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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 March 31, 2004



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 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 |  | 35,216,321 shares           
|(Class)                      |  | (Outstanding at May 5, 2004)



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##### Table of Contents

MGI PHARMA, INC.



FORM 10-Q INDEX



|                                                                                              |  |           
|--------------------------------------------------------------------------------------------- |  | ----------
|                                                                                              |  | PageNumber
|PART I.
FINANCIAL INFORMATION                                                                 |  |           
|                                                                                              | 
|Item 1.
Financial Statements (Unaudited)                                                      |  |           
|                                                                                              | 
|Balance Sheets  March 31, 2004 and December 31, 2003                                         |  | 3         
|                                                                                              | 
|Statements of Operations  Three Months Ended March 31, 2004 and 2003                         |  | 5         
|                                                                                              | 
|Statements of Cash Flows  Three Months Ended March 31, 2004 and 2003                         |  | 6         
|                                                                                              | 
|Notes to Financial Statements                                                                 |  | 7         
|                                                                                              | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14        
|                                                                                              | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                            |  | 35        
|                                                                                              | 
|Item 4.
Controls and Procedures                                                               |  | 35        
|                                                                                              | 
|PART II.
OTHER INFORMATION                                                                    |  |           
|                                                                                              | 
|Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 36        
|                                                                                              | 
|Item 5.
Other Information                                                                     |  | 37        
|                                                                                              | 
|Item 6.
Exhibits and Reports on Form 8-K                                                      |  | 38        
|                                                                                              | 
|SIGNATURES                                                                                    |  | 40        



2



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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1. Financial Statements



MGI PHARMA, INC.



BALANCE SHEETS



(unaudited)



|                                                                                                                    |  |                |             |                  |   |            
|------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | ---------------- | - | -----------
|                                                                                                                    |  | March 31, 2004 |             | December 31,2003
|ASSETS                                                                                                              |  |                |             |                  |   |            
|                                                                                                                    |  |               
|Current assets:                                                                                                     |  |                |             |                  |   |            
|Cash and cash equivalents                                                                                           |  | $              | 347,264,002 |                  | $ | 116,570,518
|Short-term marketable investments                                                                                   |  |                | 22,153,916  |                  |   | 23,362,898 
|Restricted marketable investments                                                                                   |  |                | 5,816,589   |                  |   |           
|Receivables, less contractual allowances and bad debt of $5,487,410 and $3,315,399                                  |  |                | 24,109,171  |                  |   | 6,223,964  
|Inventories                                                                                                         |  |                | 5,998,105   |                  |   | 7,437,550  
|Prepaid expenses                                                                                                    |  |                | 940,691     |                  |   | 922,070    
|                                                                                                                    |  |                |             |                  |   |            
|Total current assets                                                                                                |  |                | 406,282,474 |                  |   | 154,517,000
|                                                                                                                    |  |               
|Equipment, furniture and leasehold improvements, at cost less accumulated depreciation of $3,331,403 and $3,041,360 |  |                | 2,799,805   |                  |   | 2,828,602  
|Long-term marketable investments                                                                                    |  |                | 31,319,141  |                  |   | 37,819,837 
|Restricted marketable investments, less current portion                                                             |  |                | 11,264,397  |                  |   |           
|Debt issuance costs, less accumulated amortization of $96,168 and $10,799                                           |  |                | 7,982,054   |                  |   | 39,044     
|Long-term equity investment                                                                                         |  |                | 3,646,052   |                  |   | 3,646,052  
|Intangible assets, at cost less accumulated amortization of $4,008,866 and $3,667,412                               |  |                | 5,312,004   |                  |   | 5,653,457  
|Other assets                                                                                                        |  |                | 54,206      |                  |   | 54,206     
|                                                                                                                    |  |                |             |                  |   |            
|Total assets                                                                                                        |  | $              | 468,660,133 |                  | $ | 204,558,198
|                                                                                                                    |  |                |             |                  |   |            



(Continued)



3



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##### Table of Contents

BALANCE SHEETS

(Unaudited)

