 16,715
|                               |  |                                |        |      |   |       
|Total                          |  | $                              | 39,457 |      | $ | 36,001
|                               |  |                                |        |      |   |       



(10) Comprehensive Income (Loss)



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



|                                                                        |  |                                 |        |      |   |         |  
|----------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------- | -
|                                                                        |  | Three Months EndedSeptember 30, |       
|(in thousands)                                                          |  | 2005                            |        | 2004 |  
|Net income (loss), as reported                                          |  | $                               | 12,858 |      | $ | (89,285 | )
|Unrealized gain (loss) from securities classified as available for sale |  |                                 | 5,117  |      |   | 283     |  
|                                                                        |  |                                 |        |      |   |         |  
|Comprehensive income (loss)                                             |  | $                               | 17,975 |      | $ | (89,002 | )
|                                                                        |  |                                 |        |      |   |         |  



|                                                                        |  |                                |        |   |      |   |         |  
|----------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------- | -
|                                                                        |  | Nine Months EndedSeptember 30, |       
|(in thousands)                                                          |  | 2005                           |        |   | 2004 |  
|Net income (loss), as reported                                          |  | $                              | 37,166 |   |      | $ | (83,878 | )
|Unrealized gain (loss) from securities classified as available for sale |  |                                | (4,144 | ) |      |   | 2,838   |  
|                                                                        |  |                                |        |   |      |   |         |  
|Comprehensive income (loss)                                             |  | $                              | 33,022 |   |      | $ | (81,040 | )
|                                                                        |  |                                |        |   |      |   |         |  



14



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##### Table of Contents

(11) Subsequent Event



Guilford Pharmaceuticals Inc. Acquisition



On October 3, 2005, Granite Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of MGI PHARMA, merged with and into Guilford Pharmaceuticals Inc.,
a Delaware corporation now known as MGI GP, Inc. (Guilford or MGI GP), with Guilford surviving as a wholly owned subsidiary of MGI PHARMA (the Guilford Merger). On October 3, 2005, upon closing of the
Guilford Merger, all shares of Guilford common stock were exchanged for the right to receive an aggregate of approximately 5.3 million shares of MGI PHARMA common stock plus approximately $53.9 million in cash, which represents $3.75 per
Guilford share of common stock, based on the average closing price of MGI PHARMAs common stock over a five trading day period ended on September 27, 2005, or total consideration of $179.6 million.



The Guilford Merger triggered an obligation for Guilford to make an offer to repurchase all
the Guilfords 5% Convertible Subordinated Notes due July 1, 2008 (the Notes) in accordance with the terms of the related indenture at a repurchase price in cash equal to 100% of the principal amount of the Notes, plus accrued
and unpaid interest and liquidated damages, if any, up to but excluding the payment date. Each $1,000 principal amount of the Notes is currently convertible, at the option of the holder, into (i) 17.6772 shares of MGI PHARMA common stock, and
(ii) $180.28 in cash.



We estimate that the purchase price will be
approximately $1,020.56 per $1,000 principal amount of Notes, which is equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest through November 28, 2005. The tender offer is not contingent on any financing. The
tender offer will expire at 5:00 p.m. New York City time on November 28, 2005, unless extended.



On September 29, 2005, MGI PHARMA extinguished Guilfords revenue interest assignment agreement with Paul Royalty. The $59.8 million related to the extinguishment of Guilfords revenue interest
assignment agreement with Paul Royalty and other acquisition expenses paid prior to September 30, 2005 are accounted for as prepaid acquisition costs.



Purchase Price: A preliminary estimate of the purchase price is as follows (table in thousands):



|                                                                                     |  |   |        
|------------------------------------------------------------------------------------ |  | - | -------
|Purchase of Guilford  cash consideration                                            |  | $ | 53,886 
|Purchase of Guilford  equity consideration                                          |  |   | 125,733
|Extinguishment of Guilfords revenue interest obligation agreement with Paul Royalty |  |   | 59,779 
|Expected Extinguishment of Guilfords convertible debt                               |  |   | 70,780 
|Transaction costs and fees                                                           |  |   | 19,523 
|                                                                                     |  |   |        
|Preliminary estimated purchase price                                                 |  | $ | 329,701
|                                                                                     |  |   |        



The preliminary estimated purchase
price will be allocated to the tangible and intangible assets and liabilities acquired on October 3, 2005 based on their estimated fair values as of September 30, 2005 (table in thousands):



|                                            |  |   |         |  
|------------------------------------------- |  | - | ------- | -
|Cash and investments                        |  | $ | 33,585  |  
|Short term marketable investments           |  |   | 2,978   |  
|Investments held by SNDC                    |  |   | 21,262  |  
|Accounts receivable, net                    |  |   | 4,153   |  
|Inventories, net                            |  |   | 3,045   |  
|Other current assets                        |  |   | 1,860   |  
|Goodwill                                    |  |   | 80,738  |  
|Investments, restricted                     |  |   | 1,837   |  
|In-process research and development         |  |   | 156,500 |  
|Acquired identifiable intangible assets     |  |   | 62,300  |  
|Aggrastat intangible assets  held for sale |  |   | 15,000  |  
|Property and equipment, net                 |  |   | 1,768   |  
|Other assets                                |  |   | 3,546   |  
|Accounts payable                            |  |   | (7,414  | )
|Accrued expenses                            |  |   | (22,042 | )
|Debt                                        |  |   | (2,266  | )
|Other liabilities                           |  |   | (9,115  | )
|Minority interest                           |  |   | (18,034 | )
|                                            |  |   |         |  
|Total preliminary estimated purchase price  |  | $ | 329,701 |  
|                                            |  |   |         |  



15



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##### Table of Contents

The allocation of the estimated purchase price is preliminary. The final determination of the purchase price allocation
will be based on the fair value of assets acquired, including the fair values of in-process research and development and other identifiable intangible assets and the fair values of liabilities assumed as of the date of the Guilford Merger. The
allocation of the purchase price requires a series of assumptions and estimates and the exercise of judgment including the assignment of values to tangible and intangible assets.



The purchase price allocation will remain preliminary until the completion of a third-party valuation as of the closing date of the Guilford
Merger of significant identifiable intangible assets acquired (including in-process research and development) and until MGI PHARMA determines the fair values of other identifiable assets acquired and liabilities assumed. The revised determination of
the purchase price allocation is expected to be completed in the fourth quarter of 2005. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented above.



The amount preliminarily allocated to acquired identifiable intangible assets has been
attributed to the following identifiable assets (table in thousands):



|                          |  |   |       
|------------------------- |  | - | ------
|Gliadel                   |  | $ | 61,500
|Distribution Intangible   |  |   | 800   
|Aggrastat  held for sale |  |   | 15,000



The estimated fair value of Gliadel
was derived using a preliminary valuation from an independent third party. The estimated fair value attributed to Gliadel will be amortized on a straight-line basis over 15 years. While patent protection for Gliadel ends in August 2006, during
September 2004, the U.S. Food and Drug Administration (FDA) notified Guilford that Gliadel is entitled to market exclusivity for the treatment of patients with malignant glioma undergoing primary surgical resection until February 2010
under applicable orphan drug laws. In addition, Gliadel is manufactured using a proprietary process. MGI PHARMA management believes, after consultation with an independent third party, that this proprietary process will provide a significant barrier
to future, generic competition.



The estimated fair value of the Distribution
Intangible was derived using a preliminary valuation from an independent third party and represents the value of creating a new distribution relationship. As the Distribution Intangible is related to the distribution of Gliadel, it will also be
amortized on a straight-line basis over 15 years.



The estimated fair value
attributed to Aggrastat was determined based on a comparison of non-binding offers received from third parties.



16



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##### Table of Contents

The amount allocated to in-process research and development represents an estimate of the fair value of purchased
in-process technology for research projects that, as of the closing date of the Guilford Merger, have not yet reached technological feasibility and have no alternative future use. Only those research projects that had advanced to a stage of
development where management believed that a reasonable likelihood of technical success existed were included in the estimated fair value. In-process research and development has been expensed immediately following consummation of the Guilford
Merger. The estimated fair value of the in-process research and development was derived using a preliminary valuation from an independent third party and primarily represents the estimated fair value of Aquavan, a novel sedative/hypnotic that is
currently being evaluated for use as a procedural sedative during brief diagnostic and therapeutic medical procedures.



There are several methods that can be used to determine the estimated fair value of the acquired in-process research and development. We utilized the income
method, which applies a probability weighting to the estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection,
historical pricing of similar products, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate that incorporates the weighted cost of capital relative to the
industry and the Company as well as product specific risks associated with the acquired in-process research and development products. Product specific risk factors included the products phase of development, likelihood of success, clinical
data, target product profile and development plan. These cash flows were then discounted to a present value using a discount rate of approximately 17%. The Company believes the assumptions used in the valuation were reasonable at the time of the
acquisition.



The major risks and uncertainties associated with the timely and
successful completion of these projects consist of the ability to confirm the safety and efficacy of the technology based on the data from clinical trials and obtaining necessary regulatory approvals. In addition, no assurance can be given that the
underlying assumptions used to forecast the cash flows or the timely and successful completion of such projects will materialize, as estimated. For these reasons, among others, actual results may vary significantly from the estimated results.



17



---

##### 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 PHARMA, we, or the Company) is a biopharmaceutical company engaged in the
acquisition, research, development and commercialization of proprietary pharmaceutical products that target the oncology and acute care markets to address the unmet needs of patients. Our goal is to become a leading oncology and acute care focused
biopharmaceutical company through the application of our core competencies of oncology and acute care product discovery, acquisition, development and commercialization. In the past, we have acquired 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. After the reporting period ended, on October 3, 2005, we acquired Guilford Pharmaceuticals Inc.
(Guilford), located in Baltimore, Maryland. With the acquisition of Guilford, we have added the additional competency of drug discovery. We now expect to be able to focus on our relevant markets as a fully-integrated pharmaceutical
company performing targeted drug discovery, product development and commercialization. We have facilities in Bloomington, Minnesota; Lexington, Massachusetts; Princeton, New Jersey; and Baltimore, Maryland.



Because the acquisition of Guilford occurred after the completion of our fiscal quarter,
financial information for Guilford is not included in our financial results in this quarterly report. Certain pro forma financial information related to Guilford and our acquisition of Guilford is included in our Current Report on Form 8-K/A,
filed with the Securities and Exchange Commission on November 4, 2005.



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, Kadian® (morphine sulfate) sustained release capsules, Gliadel® (polifeprosan 20 with carmustine implant) Wafer and Aggrastat® injection.



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 exceed 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 expanded our agreement with Helsinn to include the
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 2005 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 do not include any sales of Aloxi injection for PONV or Aloxi
oral for CINV) for the nine months ended September 30, 2005 and for the year ended December 31, 2004 were $181.5 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



18



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##### Table of Contents

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. The
introduction of these competing, generic products has resulted in a significant decline of Salagen Tablets sales from 2004 sales of $29.3 million in the United States. Sales of Salagen Tablets were $8.7 million and $21.5 million for the nine months
ended September 30, 2005 and 2004, respectively.



Gliadel (polifeprosan 20
with carmustine implant) Wafer is a biodegradable wafer containing the chemotherapy agent carmustine, or BCNU, approved for the treatment of high-grade malignant gliomas as an adjunct to surgery and radiation. Gliadel was acquired in October 2005 as
part of the Guilford acquisition (see Note 11 in the Notes to Condensed Consolidated Financial Statements).



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



Aggrastat injection is a glycoprotein GP IIb/IIIa receptor antagonist that is indicated for the treatment of acute coronary syndrome (or
ACS), including patients who are to be medically managed and those who are to undergo percutaneous transluminal coronary angioplasty or atherectomy. The Company acquired Aggrastat as part of the Guilford acquisition and expenses will be
accounted for as discontinued operations, as MGI PHARMA plans to continue efforts to divest this product.



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 PHARMA                                                                  
|                       |  |                                                                                                                                                     | 
|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 PHARMA Europe: Novartis Canada: Pfizer Rest of World: Various other
collaborators
|                       |  |                                                                                                                                                     | 
|Hexalen capsules       |  | Ovarian Cancer                                                                                                                                      |  | Currently marketed |  | U.S.: MGI PHARMA Outside U.S.: Various
collaborators                                       
|                       |  |                                                                                                                                                     | 
|Kadian capsules        |  | Cancer related pain                                                                                                                                 |  | Currently promoted |  | U.S.: MGI PHARMA - Cancer Alpharma  all
other                                             
|                       |  |                                                                                                                                                     | 
|Gliadel Wafer **       |  | Malignant glioma at time of initial surgery                                                                                                         |  | Currently marketed |  | U.S.: MGI PHARMA Outside U.S.: Various
collaborators                                       
|                       |  |                                                                                                                                                     | 
|                       |  | Recurrent glioblastoma multiforme (GBM)                                                                                                             |  | Currently marketed |  | U.S.: MGI PHARMA Outside U.S.: Various collaborators                                       
|                       |  |                                                                                                                                                     | 
|Aggrastat Injection ** |  | Acute coronary syndrome                                                                                                                             |  | Currently marketed |  | U.S.: MGI PHARMA Outside U.S.: Merck &
Co.                                                 