Page 2



|                                                                                                                                                                                                                       |  |                |              |   |                  |   |              |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                                                                                                       |  | March 31, 2004 |              |   | December 31,2003 |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                   |  |                |              |   |                  |   |              |  
|                                                                                                                                                                                                                       |  |               
|Current liabilities:                                                                                                                                                                                                   |  |                |              |   |                  |   |              |  
|Accounts payable                                                                                                                                                                                                       |  | $              | 5,121,429    |   |                  | $ | 4,039,139    |  
|Accrued expenses                                                                                                                                                                                                       |  |                | 16,350,304   |   |                  |   | 21,632,345   |  
|Deferred revenue                                                                                                                                                                                                       |  |                | 245,000      |   |                  |   | 245,000      |  
|Other current liabilities                                                                                                                                                                                              |  |                | 633,032      |   |                  |   | 28,910       |  
|                                                                                                                                                                                                                       |  |                |              |   |                  |   |              |  
|Total current liabilities                                                                                                                                                                                              |  |                | 22,349,765   |   |                  |   | 25,945,394   |  
|                                                                                                                                                                                                                       |  |                |              |   |                  |   |              |  
|Noncurrent liabilities:                                                                                                                                                                                                |  |                |              |   |                  |   |              |  
|Senior subordinated convertible notes, face value of $348,000,000 and $21,000,000 net of unamortized discount of $87,828,240 as of March 31,
2004 and unamortized warrant costs of $1,322,244 as of December 31, 2003. |  |                | 260,171,760  |   |                  |   | 19,677,756   |  
|Deferred revenue                                                                                                                                                                                                       |  |                | 2,135,000    |   |                  |   | 2,196,250    |  
|Other noncurrent liabilities                                                                                                                                                                                           |  |                | 133,288      |   |                  |   | 128,636      |  
|                                                                                                                                                                                                                       |  |                |              |   |                  |   |              |  
|Total noncurrent liabilities                                                                                                                                                                                           |  |                | 262,440,048  |   |                  |   | 22,002,642   |  
|                                                                                                                                                                                                                       |  |                |              |   |                  |   |              |  
|Total liabilities                                                                                                                                                                                                      |  |                | 284,789,813  |   |                  |   | 47,948,036   |  
|                                                                                                                                                                                                                       |  |                |              |   |                  |   |              |  
|Stockholders equity:                                                                                                                                                                                                  |  |                |              |   |                  |   |              |  
|Preferred stock, 10,000,000 authorized and unissued shares                                                                                                                                                             |  |                |             |   |                  |   |             |  
|Common stock, $.01 par value, 70,000,000 authorized shares, 35,143,134 and 31,696,982 issued and outstanding shares                                                                                                    |  |                | 351,431      |   |                  |   | 316,970      |  
|Additional paid-in capital                                                                                                                                                                                             |  |                | 408,023,319  |   |                  |   | 377,664,610  |  
|Unearned compensation - restricted stock                                                                                                                                                                               |  |                | (11,496      | ) |                  |   | (24,129      | )
|Accumulated deficit                                                                                                                                                                                                    |  |                | (224,492,934 | ) |                  |   | (221,347,289 | )
|                                                                                                                                                                                                                       |  |                |              |   |                  |   |              |  
|Total stockholders equity                                                                                                                                                                                             |  |                | 183,870,320  |   |                  |   | 156,610,162  |  
|                                                                                                                                                                                                                       |  |                |              |   |                  |   |              |  
|Total liabilities and stockholders equity                                                                                                                                                                             |  | $              | 468,660,133  |   |                  | $ | 204,558,198  |  
|                                                                                                                                                                                                                       |  |                |              |   |                  |   |              |  



See accompanying notes to financial
statements.



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MGI PHARMA, INC.



STATEMENTS OF
OPERATIONS



(Unaudited)



|                                                      |  |                              |            |   |      |   |            |  
|----------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                      |  | Three Months Ended March 31, |           
|                                                      |  | 2004                         |            |   | 2003 |  
|Revenues:                                             |  |                              |            |   |      |   |            |  
|Sales                                                 |  | $                            | 25,833,634 |   |      | $ | 6,142,787  |  
|Licensing                                             |  |                              | 1,035,536  |   |      |   | 615,961    |  
|                                                      |  |                              |            |   |      |   |            |  
|                                                      |  |                              | 26,869,170 |   |      |   | 6,758,748  |  
|                                                      |  |                              |            |   |      |   |            |  
|Costs and expenses:                                   |  |                              |            |   |      |   |            |  
|Cost of sales                                         |  |                              | 7,283,384  |   |      |   | 770,881    |  
|Selling, general and administrative                   |  |                              | 17,464,875 |   |      |   | 8,817,980  |  
|Research and development                              |  |                              | 5,015,677  |   |      |   | 3,459,569  |  
|Amortization                                          |  |                              | 341,454    |   |      |   | 295,494    |  
|                                                      |  |                              |            |   |      |   |            |  
|                                                      |  |                              | 30,105,390 |   |      |   | 13,343,924 |  
|                                                      |  |                              |            |   |      |   |            |  
|Loss from operations                                  |  |                              | (3,236,220 | ) |      |   | (6,585,176 | )
|                                                      |  |                             
|Interest income                                       |  |                              | 815,193    |   |      |   | 206,628    |  
|Interest expense                                      |  |                              | (724,618   | ) |      |   | (249,391   | )
|                                                      |  |                              |            |   |      |   |            |  
|Net loss                                              |  | $                            | (3,145,645 | ) |      | $ | (6,627,939 | )
|                                                      |  |                              |            |   |      |   |            |  
|Net loss per common share:                            |  |                              |            |   |      |   |            |  
|Basic                                                 |  | $                            | (0.09      | ) |      | $ | (0.26      | )
|                                                      |  |                             
|Assuming dilution                                     |  | $                            | (0.09      | ) |      | $ | (0.26      | )
|                                                      |  |                             
|Weighted average number of common shares outstanding: |  |                              |            |   |      |   |            |  
|Basic                                                 |  |                              | 34,272,729 |   |      |   | 25,320,138 |  
|Diluted                                               |  |                              | 34,272,729 |   |      |   | 25,320,138 |  



See accompanying notes to financial
statements.



5



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MGI PHARMA, INC.



STATEMENTS OF
CASH FLOWS



(Unaudited)