19



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##### Table of Contents

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



|                                                                |  |                                                                                                             |  |                                                            
|--------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------
|Products                                                        |  | Principal Indications                                                                                       |  | Status                                                     
|Dacogen injection                                               |  | MDS  AML                                                                                                    |  | FDA Approvable Letter & EMEA review Pivotal program
ongoing
|                                                                |  |                                                                                                            
|Saforis oral suspension                                         |  | Oral mucositis                                                                                              |  | To submit NDA                                              
|                                                                |  |                                                                                                            
|Aloxi injection                                                 |  | PONV                                                                                                        |  | Phase 3                                                    
|                                                                |  |                                                                                                            
|Aquavan Injection **                                            |  | Procedural sedation for patients undergoing colonoscopy or other brief diagnostic or therapeutic procedures |  | Phase 3 to begin                                           
|                                                                |  |                                                                                                            
|Aloxi capsules                                                  |  | CINV                                                                                                        |  | Phase 3                                                    
|                                                                |  |                                                                                                            
|ZYC101a                                                         |  | Cervical dysplasia                                                                                          |  | Pivotal program ongoing                                    
|                                                                |  |                                                                                                            
|Irofulven *                                                     |  | Monotherapy  Combination Therapy                                                                            |  | Phase 2  Phase 2                                           
|                                                                |  |                                                                                                            
|MG98                                                            |  | Renal cell cancer                                                                                           |  | Phase 2                                                    
|                                                                |  |                                                                                                            
|ZYC300                                                          |  | Solid tumors                                                                                                |  | Phase 1/2                                                  
|                                                                |  |                                                                                                            
|NAALADase Inhibitors **                                         |  | Chemotherapy induced neuropathy and neuropathic pain                                                        |  | Phase 1/Preclinical                                        
|                                                                |  |                                                                                                            
|PARP Inhibitors **                                              |  | Cancer chemosensitization and radiosensitization                                                            |  | Preclinical                                                
|                                                                |  |                                                                                                            
|                                                                |  | Cerebral and cardiac ischemia                                                                               |  | Preclinical                                                
|                                                                |  |                                                                                                            
|GPI 1485 ** (rights held by Symphony Neuro Development Company) |  | Parkinsons disease; peripheral nerve injury, including post prostatectomy erectile dysfunction             |  | Phase 2                                                    
|                                                                |  |                                                                                                            
|                                                                |  | HIV-neuropathy; HIV-dementia                                                                                |  | Pre-clinical                                               
|                                                                |  |                                                                                                            
|Other acylfulvene analogs                                       |  | Various Cancers                                                                                             |  | Preclinical                                                

---

|* | Includes National Cancer Institute trials
|- | -----------------------------------------

|** | Represents products and product candidates acquired from Guilford Pharmaceuticals, Inc., on October 3, 2005, after the period ended.
|-- | ------------------------------------------------------------------------------------------------------------------------------------

|
|



20



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##### Table of Contents

Results of Operations



The three months and nine months ended September 30, 2005 compared to the three months and nine months ended September 30, 2004:



Revenues



Total revenues in the third quarter and first nine months of 2005 increased 22 percent and 52 percent, respectively, over total revenues in
the corresponding periods of 2004.



|                    |  |                                  |        |      |   |        |  |   |         |   |  |     |  
|------------------- |  | -------------------------------- | ------ | ---- | - | ------ |  | - | ------- | - |  | --- | -
|                    |  | Three Months Ended September 30, |       
|(in thousands)      |  | 2005                             |        | 2004 |   | Change |  |   | %Change |  
|Product sales:      |  |                                  |        |      |   |        |  |   |         |   |  |     |  
|Aloxi injection     |  | $                                | 63,605 |      | $ | 47,606 |  | $ | 15,999  |   |  | 34  | %
|Salagen Tablets     |  |                                  | 1,765  |      |   | 6,176  |  |   | (4,411  | ) |  | (71 | )
|Other               |  |                                  | 1,078  |      |   | 1,123  |  |   | (45     | ) |  | (4  | )
|                    |  |                                  |        |      |   |        |  |   |         |   |  |     |  
|Total product sales |  |                                  | 66,448 |      |   | 54,905 |  |   | 11,543  |   |  | 21  |  
|                    |  |                                  |        |     
|Licensing and other |  |                                  | 1,410  |      |   | 645    |  |   | 765     |   |  | 119 |  
|                    |  |                                  |        |      |   |        |  |   |         |   |  |     |  
|Total revenues      |  | $                                | 67,858 |      | $ | 55,550 |  | $ | 12,308  |   |  | 22  |  
|                    |  |                                  |        |      |   |        |  |   |         |   |  |     |  



|                    |  |                                 |         |      |   |         |  |   |         |   |  |     |  
|------------------- |  | ------------------------------- | ------- | ---- | - | ------- |  | - | ------- | - |  | --- | -
|                    |  | Nine Months Ended September 30, |        
|(in thousands)      |  | 2005                            |         | 2004 |   | Change  |  |   | %Change |  
|Product sales:      |  |                                 |         |      |   |         |  |   |         |   |  |     |  
|Aloxi injection     |  | $                               | 181,514 |      | $ | 103,308 |  | $ | 78,206  |   |  | 76  | %
|Salagen Tablets     |  |                                 | 8,736   |      |   | 21,465  |  |   | (12,729 | ) |  | (59 | )
|Other               |  |                                 | 3,902   |      |   | 2,828   |  |   | 1,074   |   |  | 38  |  
|                    |  |                                 |         |      |   |         |  |   |         |   |  |     |  
|Total product sales |  |                                 | 194,152 |      |   | 127,601 |  |   | 66,551  |   |  | 52  |  
|                    |  |                                 |         |     
|Licensing and other |  |                                 | 4,103   |      |   | 2,757   |  |   | 1,346   |   |  | 49  |  
|                    |  |                                 |         |      |   |         |  |   |         |   |  |     |  
|Total revenues      |  | $                               | 198,255 |      | $ | 130,358 |  | $ | 67,897  |   |  | 52  |  
|                    |  |                                 |         |      |   |         |  |   |         |   |  |     |  



21



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##### Table of Contents

Sales: Product sales revenue in the third quarter and first nine months of 2005 increased 21 percent and 52
percent, respectively, over product 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 $63.6 million or 96 percent of our product sales
revenue in the third quarter of 2005 and $181.5 million or 94 percent of our product sales revenue in the first nine months of 2005. Aloxi injection net sales revenue was $47.6 million or 87 percent of our product sales revenue in the third quarter
of 2004 and $103.3 million or 81 percent of our product sales revenue in the first nine months of 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the third quarter of 2005 and 2004, we recognized $1.8 million of Salagen Tablets sales or 3 percent of our product sales revenue and $6.2 million of Salagen Tablets sales or 11
percent of our product sales revenue, respectively. In the first nine months of 2005 and 2004, we recognized $8.7 million of Salagen Tablets sales or 4 percent of our product sales revenue and $21.5 million of Salagen Tablets sales or 17 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, a second ANDA was approved in December
2004 and a third ANDA was approved in October of 2005. As a result of these ANDAs, we have suspended direct promotion of Salagen Tablets. Salagen Tablet sales in 2005 have declined significantly from 2004 levels and we expect Salagen Tablet sales
will continue to decline from current sales levels.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | At September 30, 2005, and 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, as of March 31, 2005. These estimates are based on historical and current product sales trends.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Licensing and other: Licensing and other revenue increased 119 percent to $1.4 million
in the third quarter of 2005 from $0.6 million in the third quarter of 2004 and increased 49 percent to $4.1 million in the first nine months of 2005 from $2.8 million in the first nine months of 2004. Licensing revenue is a combination of deferred
revenue 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.



We expect total revenue for 2005 to be approximately $280 to $290 million, including estimated Aloxi injection sales of $250 to 260 million for 2005 and Gliadel
wafer sales of approximately $10 million in the fourth quarter of 2005.



Costs and Expenses



|                                           |  |                                  |        |      |   |         |  |   |         |   |  |     |  
|------------------------------------------ |  | -------------------------------- | ------ | ---- | - | ------- |  | - | ------- | - |  | --- | -
|                                           |  | Three Months Ended September 30, |       
|(in thousands)                             |  | 2005                             |        | 2004 |   | Change  |  |   | %Change |  
|Costs and expenses:                        |  |                                  |        |      |   |         |  |   |         |   |  |     |  
|Cost of sales                              |  | $                                | 23,432 |      | $ | 18,210  |  | $ | 5,222   |   |  | 29  | %
|Selling, general and administrative        |  |                                  | 16,725 |      |   | 20,276  |  |   | (3,551  | ) |  | (18 | )
|Research and development                   |  |                                  | 14,755 |      |   | 22,952  |  |   | (8,197  | ) |  | (36 | )
|Acquired in-process research & development |  |                                  |       |      |   | 83,094  |  |   | (83,094 | ) |  | NA  |  
|                                           |  |                                  |        |      |   |         |  |   |         |   |  |     |  
|Total                                      |  | $                                | 54,912 |      | $ | 144,532 |  | $ | (89,620 | ) |  | (62 | )
|                                           |  |                                  |        |      |   |         |  |   |         |   |  |     |  



22



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##### Table of Contents

|                                           |  |                                 |         |      |   |         |  |   |         |   |  |     |  
|------------------------------------------ |  | ------------------------------- | ------- | ---- | - | ------- |  | - | ------- | - |  | --- | -
|                                           |  | Nine Months Ended September 30, |        
|(in thousands)                             |  | 2005                            |         | 2004 |   | Change  |  |   | %Change |  
|Costs and expenses:                        |  |                                 |         |      |   |         |  |   |         |   |  |     |  
|Cost of sales                              |  | $                               | 68,268  |      | $ | 39,976  |  | $ | 28,292  |   |  | 71  | %
|Selling, general and administrative        |  |                                 | 52,316  |      |   | 54,424  |  |   | (2,108  | ) |  | (4  | )
|Research and development                   |  |                                 | 39,457  |      |   | 36,001  |  |   | 3,456   |   |  | 10  |  
|Acquired in-process research & development |  |                                 |        |      |   | 83,094  |  |   | (83,094 | ) |  | NA  |  
|                                           |  |                                 |         |      |   |         |  |   |         |   |  |     |  
|Total                                      |  | $                               | 160,041 |      | $ | 213,495 |  | $ | (53,454 | ) |  | (25 | )
|                                           |  |                                 |         |      |   |         |  |   |         |   |  |     |  



Cost of sales: Cost of sales as
a percentage of product sales was 37 percent for the third quarter and 35 percent for the first nine months of 2005 compared to 33 percent for the third quarter and 31 percent for the first nine months 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. We believe that total cost of sales for 2005, including the impact of the Guilford acquisition, will be
approximately $92 to 96 million.



Selling, general and administrative:
Selling, general and administrative expenses decreased 18 percent to $16.7 million in the third quarter of 2005 from $20.3 million in the third quarter of 2004, and decreased 4 percent to $52.3 million in the first nine months of 2005 from $54.4
million in the first nine months of 2004. The decrease is primarily due to 2004 costs associated with the first year launch and promotion expenses of Aloxi injection that were not incurred in 2005. We expect selling, general and administrative
expense for 2005, including the impact of the Guilford acquisition, will be approximately $90 million for 2005.



Research and development: Research and development expense decreased 36 percent to $14.8 million in the third quarter of 2005 from $23.0 million in the third
quarter of 2004. This decrease is a primarily due to $16.7 million of licensing expense related to the initiation of the Dacogen injection license agreement incurred in third quarter of 2004. Research and development expense increased 10 percent to
$39.5 million in the first nine months of 2005 from $36.0 million in the first nine months of 2004. The increase primarily represents increased spending on development programs for the late-stage product candidates in our pipeline, including those
acquired or in-licensed in 2004. We expect net research and development expense for 2005, including the impact of the Guilford acquisition, will be approximately $70 million.



Acquired in-process research and development: For the quarter ended September 30, 2004, in connection with our acquisitions of
Zycos, Inc. and Aesgen, Inc., we recorded acquired in-process research and development expense of $83.1 million related to the fair value of certain projects that, as of the acquisition date, had not yet achieved regulatory approval for marketing
and have no alternative future use. Preliminary estimates of acquired in-process research and development expense for 2005, related to the Guilford acquisition, are approximately $157 million (see Note 11 of the Companys Notes to Condensed
Consolidated Financial Statements).



23



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##### Table of Contents

Interest Income and Expense



|                 |  |                                  |        |   |      |   |        |        |  |         |     |  |    |  
|---------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ------ |  | ------- | --- |  | -- | -
|                 |  | Three Months Ended September 30, |       
|(in thousands)   |  | 2005                             |        |   | 2004 |   |        | Change |  | %Change |    
|Interest income  |  | $                                | 1,963  |   |      | $ | 1,761  |        |  | $       | 202 |  | 11 | %
|Interest expense |  |                                  | (1,754 | ) |      |   | (1,754 | )      |  |         |    |  |    |  
|                 |  |                                  |        |   |      |   |        |        |  |         |     |  |    |  
|Total            |  | $                                | 209    |   |      | $ | 7      |        |  | $       | 202 |  | NM | *
|                 |  |                                  |        |   |      |   |        |        |  |         |     |  |    |  

---

|* | Not Meaningful
|- | --------------



|                 |  |                                 |        |   |      |   |        |        |  |   |         |   |  |    |  
|---------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | ------- | - |  | -- | -
|                 |  | Nine Months Ended September 30, |       
|(in thousands)   |  | 2005                            |        |   | 2004 |   |        | Change |  |   | %Change |  
|Interest income  |  | $                               | 5,067  |   |      | $ | 3,952  |        |  | $ | 1,115   |   |  | 28 | %
|Interest expense |  |                                 | (5,263 | ) |      |   | (4,233 | )      |  |   | (1,030  | ) |  | 24 |  
|                 |  |                                 |        |   |      |   |        |        |  |   |         |   |  |    |  
|Total            |  | $                               | (196   | ) |      | $ | (281   | )      |  | $ | 85      |   |  | NM | *
|                 |  |                                 |        |   |      |   |        |        |  |   |         |   |  |    |  