|                                                                  |  |                              |             |   |      |   |            |  
|----------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                                  |  | Three Months Ended March 31, |            
|                                                                  |  | 2004                         |             |   | 2003 |  
|OPERATING ACTIVITIES:                                             |  |                              |             |   |      |   |            |  
|Net loss                                                          |  | $                            | (3,145,645  | ) |      | $ | (6,627,939 | )
|Adjustments for non-cash items:                                   |  |                              |             |   |      |   |            |  
|Depreciation and intangible amortization                          |  |                              | 637,006     |   |      |   | 513,204    |  
|Benefit plan contribution                                         |  |                              | 208,736     |   |      |   | 143,313    |  
|Amortization of non-cash financing charges                        |  |                              | 208,618     |   |      |   | 91,891     |  
|Amortization of restricted stock expense                          |  |                              | 12,254      |   |      |   | 39,617     |  
|Deferred rent                                                     |  |                              | 4,651       |   |      |   | 9,716      |  
|Noncash consulting payments                                       |  |                              | 7,500       |   |      |   | 5,000      |  
|Other                                                             |  |                              | 2,749       |   |      |   |           |  
|Change in operating assets and liabilities:                       |  |                              |             |   |      |   |            |  
|Receivables                                                       |  |                              | (17,885,207 | ) |      |   | (104,652   | )
|Inventories                                                       |  |                              | 1,439,445   |   |      |   | 297,063    |  
|Prepaid expenses                                                  |  |                              | (18,621     | ) |      |   | (921,782   | )
|Accounts payable and accrued expenses                             |  |                              | (3,513,610  | ) |      |   | (1,553,951 | )
|Deferred revenue                                                  |  |                              | (61,250     | ) |      |   | (198,596   | )
|Other current liabilities                                         |  |                              | 604,122     |   |      |   | 190,197    |  
|                                                                  |  |                              |             |   |      |   |            |  
|Net cash used in operating activities                             |  |                              | (21,499,252 | ) |      |   | (8,116,919 | )
|                                                                  |  |                              |             |   |      |   |            |  
|INVESTING ACTIVITIES:                                             |  |                              |             |   |      |   |            |  
|Purchase of investments                                           |  |                              | (32,421,932 | ) |      |   |           |  
|Maturity of investments                                           |  |                              | 40,131,610  |   |      |   | 3,089,679  |  
|Purchase of equipment, furniture and leasehold improvements       |  |                              | (269,505    | ) |      |   | (123,331   | )
|                                                                  |  |                              |             |   |      |   |            |  
|Net cash provided by investing activities                         |  |                              | 7,440,173   |   |      |   | 2,966,348  |  
|                                                                  |  |                              |             |   |      |   |            |  
|FINANCING ACTIVITIES:                                             |  |                              |             |   |      |   |            |  
|Restricted marketable securities held by trustee for debt service |  |                              | (17,080,986 | ) |      |   |           |  
|Issuance of shares under stock plans                              |  |                              | 5,890,011   |   |      |   | 101,786    |  
|Proceeds of debt offering                                         |  |                              | 260,171,760 |   |      |   |           |  
|Issuance costs of debt offering                                   |  |                              | (8,078,222  | ) |      |   |           |  
|Issuance of shares through stock purchase warrant exercise        |  |                              | 3,850,000   |   |      |   |           |  
|                                                                  |  |                              |             |   |      |   |            |  
|Net cash provided by financing activities                         |  |                              | 244,752,563 |   |      |   | 101,786    |  
|                                                                  |  |                              |             |   |      |   |            |  
|Increase (decrease) in cash and cash equivalents                  |  |                              | 230,693,484 |   |      |   | (5,048,785 | )
|                                                                  |  |                             
|Cash and cash equivalents at beginning of period                  |  |                              | 116,570,518 |   |      |   | 52,933,393 |  
|                                                                  |  |                              |             |   |      |   |            |  
|Cash and cash equivalents at end of period                        |  | $                            | 347,264,002 |   |      | $ | 47,884,608 |  
|                                                                  |  |                              |             |   |      |   |            |  
|Supplemental disclosure of cash information:                      |  |                              |             |   |      |   |            |  
|Cash paid for interest                                            |  | $                            | 0           |   |      | $ | 0          |  



See accompanying notes to financial
statements.



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MGI PHARMA, INC.



NOTES TO
FINANCIAL STATEMENTS

(Unaudited)



(1) Basis of Presentation



In the opinion of management, the accompanying Unaudited Financial Statements (financial statements) of MGI PHARMA, INC. (MGI or
Company) have been prepared on a consistent basis with the December 31, 2003 audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the information set forth
therein. The 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 generally accepted accounting
principles. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003, which was filed with the SEC
on February 24, 2004. Certain amounts reported in previous periods have been reclassified to conform to the current period presentation. The results of operations for the first three months of 2004 are not necessarily indicative of the results to be
expected for the entire fiscal year.



Accounting Policies:



In preparing the financial statements in conformity with accounting principles generally
accepted in the United States of America, 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 financial statements are prepared. Note 1 to the financial statements in the Companys Annual Report on Form 10-K provides a summary of the significant accounting policies followed in the preparation of the
financial statements. Other footnotes in the Companys Annual Report on Form 10-K describe various elements of the financial statements and the assumptions made in determining specific amounts.



Recent Accounting Pronouncements:



FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51, requires companies to consolidate certain types of variable interest entities. A variable interest entity is an entity that has inadequate invested equity at risk to meet expected future losses, or whose holders of the equity investments
lack any of the following three characteristics: (i) the ability to make decisions about the entitys activities; (ii) the obligation to absorb the entitys losses if they occur; (iii) the right to receive the entitys future returns
if they occur. The provisions of the interpretation are effective for financial statements issued for the first period ending after December 15, 2003, or March 15, 2004, depending on the nature of the variable interest entity. The adoption of FIN46
did not have any impact on our financial position or results of operations.