---

|* | Not Meaningful
|- | --------------



Interest Income: Interest income increased 11 percent to $1.96 million in the third quarter of 2005 from $1.76 million in the third quarter of 2004, and increased 28 percent to $5.1 million in the first nine
months of 2005 from $4.0 million in the first nine months of 2004. The increase was due to an increase in the effective interest rates received on our cash and marketable investments, 2.4% and 1.2% for the first nine months of 2005 and 2004,
respectively, which was offset by the decrease in the average amount of funds available for investment, $210 million and $340 million for the first nine months of 2005 and 2004, respectively. 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 third quarter of 2005 remained consistent with interest expense in the third quarter of 2004, and increased 24 percent to $5.3 million in the first nine months of 2005 from
$4.2 million in the first nine months of 2004. The increase was due to our issuance of convertible debt in March 2004. We expect interest expense for 2005, inclusive of Guilfords convertible debt, to be approximately $9.1 million, of which
$6.4 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 by MGI PHARMA in March 2004 and
Guilford in July 2003.



Provision for Income Taxes



Tax expense for the third quarter and first nine months of 2005 was $0.3 million and $0.9
million, respectively, and represents federal alternative minimum taxes. 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 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,



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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 the demonstration of consecutive quarters of profitability.



Net Income



We reported net income (loss) of $12.9 million and ($89.3) million for the third quarter of 2005 and 2004, respectively. We reported net income (loss) of $37.2 million and ($83.9) for the first nine months of 2005 and
2004, respectively. The primary reasons for the increase in net income were the increased Aloxi injection sales in 2005 and the $83.1 million of acquired in-process research and development and $16.7 million of license expense related to the
initiation of the Dacogen injection license agreement incurred in the third quarter of 2004. We expect our operating loss from continuing operations for 2005 to be approximately $124 to $130 million inclusive of an estimated $157 million of acquired
in-process research and development expense related to the Guilford acquisition.



Liquidity and Capital Resources



At September 30, 2005,
we had cash, cash equivalents and unrestricted marketable debt investments of $161 million and working capital of $312 million, compared with $239 million and $284 million, respectively, at December 31, 2004. The decrease in cash and cash
equivalents was to fund working capital requirements for inventory, receivables and accounts payable and accrued expenses in the first nine months of 2005 and to fund the extinguishment of an obligation related to a revenue interest agreement
between Guilford and Paul Royalty Fund, LP (Paul Royalty).



Net Cash Used in Operating Activities



Net cash used in
operations was $26.9 million and $36.0 million for the nine months ended September 30, 2005 and 2004, respectively. The cash use for the first nine months of 2005 was due primarily to an increase in accounts receivable and inventories and a
decrease in accounts payable and accrued expenses offset by an increase to net income. The $14.6 million decrease to accounts payable and accrued expenses was primarily a result of decreased accruals related to product administrative fees accruals,
product return accruals and bonus accruals (see Note 6 in the Notes to Condensed Consolidated Financial Statements). The $32.0 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 94 days, a decrease from our previous terms of 154 days, which we anticipate will contribute to cash flow from operations in the fourth quarter. The $24.2 million increase in accounts
receivable was primarily a result of increased Aloxi injection sales from the second and third quarter of 2005 compared to sales in the same periods in of 2004.



Net Cash Provided by (Used in) Investing Activities



Net cash provided by investing was $87.7 million for the nine months ended September 30, 2005, and net cash used in investing was $210.6 million for the nine months
ended September 30, 2004. The 2005 cash provided by investing was the result of maturing investments offset by $61.1 million of prepaid acquisition costs related to the Guilford acquisition which included $59.8 million for extinguishment of an
obligation related to a revenue interest agreement between Guilford and Paul Royalty. The 2004 cash used in investing activities was primarily a result of purchases of certain net assets in connection with the Aesgen and Zycos business acquisitions
and the purchase of an equity investment in SuperGen in connection with the Dacogen injection license agreement. Cash provided by or used in investing activities will fluctuate due to investments in acquisitions, in-licensing and the timing of
purchases and maturities of investments.



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##### Table of Contents

Net Cash Provided by Financing Activities



Net cash provided by financing was $12.3 million and $251.2 million for the nine months ended September 30, 2005 and 2004,
respectively. The 2005 cash provided by financing activities was the result of the $5.7 million from the maturing of restricted investments and $6.6 million from the issuance of shares under stock plans. The 2004 cash provided by investing
activities was due to net proceeds of $252.1 million received from the issuance of convertible debt in March 2004, $9.6 million from issuance of shares under stock award plans, $2.9 million from maturing of restricted investments 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 nine scheduled interest payments related to the issuance
of convertible debt.



Cash Management and Requirements



Our cash use in 2005 will depend in part upon the pattern of Aloxi
injection sales and the collection of the related accounts receivable. We expect cash provided by operations in 2005 to be approximately $60 million.



Our overall change in cash position in 2005 will be negative because of our acquisition of Guilford. In the third quarter, we incurred a cash outflow of $59.8 million
related to the extinguishment of Guilfords revenue interest obligation agreement with Paul Royalty. On October 3, 2005, we incurred a cash outflow of $53.9 million for the cash portion of the Guilford shareholder consideration and we expect to
incur additional cash outflows totaling about $90.3 million in the fourth quarter related to transaction costs, fees and the extinguishment of Guilfords convertible debt.



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 also 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 September 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             |  | $                | 636 |      | $ | 2,568 |  | $    | 2,605 |      | $ | 1,720      |  | $     | 1,126 |  | $ | 559     |  | $ | 9,214  
|Convertible debt                     |  |                  |    |      |   |      |  |      |      |      |   |           |  |       |      |  |   | 348,000 |  |   | 348,000
|Helsinn minimum sales obligation (a) |  |                  |    |      |   | 5,181 |  |      | 6,120 |      |   | 5,554      |  |       | 4,795 |  |   | 11,465  |  |   | 33,115 
|                                     |  |                  |     |      |   |       |  |      |       |      |   |            |  |       |       |  |   |         |  |   |        
|Total                                |  | $                | 636 |      | $ | 7,749 |  | $    | 8,725 |      | $ | 7,274      |  | $     | 5,921 |  | $ | 360,024 |  | $ | 390,329
|                                     |  |                  |     |      |   |       |  |      |       |      |   |            |  |       |       |  |   |         |  |   |        

---

|(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



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certain development milestones. Associated with the Guilford acquisition, on October 3, 2005, we incurred a cash outflow of $53.9 million for the cash
portion of the Guilford shareholder consideration and we expect to incur additional cash outflows totaling about $90.3 million in the fourth quarter related to transaction costs, fees and the extinguishment of Guilfords convertible debt. The
following table summarizes the contractual obligations assumed as part of the Guilford acquisition 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               |  | $                | 724   |      | 2,814  |      | 2,788 |      | 2,872 |      | 2,958 |            | 33,711 |       | 45,867
|Capital lease payments                 |  |                  | 519   |      | 1,223  |      | 313   |      | 168   |      |      |            |       |       | 2,223 
|Research and development arrangements  |  |                  | 7,004 |      | 17,845 |      | 157   |      | 35    |      |      |            |       |       | 25,041
|Manufacturing commitment for Aggrastat |  |                  | 1,193 |      | 1,475  |      | 1,474 |      | 1,465 |      | 634   |            |       |       | 6,241 
|                                       |  |                  |       |      |        |      |       |      |       |      |       |            |        |       |       
|Total                                  |  | $                | 9,440 |      | 23,357 |      | 4,732 |      | 4,540 |      | 3,592 |            | 33,711 |       | 79,372
|                                       |  |                  |       |      |        |      |       |      |       |      |       |            |        |       |       



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.