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(2) Stock Incentive Plans



Under stock incentive plans, designated persons (including officers, directors, employees
and consultants) have been or may be granted rights to acquire our common stock. These rights include stock options and other equity rights. At March 31, 2004, shares issued and shares available under stock incentive plans are as follows:



|                                               |  |                          |           |            |   |                    |  |   |          
|---------------------------------------------- |  | ------------------------ | --------- | ---------- | - | ------------------ |  | - | ---------
|                                               |  | ShareholderApprovedPlans |           | OtherPlans |   | Total For AllPlans
|Shares issuable under outstanding options      |  |                          | 3,973,538 |            |   | 20,308             |  |   | 3,993,846
|Shares available for future issuance           |  |                          | 290,146   |            |   |                   |  |   | 290,146  
|                                               |  |                          |           |            |   |                    |  |   |          
|Total                                          |  |                          | 4,263,684 |            |   | 20,308             |  |   | 4,283,992
|                                               |  |                          |           |            |   |                    |  |   |          
|Average exercise price for outstanding options |  | $                        | 17.38     |            | $ | 10.47              |  | $ | 17.35    



We apply the intrinsic value method
described in Accounting Principles Board (APB) Opinion No. 25 in accounting for the issuance of stock options to employees and directors. Accordingly, as all grants are made at or above market price, no compensation expense has been recognized in
the financial statements. 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 loss would have been
reported as follows:



|                                                                                                                |  |                              |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                |  | Three Months Ended March 31, |           
|                                                                                                                |  | 2004                         |            |   | 2003 |  
|Net loss, as reported                                                                                           |  | $                            | (3,145,645 | ) |      | $ | (6,627,939 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                              | (3,097,722 | ) |      |   | (1,244,286 | )
|                                                                                                                |  |                              |            |   |      |   |            |  
|Pro forma net loss                                                                                              |  | $                            | (6,243,367 | ) |      | $ | (7,872,225 | )
|                                                                                                                |  |                              |            |   |      |   |            |  
|Net loss per common share:                                                                                      |  |                              |            |   |      |   |            |  
|As reported basic and diluted                                                                                   |  | $                            | (0.09      | ) |      | $ | (0.26      | )
|Pro forma basic and diluted                                                                                     |  | $                            | (0.18      | ) |      | $ | (0.31      | )
|                                                                                                                |  |                             
|                                                                                                                |  | 2004                         |            |   | 2003 |  
|Expected dividend yield                                                                                         |  |                              | 0          | % |      |   | 0          | %
|Risk-free interest rate                                                                                         |  |                              | 2.99       | % |      |   | 2.70       | %
|Annualized volatility                                                                                           |  |                              | 0.80       |   |      |   | 0.80       |  
|Expected life, in years                                                                                         |  |                              | 5          |   |      |   | 5          |  



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(3) Loss Per Common Share



Loss per share for the three-month periods ended March 31, 2004 and 2003 is based on
weighted average shares outstanding as summarized in the following table:



|                                            |  |            |  |           
|------------------------------------------- |  | ---------- |  | ----------
|Three months ended March 31,                |  | 2004       |  | 2003      
|Weighted-average shares - basic             |  | 34,272,729 |  | 25,320,138
|Effect of dilutive stock options            |  |           |  |          
|Effect of convertible debt                  |  |           |  |          
|                                            |  |            |  |           
|Weighted-average shares - assuming dilution |  | 34,272,729 |  | 25,320,138
|                                            |  |            |  |           



Potentially dilutive securities, which
are excluded from the calculation because their inclusion in a calculation of net loss per share would have been antidilutive, include options for 3,993,846 and 4,333,157 shares of common stock for 2004 and 2003, respectively, and convertible debt
and warrants for 2,971,428 shares of common stock in 2003.



As of March 31,
2004, the 4,134,971 shares that would be issued upon conversion of the convertible notes issued on March 2, 2004 are not included in the calculation of diluted net loss per share because all conditions required to permit conversion have not been
satisfied (see Note 7).



(4) Marketable
Investments



Marketable investments and restricted marketable investments
consist of held-to-maturity investments and are stated at amortized cost, which approximates fair value. Short-term marketable investments at March 31, 2004 and December 31, 2003 are summarized in the following table:



|                |  |               |            |                  |   |           
|--------------- |  | ------------- | ---------- | ---------------- | - | ----------
|                |  | March 31,2004 |            | December 31,2003
|Corporate notes |  | $             | 22,153,916 |                  | $ | 23,362,898
|                |  |               |            |                  |   |           
|Total           |  | $             | 22,153,916 |                  | $ | 23,362,898
|                |  |               |            |                  |   |           



Long-term marketable investments of
$31,319,141 as of March 31, 2004 and $37,819,837 as of December 31, 2003 consisted of United States government agencies and corporate notes that mature between June and September of 2005.



|                    |  |               |            |                  |   |           
|------------------- |  | ------------- | ---------- | ---------------- | - | ----------
|                    |  | March 31,2004 |            | December 31,2003
|Corporate notes     |  | $             | 11,277,523 |                  | $ | 8,040,660 
|Government agencies |  |               | 20,041,618 |                  |   | 29,779,177
|                    |  |               |            |                  |   |           
|Total               |  | $             | 31,319,141 |                  | $ | 37,819,837
|                    |  |               |            |                  |   |           



9



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##### Table of Contents

Restricted marketable investments of $17,080,986 at March 31, 2004 consist of United States government agency investments
(see note 7).



(5) Inventories



Inventories at March 31, 2004 and December 31, 2003 are summarized as
follows:



|                           |  |      |           |      |   |          
|-------------------------- |  | ---- | --------- | ---- | - | ---------
|                           |  | 2004 |           | 2003
|Raw materials and supplies |  | $    | 51,472    |      | $ | 348,087  
|Work in process            |  |      | 626,807   |      |   | 593,028  
|Finished products          |  |      | 5,319,826 |      |   | 6,496,435
|                           |  |      |           |      |   |          
|Total                      |  | $    | 5,998,105 |      | $ | 7,437,550
|                           |  |      |           |      |   |          



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 March 31, 2004 and December 31, 2003 are summarized as follows:



|                                   |  |      |            |      |   |           
|---------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                   |  | 2004 |            | 2003
|Product development commitments    |  | $    | 993,628    |      | $ | 11,056,023
|Field sales bonuses                |  |      | 2,324,947  |      |   | 843,000   
|Other bonuses                      |  |      | 731,313    |      |   | 1,297,575 
|Product return accrual             |  |      | 1,921,349  |      |   | 1,484,638 
|Lease accrual                      |  |      | 215,326    |      |   | 251,011   
|Retirement plan accruals           |  |      | 413,995    |      |   | 1,572,626 
|Product administrative fee accrual |  |      | 4,588,889  |      |   | 1,080,215 
|Other accrued expenses             |  |      | 5,160,857  |      |   | 4,047,257 
|                                   |  |      |            |      |   |           
|Total                              |  | $    | 16,350,304 |      | $ | 21,632,345
|                                   |  |      |            |      |   |           



(7)
Convertible Debt



Convertible debt, which is stated at face value less
unamortized discount and warrants, at March 31, 2004 and December 31, 2003 is summarized as follows:



|                     |  |      |             |   |      |   |            |  
|-------------------- |  | ---- | ----------- | - | ---- | - | ---------- | -
|                     |  | 2004 |             |   | 2003 |  
|Convertible notes    |  | $    | 348,000,000 |   |      | $ | 21,000,000 |  
|Unamortized discount |  |      | (87,828,240 | ) |      |   |           |  
|Unamortized warrants |  |      |            |   |      |   | (1,322,244 | )
|                     |  |      |             |   |      |   |            |  
|Total                |  | $    | 260,171,760 |   |      | $ | 19,677,756 |  
|                     |  |      |             |   |      |   |            |  



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##### Table of Contents

On January 5 and February 6, 2004, an aggregate of 2,571,428 shares of our common stock were issued to Deerfield
International Limited and Deerfield Partners, L.P. pursuant to their election to, first partially and then fully, convert our 3% convertible subordinated notes issued in December 2002 for gross proceeds of $21 million. Also on February 6, 2004, the
common stock purchase warrants that were issued in connection with that December 2002 financing were exercised. We received $3,850,000 upon the exercise of the warrants and issued 400,000 common shares.



On March 2, 2004, we issued $348 million of senior subordinated convertible notes, or 348,000
notes (the Notes). The net proceeds to us were $252.1 million after discount of $87.8 million and issuance costs of $8.1 million. We will pay cash interest on the Notes at the rate of 1.6821% per year on the principal amount at maturity
(2.25% per year of the issue price) payable semiannually from September 2, 2004 until March 2, 2011. After March 2, 2011, we will not pay cash interest on the notes prior to maturity at March 2, 2024 and we will begin to amortize the discount as
interest expense consistent with the effective interest method. Debt issuance costs are being amortized to interest expense over 7 years.



The Notes are convertible at the option of the holders into shares of our common stock, after June 30, 2004, only under the following circumstances: (1) if the closing
sale price of our common stock was more than 120% of the then current conversion price of the Notes for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous calendar quarter (once
the forgoing condition is satisfied for any one quarter, then the notes will thereafter be convertible at any time at the option of the holder, through maturity), (2) if we elect to redeem the Notes, (3) upon the occurrence of specified corporate
transactions or significant distributions to holders of our common stock occur or (4) subject to certain exceptions, for the five consecutive business day period following any five consecutive trading day period in which the average trading price of
the Notes was less than 98% of the average of the sale price of our common stock during such five-day trading period multiplied by the Notes then current conversion rate. Subject to the above conditions, the Notes are convertible into an aggregate
of 4,134,971 shares of common stock at an initial conversion price of $62.92 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.
| | - | ------------------------------------------------------------------------------



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 note;
| | - | ---------------------------------



| |  | March 2, 2014 - $799.52 per note;
| | - | ---------------------------------



| |  | March 2, 2019 - $894.16 per note.
| | - | ---------------------------------



In connection with the issuance of the Notes, we pledged marketable investments of $17.1 million as security for the first six scheduled interest payments due on the
Notes. At March 31, 2004, $5.8 million was classified as short-term marketable securities due within one year and $11.3 million was classified as long-term due within three years.



We have agreed to file and seek effectiveness of a shelf registration statement for the resale by investors of the Notes and the common
stock issuable upon conversion of the Notes. The issuance and sale of the Notes and the subsequent offering of the Notes by the initial purchasers were exempt from the registration provisions of the Securities Act of 1933 pursuant to Section 4(2) of
such Act and Rule 144A promulgated thereunder.



11



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##### Table of Contents

(8) Stockholders Equity



Changes in selected stockholders equity accounts for the three months ended March 31,
2004 were as follows:



|                                      |  |              |   |  |           |         |                           |   |             |                                        |  |   |         |  
|------------------------------------- |  | ------------ | - |  | --------- | ------- | ------------------------- | - | ----------- | -------------------------------------- |  | - | ------- | -
|                                      |  | Common Stock |   |  |           |         |                           |  
|                                      |  | Shares       |   |  | Par value |         | Additionalpaid-in capital |   |             | Unearnedcompensation - restrictedstock | 
|Balance at December 31, 2003          |  | 31,696,982   |   |  | $         | 316,970 |                           | $ | 377,664,610 |                                        |  | $ | (24,129 | )
|Conversion of debt                    |  | 2,571,428    |   |  |           | 25,713  |                           |   | 19,725,448  |                                        |  |   |         |  
|Exercise of stock purchase warrants   |  | 400,000      |   |  |           | 4,000   |                           |   | 3,846,000   |                                        |  |   |         |  
|Exercise of stock options             |  | 455,299      |   |  |           | 4,553   |                           |   | 5,885,458   |                                        |  |   |         |  
|Employee retirement plan contribution |  | 19,357       |   |  |           | 194     |                           |   | 894,683     |                                        |  |   |         |  
|Cancel restricted stock               |  | (55          | ) |  |           |         |                           |   | (379        | )                                      |  |   |         |  
|Restricted stock expense              |  |              |   |  |           |         |                           |   |             |                                        |  |   | 12,633  |  
|Other issuances                       |  | 123          |   |  |           | 1       |                           |   | 7,499       |                                        |  |   |         |  
|                                      |  |              |   |  |           |         |                           |   |             |                                        |  |   |         |  
|Balance at March 31, 2004             |  | 35,143,134   |   |  | $         | 351,431 |                           | $ | 408,023,319 |                                        |  | $ | (11,496 | )
|                                      |  |              |   |  |           |         |                           |   |             |                                        |  |   |         |  



(9) Licensing



In April 2001, we obtained the exclusive United States and Canada oncology license and
distribution rights for Aloxi injection from Helsinn Healthcare SA. Aloxi injection is a unique 5-HT3antagonist and
at that time was being developed for the prevention of chemotherapy-induced nausea and vomiting (CINV). Aloxi injection was approved for marketing by the FDA on July 25, 2003. Our $11 million upfront obligation was satisfied through a $5
million deposit made upon the execution of the letter of intent in October 2000, $3 million in cash paid in April 2001, and $3 million of our common shares delivered in April 2001. All time-based or performance milestone payments related to
Helsinns development of Aloxi injection for the prevention of CINV were cash payments as follows: $2 million in October 2001, $4 million in April 2002, $10 million in December 2002 and $11 million in August 2003.



In November 2003, we expanded our exclusive United States and Canada license agreement for
Aloxi injection to include the prevention of postoperative nausea and vomiting (PONV), an oral Aloxi formulation and extended the term through December 31, 2015 for all of our rights under the expanded agreement. Under the terms of this
amendment, we made initial payments to Helsinn totaling $22.5 million and we expect to make additional payments totaling $25 million over the course of the next several years upon achievement of certain development milestones that culminate with the
approvals in the United States of Aloxi injection for the prevention of PONV and an oral Aloxi formulation. We will also pay royalties and product supply fees based upon net sales. Helsinn will continue to fund and conduct the majority of
development of Aloxi injection for the prevention of PONV and oral Aloxi formulation, and will supply finished product upon commercialization.



12



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##### Table of Contents

(10) Research and Development Expense



Research and development expense for the three-month periods ended March 31, 2004 and 2003
consists of the following:



|                               |  |      |           |      |   |          
|------------------------------ |  | ---- | --------- | ---- | - | ---------
|Three months ended March 31,   |  | 2004 |           | 2003
|License fees                   |  | $    | 500,000   |      | $ |         
|Other research and development |  |      | 4,515,677 |      |   | 3,459,569
|                               |  |      |           |      |   |          
|Total                          |  | $    | 5,015,677 |      | $ | 3,459,569
|                               |  |      |           |      |   |          



(11)
Subsequent Event



In April 2004, we agreed with MethylGene to terminate
the small molecule inhibitor of DNA methyltransferase portion of our license relationship and those rights revert back to MethylGene without any additional payments by either party. We retain rights to MG98, an antisense approach to blocking DNA
methyltransferase activity, and any further payment obligations by us are suspended pending completion by MethylGene of a planned clinical trial with MG98. If we resume development of MG98, our financial responsibilities under the License Agreement
would also resume.



13



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##### Table of Contents

Item 2.



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



Business
Overview



MGI PHARMA is an oncology-focused biopharmaceutical company that
acquires, develops and commercializes proprietary products that meet cancer patient needs. We focus our direct sales efforts solely within the United States and create alliances with other pharmaceutical or biotechnology companies for the
commercialization of our products in other countries. Our sole facility is in Bloomington, Minnesota.



We promote products directly to physician specialists in the United States using our own sales force. Our marketed products include AloxiTM(palonosetron hydrochloride) injection, Salagen®Tablets (pilocarpine hydrochloride), and Hexalen®(altretamine) capsules. In the third quarter of 2003, Aloxi injection was approved by the U.S. Food and Drug Administration (FDA) for the prevention of acute and delayed chemotherapy-induced nausea and vomiting
(CINV) and we began promoting Aloxi injection in September 2003. Given the large market in which Aloxi injection competes and its favorable clinical profile, sales of Aloxi injection are expected to substantially exceed 2004 sales of our
other current products. We obtained exclusive U.S. and Canadian license and distribution rights to Aloxi injection for CINV from Helsinn Healthcare SA (Helsinn) in May 2001. In November 2003, we and Helsinn expanded the agreement to
include rights for the prevention of postoperative nausea and vomiting (PONV) application of Aloxi injection and an oral Aloxi formulation.



Salagen Tablets are approved in the United States for two indications: the symptoms of dry mouth associated with radiation treatment in head and neck cancer patients and
the symptoms of dry mouth associated with Sjögrens syndrome, an autoimmune disease that damages the salivary glands. Hexalen capsules is an orally administered chemotherapeutic agent approved in the United States for treatment of
refractory ovarian cancer patients.