Application of Critical Accounting
Policies and Estimates



There were no significant changes to our critical
accounting policies during the nine months ended September 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.



Investing in our securities involves a high degree of risk. Before making an investment decision, you should carefully consider the risk factors set forth herein, as well as other information we include in this report
and the additional information in the other reports we file with the Securities and Exchange Commission (the SEC or the Commission). If any of the following risks actually occur, our business could be harmed. In such case,
the trading price of our securities could decline and you could lose all or part of your investment. The following discussion groups risks by those related to our business, our industry and our securities. Unfavorable developments in any of these
areas could make it impossible for the Company to continue business operations or reduce or eliminate the value of the Companys securities including its common stock.



RISKS RELATED TO OUR BUSINESS



Sales of Aloxi injection account for a significant 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 93 percent and 83 percent of our total product sales and 92 and 81 percent of our total revenue for the nine months ended
September 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.



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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 Aquavan injection, ZYC101a, Saforis oral suspension, Dacogen
injection and 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.



In addition to Aloxi, to a more limited extent we will also depend on maintaining or
increasing revenues from Gliadel wafer, the failure of which would have an adverse effect on our ability to accomplish our business objectives.



Prior to February 2003, the FDA had only approved the marketing of Gliadel in the United States for patients who had a brain tumor surgically removed and had recurrent
forms of a type of brain cancer called glioblastoma multiforme (GBM), affecting approximately 3,000 to 4,000 patients annually. In February 2003, the FDA granted approval to also market Gliadel for patients undergoing initial
surgery, also known as first line therapy, in the United States for malignant glioma in conjunction with surgery and radiation. We estimate that the total number of such patients in the United States to be between 7,000 and 9,000 per year.



Our ability to increase sales of Gliadel will depend upon achieving greater
market penetration among GBP patients and successful marketing of Gliadel for first line therapy. Even if we increase our sales and marketing efforts, such increases may not result in increased sales of Gliadel. If Gliadel fails to gain broader
market acceptance among GBP patients or as first line therapy, the revenues we receive from sales of Gliadel would be unlikely to increase.



Sales of our Salagen Tablets (pilocarpine hydrochloride) in the United States are likely to decline significantly for subsequent periods because generic pilocarpine
hydrochloride tablets were introduced into the United States in November 2004.



Beginning in November 2004, generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen Tablets (pilocarpine hydrochloride) compete. Sales of Salagen Tablets declined significantly so far in 2005
from our 2004 sales of $29.3 million in the United States. Salagen Tablets net sales revenue was $8.7 million and $21.5 million for the first nine months of 2005 and 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;
| | - |  | ---------------------------------------------------



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| |  |  | changing demand for our other products, including Gliadel® Wafer;
| | - |  | -----------------------------------------------------------------



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



| |  |  | announcements regarding the results of events relating to or results of the clinical trials for our products or product candidates;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | expenditures we incur to identify, 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 nine months of 2005, we reported net income of $37.2 million, we expect an operating loss from continuing operations for 2005 of approximately $124 to $130
million including an estimated $157 million of acquired in-process research and development expense related to the Guilford acquisition. 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.



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. These deferred tax assets include the net operating loss carryforwards and research and development credit carryforwards acquired
in the Guilford, Aesgen and Zycos transactions all of which are subject to ownership change limitations and may also be subject to various other limitations on the amounts utilized. For subsequent tax periods, our tax provision will 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



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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, Aquavan 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;
| | - |  | ----------------------------------------------------------------



| |  |  | 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.



Because our product candidates such as Dacogen injection, Aquavan
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.



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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.



In addition, the uncertainty of the development path for a
particular product candidate makes it difficult to ascertain the capital resources that will be required. For example, our product candidate Aquavan is expected to begine Phase 3 clinical trials in early 2006, and we cannot be certain of the
number of procedural sedation settings that the FDA will require us to test in order to receive approval to market the drug for a broad range of brief diagnostic or therapeutic procedures. The results of these determinations can cause our capital
requirements to vary considerably.



Timely regulatory approval(s) to market
Aquavan, without the requirement for monitored anesthesia care, will directly affect whether we achieve our financial goals.



It is essential to the success of our new business strategy that we receive approval from the Food and Drug Administration (FDA) to market Aquavan so that we may
launch our sales of the product. If this approval is significantly delayed, we may not achieve our financial goals, which include goals related to revenues, total expenses, losses and profits. Additionally, if the FDAs approval of Aquavan
limits or prohibits our ability to market the administration of the product without an anesthesiologist, a nurse anesthetist or similar medical professional, we may not achieve our financial goals.



Our ability to achieve strong revenue growth for Gliadel and Aquavan may depend to a large
extent on the results of additional clinical trials that we may conduct.



We may conduct additional clinical trials with Gliadel to provide physicians with added clinical data and/or to expand Gliadels labeled indications. There is no assurance that such clinical trials, if any, will be successful, or if
successful, will persuade physicians to use the product with more frequency or convince the FDA that an additional indication is warranted. Also, if one or more additional clinical trials are not successful, sales of the product in its current
markets could be adversely affected and could significantly adversely affect our ability to achieve our financial goals.



Additionally, our ability to increase the size of the potential market for Aquavan will depend upon our success in obtaining approval for the product in a variety of
procedural sedation settings. We will likely need to conduct additional clinical trials beyond those we already have announced to do so, and such trials may not be



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successful or may not, in the determination of the FDA, warrant an indication for Aquavan larger than the one we are currently attempting to obtain. In such
cases, sales of Aquavan may never meet our expectations and we would not be able to achieve our financial goals.



European regulatory agencies may impose restrictions on our ability to import Gliadel to the European Union.



We have been informed by the European regulatory agency responsible for overseeing the
testing and release of Gliadel in the European Union that we may have to test each sublot of Gliadel that we ship to the European Union. Each time a lot is tested it results in the destruction of a portion of the lot and the testing is costly. This
requirement would make it commercially unfeasible to ship small sublots of Gliadel labeled for smaller European markets. If we are not able to agree with the regulatory agency to an alternative method of testing and releasing sublots of Gliadel, we
may not be able to continue to ship Gliadel to our distributors for smaller European markets. As a result, our Gliadel revenue would be negatively affected.