Our current product development efforts
include preclinical and clinical programs for the acylfulvenes, including irofulven, our novel anti-cancer agent with demonstrated activity in a variety of cancers and a unique mechanism of action. Further, we provide ongoing clinical support of
Aloxi injection and Salagen Tablets. Our research and development expense also includes license fees related to Helsinns now concluded development of Aloxi injection for CINV and its ongoing development of Aloxi injection for PONV and for an
oral Aloxi formulation. We have also funded development of MG98 and inhibitors of DNA methyltransferase for North American markets.



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##### Table of Contents

The following table summarizes the principal indications and commercial rights for our currently marketed products and
development programs.



|                          |  |                       |  |                                                                           |  |                                    |  |                                              
|------------------------- |  | --------------------- |  | ------------------------------------------------------------------------- |  | ---------------------------------- |  | ---------------------------------------------
|Products                  |  | Principal Indications |  | Status                                                                    |  | Commercial Rights                 
|Aloxi injection           |  |                      |  | Chemotherapy-induced nausea and vomiting                                  |  |       Currently marketed          |  | U.S. & Canada: MGI                           
|                          |  |                       |  |                                                                          
|Salagen Tablets           |  |                      |  | Symptoms of radiation-induced dry mouth in head and neck cancer patients  |  |       Currently marketed          |  | U.S.: MGI Europe: Novartis Canada: Pfizer    
|                          |  |                      |  | Dry mouth, plus dry eyes outside the U.S., in Sjögrens syndrome patients |  |       Currently marketed          |  | Rest of World: Various other collaborators   
|                          |  |                       |  |                                                                          
|Hexalen capsules          |  |                      |  | Ovarian cancer                                                            |  |       Currently marketed          |  | U.S.: MGI Outside U.S.: Various
collaborators
|                          |  |                       |  |                                                                          
|Aloxi injection           |  |                      |  | Post operative nausea and vomiting                                        |  |       To begin Phase 3            |  | U.S. & Canada: MGI                           
|                          |  |                       |  |                                                                          
|Oral Aloxi formulation    |  |                      |  | Nausea and vomiting                                                       |  |       To begin Phase 3            |  | U.S. & Canada: MGI                           
|                          |  |                       |  |                                                                          
|Irofulven                 |  |                     |  | Monotherapy Combination therapy                                           |  |       Phase 2       Phases 1 & 2 |  | Worldwide: MGI                               
|                          |  |                       |  |                                                                          
|Other Acylfulvene Analogs |  |                      |  | Various cancers                                                           |  |       Preclinical                 |  | Worldwide: MGI                               
|                          |  |                       |  |                                                                          
|MG98                      |  |                      |  | Various cancers                                                           |  |       Phase 1                     |  | U.S. & Canada: MGI                           



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



| |  | Continue to successfully commercialize Aloxi injection for prevention of CINV. We intend to aggressively market Aloxi injection as an enhanced alternative to currently marketed
5-HT3receptor antagonists indicated for prevention of CINV.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Expand the Aloxi franchise by developing Aloxi injection for prevention of PONV and by developing an oral Aloxi formulation for nausea and vomiting. Phase 3 trials of Aloxi
injection for prevention of PONV and of an oral Aloxi formulation are expected to initiate in 2004.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Selectively add to our product portfolio through various means, including product acquisition, in-licensing, co-promotion or business combinations. We intend to focus our product
acquisition efforts on currently marketed pharmaceutical products or product candidates for which we believe we can effectively add value through our commercial and development capabilities.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Advance the irofulven clinical program, including initiation of a phase two hormone refractory prostate cancer program during 2004.
| | - | -----------------------------------------------------------------------------------------------------------------------------------



15



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##### Table of Contents

Results of Operations



Quarter ended March 31, 2004 compared to March 31, 2003



Revenues



Total revenues in the first quarter of 2004 increased 298% over total revenues in the first quarter of 2003.



|                |  |                              |            |      |   |           |  |   |            |   |  |     |  
|--------------- |  | ---------------------------- | ---------- | ---- | - | --------- |  | - | ---------- | - |  | --- | -
|                |  | Three Months Ended March 31, |            |      |   |           |  |  
|                |  | 2004                         |            | 2003 |   | Change    |  |   | %Change    |  
|Sales:          |  |                              |            |      |   |           |  |   |            |   |  |     |  
|Aloxi injection |  | $                            | 18,560,958 |      | $ |          |  | $ | 18,560,958 |   |  | N/A |  
|Salagen         |  |                              | 6,717,026  |      |   | 5,215,310 |  |   | 1,501,716  |   |  | 29  | %
|Other           |  |                              | 555,650    |      |   | 927,477   |  |   | (371,827   | ) |  | (40 | )
|                |  |                              |            |      |   |           |  |   |            |   |  |     |  
|Total sales     |  |                              | 25,833,634 |      |   | 6,142,787 |  |   | 19,690,847 |   |  | 321 |  
|                |  |                              |            |     
|Licensing       |  |                              | 1,035,536  |      |   | 615,961   |  |   | 419,575    |   |  | 68  |  
|                |  |                              |            |      |   |           |  |   |            |   |  |     |  
|Total revenues  |  | $                            | 26,869,170 |      | $ | 6,758,748 |  | $ | 20,110,422 |   |  | 298 | %
|                |  |                              |            |      |   |           |  |   |            |   |  |     |  



Sales: Sales revenue increased
321% percent in the first quarter of 2004 from the first quarter of 2003.