The development and commercialization rights to GPI 1485, a product candidate acquired from Guilford, were licensed to Symphony Neuro Development Company (or SNDC) and
we will not receive any future royalties or revenues with respect to this intellectual property unless we exercise an option to acquire SNDC in the future. Exercising this option will require significant financial resources and we may not have
sufficient clinical data in order to determine whether we should exercise this option.



In June 2004, SNDC licensed from Guilford the rights to GPI 1485 in the United States in exchange for SNDCs investment of up to $40.0 million to advance GPI 1485 through clinical development in four
indications: Parkinsons disease, peripheral nerve injury, including post-prostatectomy erectile dysfunction, HIV neuropathy and HIV dementia. We expect that the $40.0 million clinical development budget will be fully expended by the end
of 2006. In connection with this license, we obtained an option to acquire all of the equity of SNDC. We may, at our discretion, exercise this option at any time prior to the earlier of March 31, 2007 or the 90th day after the date that SNDC
provides us with financial statements showing cash and cash equivalents of less than $2.0 million. The option exercise price started at $75.1 million in April 2005 and increases incrementally to $119.8 million in January 2007, and may
be paid in cash or in our common stock, at our sole discretion, provided that our common stock may not constitute more than 50% of the consideration tendered for payment.



If we elect to exercise the purchase option, we will be required to make a substantial cash payment or to issue a substantial number of
shares of our common stock, or enter into a financing arrangement or license arrangement with one or more third parties, or some combination of these. A payment in cash would reduce our capital resources. A payment in shares of our common stock
could result in dilution to our stockholders at that time. Other financing or licensing alternatives may be expensive or impossible to obtain. The exercise of the purchase option will likely require us to record a significant charge to earnings and
may adversely impact future operating results. If we do not exercise the purchase option prior to its expiration, our rights in and to SNDC with respect to the GPI 1485 programs will terminate. Exercising the purchase option may impact our ability
to fund other operations, and if we determine we do not have the financial resources to do so, we will lose these rights. Additionally, we may not have sufficient clinical data in order to determine whether we should exercise this option.



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.



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We rely on Helsinn Birex Pharmaceuticals Ltd. as our sole and exclusive supplier of Aloxi injection finished drug
product. Helsinn Birex Pharmaceuticals Ltd. may make regulatory provision for alternate sites for the manufacture of Aloxi injection. However, if our relationship with Helsinn Birex Pharmaceuticals Ltd. terminates, we will be unable to continue to
offer Aloxi injection for commercial sale.



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 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 have 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



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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. Our 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, we 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. 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 end user demand, we could
experience reduced revenue from sales in subsequent periods due to a reduction in end user 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, other than Gliadel, which we manufacture ourselves. We expect to continue to
rely on others to manufacture future products, including products currently in development. 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;
| | - |  | ------------



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| |  |  | 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.
| | - |  | ----------------------



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 discover,
obtain, develop and successfully commercialize additional products, we may not achieve expectations of our future performance and our stock price could decline. Other companies, including some with substantially greater financial, marketing and
sales resources, are competing with us to acquire or license 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.



On October 3, 2005, we closed the acquisition of Guilford Pharmaceuticals Inc. During the third quarter of 2004, we acquired Zycos, Inc. and Aesgen, Inc. 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 and collaborators;
| | - |  | ------------------------------------------



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| |  |  | 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 companies we acquire, 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. In an acquisition, some customers may seek alternative sources of product after the announcement of the merger
or after the merger due to, among other reasons, a desire not to do business with the combined company or perceived concerns that the combined company may not continue to support and develop certain products. After an acquisition, a combined company
could also experience some customer attrition or disputes by reason of the acquisition. Our failure to achieve expected benefits from an acquisition or to minimize the impact of any negative effect could have a material adverse effect on our results
of operations.



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 commercialize our product candidates, including research and clinical trial expenses;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | 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,



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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 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 Helsinn Healthcare SA. 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



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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;
| | - |  | ---------------------------------------------------------



| |  |  | 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, Merck and other large multinational competitors. If Aloxi injection does not compete successfully with existing products on the market, our stock price could decline significantly. Gliadel currently
competes as a treatment of malignant glioma with traditional systemic chemotherapy, radioactive seeds, radiation catheters, TEMODAR® Capsules, a chemotherapy product manufactured by Schering Corporation, and other experimental protocols. Additionally, MedImmune, Inc., Daichi
Pharmaceutical, and three 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, our product revenue could decrease and our stock price could decline.



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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 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.



We may not be successful in our attempts to minimize our ongoing expenses related to Aggrastat, which we obtained when we acquired
Guilford, or to implement an exit strategy from this product.



Guilfords attempts to minimize ongoing expenses related to Aggrastat and to devise and implement an exit strategy from the product were not successful prior to our acquisition of Guilford. We have the same goal, the success of which
is contingent upon a number of factors, including our ability to appropriately manage the process of reducing product development expenses, finding and engaging qualified purchasers, licensees or partners for the product and minimizing the time that
it takes us to do so. Our success, if any, will also depend on the consideration that we are able to receive for Aggrastat. If we do not find and engage qualified purchasers, licensees or partners who are willing to provide the consideration that we
determine is reasonable or appropriate, or if it takes a significantly longer amount of time and resources than we presently anticipate to accomplish these objectives, we may not be able to minimize our ongoing expenses related to Aggrastat or be
able to implement an exit strategy from the product.



As of September 30,
2005, the contractual commitments of Guilford related to Aggrastat included an agreement with Baxter Healthcare Corporation for the supply of 250 ml and 100 ml bags of Aggrastat through July 2009, which commits us to purchase approximately $6.1
million of such bags, and $1.2 million of such purchase commitment remains outstanding for the remainder of 2005. Additionally, we have assumed funding commitments and agreements related to the advancement of research and development
activities, all of which are assignable with the mutual consent of the parties. If we elected to terminate these commitments and agreements, we would be responsible for the costs related to services rendered to date and any irrevocable commitments
entered into on our behalf. We currently estimate these costs to be no more than $1.0 million.



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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, Aquavan injection 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, Aquavan injection,
Saforis oral suspension, ZYC101 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 continue to decline significantly from our 2004 sales of $29.3 million in the United States. Salagen
Tablets net sales revenue was $8.7 million and $21.5 million for the first nine months of 2005 and 2004, respectively.



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



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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.



In our acquisition of Guilford, we obtained an exclusive license to intellectual property,
including patents, patent applications and know-how, related to Gliadel, which requires us to pay a royalty to the Massachusetts Institute of Technology on revenue from Gliadel. Our U.S. patent protection for Gliadel expires in August 2006. In
addition, in February 2003, the FDA awarded orphan drug status for Gliadel for seven years for the treatment of patients with malignant glioma undergoing primary surgical resection. Accordingly, following the expiration of U.S. patent
protection, we now have approximately four additional years of market exclusivity for Gliadel for initial surgical resection. However, there can be no assurance that others will not enter the market with a generic copy of Gliadel for recurrent
surgical resection. The availability of such a generic copy could negatively impact our revenues from Gliadel for initial surgical resection after August 2006.



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.



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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 for MGI PHARMA legacy products, product candidates and clinical trials and $10 million per occurrence and in the aggregate for
the year for Guilford legacy products, product candidates and clinical trials. There is a risk that our insurance will not be sufficient to cover claims. There is also a risk that adequate insurance coverage 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. net income, cash balances and price of our stock could decline.



Our ability to commercialize our products successfully will depend in
part on the extent to which private health insurers, organizations such as HMOs and governmental authorities reimburse the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged for medical
products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well
as legislative proposals to reform health care or reduce government insurance programs,



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may all result in lower prices for or rejection of our products. The cost containment measures that health care payors and providers are instituting and the
effect of any health care reform could materially and adversely affect our ability to operate profitably.



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.



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 research, development and manufacturing 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. If we do not comply with environmental regulations, we may face significant
fines or penalties. In the event of an accident or environmental discharge, third parties or governmental entities may hold us liable for any resulting damages, which, along with fines and penalties, 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



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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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | 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 $2.92 to $34.49 per share during the three-year period ended September 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, convertible notes and warrants 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 September 30, 2005, we had options outstanding at option prices ranging from $1.81 to
$33.22 for 9.8 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 of our convertible debt is contingent on a number of factors that have not yet been satisfied. Additionally, in our acquisition of Guilford, we assumed warrants to purchase 319,206 of our shares at a weighted average
exercise price (net of cash we would be required to pay on exercise) of $61.21. Consequently, we are not able to estimate when, if ever, our 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.



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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, 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.



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 September 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.



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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.



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 September 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.
| | - |  | ------------------------------------------------------------------------------



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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 favorable impact on our net income as a result of
a 25, 50 or 100 basis point (where 100 basis points equals 1%) increase in short-term interest rates would be approximately $0.4 million, $.8 million or $1.6 million annually based on our cash, cash equivalents, marketable investment and restricted
marketable investment balances at September 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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PART II  OTHER INFORMATION



Item 6. Exhibits



|              |  |                                                                                                                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                   
|2.1           |  | Agreement and Plan of Merger dated July 20, 2005, by and among MGI PHARMA, INC., Granite Acquisition, Inc. and Guilford Pharmaceuticals Inc. (Incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K filed July 20, 2005).                                      
|              | 
|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 September 30,
2002).                                                                                                     
|              | 
|3.2           |  | Articles of Amendment to the Second Amended and Restated Articles of Incorporation, filed September 2, 2004 (Incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on
Form 10-Q for the quarter ended September 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 September 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).                      



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|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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).                                                                                                                                                                                                         
|     | 
|4.9  |  | Indenture dated June 17, 2003, by and between Guilford Pharmaceuticals Inc. and Wachovia Bank, National Association, as Trustee, for 5% Convertible Subordinated Notes due 2008. (Incorporated
by reference to Exhibit 4.03 to the Form 10-Q for the quarterly period ended June 30, 2003, filed on August 7, 2003 by MGI GP, INC., formerly known as Guilford Pharmaceuticals Inc. (Commission file number 000-23736).)
|     | 
|4.10 |  | Supplemental Indenture dated October 3, 2005, by and among Guilford Pharmaceuticals Inc., MGI PHARMA, INC. and Wachovia Bank, National Association, as Trustee, for 5% Convertible Subordinated
Notes due 2008 (Incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K filed October 7, 2005).                                                                                            
|     | 
|10.1 |  | Credit Agreement dated July 20, 2005, by and between MGI PHARMA, INC. and Guilford Pharmaceuticals Inc. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed July 22, 2005).                                                                                                                                                                                                    
|     | 
|10.2 |  | Note dated July 20, 2005, executed by Guilford Pharmaceuticals Inc. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed July 22,
2005).                                                                                                                                                                                                                                        
|     | 
|10.3 |  | Letter Agreement dated July 20, 2005, by and among MGI PHARMA, INC., Guilford Pharmaceuticals Inc. and Paul Royalty Fund, LP (Incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K filed July 22, 2005).                                                                                                                                                                               
|     | 
|10.4 |  | Form of Lock Up with Director and Officer Option Holders (Incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed July 29, 2005).                                                                                                                                                                                                                                                   
|     | 
|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: November 7, 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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MGI PHARMA, INC. AND SUBSIDIARIES



Quarterly Report on Form 10-Q

for the

Quarter Ended September 30, 2005



EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                   
|2.1           |  | Agreement and Plan of Merger dated July 20, 2005, by and among MGI PHARMA, INC., Granite Acquisition, Inc. and Guilford Pharmaceuticals Inc. (Incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K filed July 20, 2005).                                      
|              | 
|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 September 30,
2002).                                                                                                     
|              | 
|3.2           |  | Articles of Amendment to the Second Amended and Restated Articles of Incorporation, filed September 2, 2004 (Incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on
Form 10-Q for the quarter ended September 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 September 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).                                           



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|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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).                                                                                                                                                                                                         
|     | 
|4.9  |  | Indenture dated June 17, 2003, by and between Guilford Pharmaceuticals Inc. and Wachovia Bank, National Association, as Trustee, for 5% Convertible Subordinated Notes due 2008. (Incorporated
by reference to Exhibit 4.03 to the Form 10-Q for the quarterly period ended June 30, 2003, filed on August 7, 2003 by MGI GP, INC., formerly known as Guilford Pharmaceuticals Inc. (Commission file number 000-23736).)
|     | 
|4.10 |  | Supplemental Indenture dated October 3, 2005, by and among Guilford Pharmaceuticals Inc., MGI PHARMA, INC. and Wachovia Bank, National Association, as Trustee, for 5% Convertible Subordinated
Notes due 2008 (Incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K filed October 7, 2005).                                                                                            
|     | 
|10.1 |  | Credit Agreement dated July 20, 2005, by and between MGI PHARMA, INC. and Guilford Pharmaceuticals Inc. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed July 22, 2005).                                                                                                                                                                                                    
|     | 
|10.2 |  | Note dated July 20, 2005, executed by Guilford Pharmaceuticals Inc. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed July 22,
2005).                                                                                                                                                                                                                                        
|     | 
|10.3 |  | Letter Agreement dated July 20, 2005, by and among MGI PHARMA, INC., Guilford Pharmaceuticals Inc. and Paul Royalty Fund, LP (Incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K filed July 22, 2005).                                                                                                                                                                               
|     | 
|10.4 |  | Form of Lock Up with Director and Officer Option Holders (Incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed July 29, 2005).                                                                                                                                                                                                                                                   
|     | 
|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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