| |  | Sales of Aloxi injection, which we began selling in September 2003, are the primary reason for the increase in sales revenue. We recognized $18.6 million in Aloxi injection net
sales revenue in the first quarter of 2004, which represented 71.8% of our sales revenue. Continued commercialization of Aloxi injection is expected to result in sales of Aloxi injection representing a greater percentage of our sales revenue in
future periods.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In the first quarter of 2004, we recognized $6.7 million of Salagen sales, which represented 26% of our sales revenue. In the first quarter of 2003, we recognized $5.2 million in
Salagen sales, which represented 85% of our sales revenue. In addition to increased sales of Salagen 5.0mg Tablets, 2004 sales increased due to the launch of Salagen 7.5mg Tablets in the first quarter of 2004. As is common in the pharmaceutical
industry, our domestic sales are made to pharmaceutical wholesalers for further distribution through pharmacies to the ultimate consumers of our products.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We expect sales for our currently marketed products for 2004, including Aloxi injection, to range from $142 million to $157 million. Sales
for Aloxi injection are expected to range from $115 million to $130 million for 2004.



Licensing: Licensing revenue increased 68% percent to $1,035,536 in the first quarter of 2004 from $615,961 in the first quarter of 2003. 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. The increase from 2003 to 2004 reflects increased royalties, which increased to $974,285 in the first quarter of 2004 from $318,614 in the first
quarter of 2003.



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 licensing revenue of approximately $2 million for
2004.



16



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##### Table of Contents

Costs and Expenses



|                                    |  |                              |            |      |   |            |  |         |            |  |     |  
|----------------------------------- |  | ---------------------------- | ---------- | ---- | - | ---------- |  | ------- | ---------- |  | --- | -
|                                    |  | Three Months Ended March 31, |            |      |   |            | 
|                                    |  | 2004                         |            | 2003 |   | Change     |  | %Change |           
|Costs and expenses:                 |  |                              |            |      |   |            |  |         |            |  |     |  
|Cost of sales                       |  | $                            | 7,283,384  |      | $ | 770,881    |  | $       | 6,512,503  |  | 845 | %
|Selling, general and administrative |  |                              | 17,464,875 |      |   | 8,817,980  |  |         | 8,646,895  |  | 98  |  
|Research and development            |  |                              | 5,015,677  |      |   | 3,459,569  |  |         | 1,556,108  |  | 45  |  
|Amortization                        |  |                              | 341,454    |      |   | 295,494    |  |         | 45,960     |  | 16  |  
|                                    |  |                              |            |      |   |            |  |         |            |  |     |  
|                                    |  | $                            | 30,105,390 |      | $ | 13,343,924 |  | $       | 16,761,466 |  | 126 | %
|                                    |  |                              |            |      |   |            |  |         |            |  |     |  



Cost of sales: Cost of sales as
a percent of sales was 28.2 percent for the first quarter of 2004 and 12.5 percent for the first quarter of 2003. The increase in cost of sales as a percentage of sales is a result of sales of Aloxi injection, which began in September 2003. 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 cost of sales for 2004 will be approximately 30 percent of sales.



Selling, general and administrative: Selling, general and administrative expenses increased 98 percent to $17,464,875 in the first quarter of 2004 from $8,817,980 in the first quarter of 2003. The increase is primarily due to costs
associated with the promotion of Aloxi injection. We expect selling, general and administrative expense of approximately $63 million for 2004.



Research and development: Research and development expense increased 45 percent to $5,015,677 in the first quarter of 2004 from $3,459,569 in the first quarter of
2003. The increase primarily represents increased spending on the development of Aloxi products and irofulven. We expect research and development expense for 2004 to be approximately $24 million, including expected license fees that will become due
upon Helsinns achievement of milestones in the Aloxi development programs.



|                 |  |                             |          |   |      |   |          |        |  |   |          |   |  |     |  
|---------------- |  | --------------------------- | -------- | - | ---- | - | -------- | ------ |  | - | -------- | - |  | --- | -
|                 |  | Three Months EndedMarch 31, |          |   |      |   |          |        | 
|                 |  | 2004                        |          |   | 2003 |   |          | Change |  |   | %Change  |  
|Interest income  |  | $                           | 815,193  |   |      | $ | 206,628  |        |  | $ | 608,565  |   |  | 295 | %
|Interest expense |  |                             | (724,618 | ) |      |   | (249,391 | )      |  |   | (475,227 | ) |  | 191 |  
|                 |  |                             |          |   |      |   |          |        |  |   |          |   |  |     |  
|                 |  | $                           | 90,575   |   |      | $ | (42,763  | )      |  | $ | 133,338  |   |  | 312 | %
|                 |  |                             |          |   |      |   |          |        |  |   |          |   |  |     |  



Interest Income



Interest income increased 295 percent to $815,193 in the first
quarter of 2004 from $206,628 in the first quarter of 2003. The increase is due to an increase in the average amount of funds available for investment, resulting from the $168.6 million in net proceeds from the August 2003 follow-on public offering
and the $252.1 million from the March 2004 convertible debt issuance. Interest income for 2004 will fluctuate depending on the timing of cash flows and changes in interest rates for marketable investments.



17



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##### Table of Contents

Interest Expense



Interest expense increased 191 percent to $724,618 in the first quarter of 2004 from $249,391 in the first quarter of 2003. The increase is due to our issuance of
convertible debt in March 2004. We expect interest expense for 2004 to be approximately $6.1 million, of which $5.1 million will be paid using cash. The non-cash portion of interest expense is primarily related to the amortization of issuance costs
incurred and capitalized in conjunction with the issuance of convertible debt in March 2004.



Tax Expense



There is no
provision for tax expense in the first three months of 2004 or the first three months of 2003 due to the net loss of $3.1 million in first quarter 2004, and a net loss of $6.6 million in first quarter 2003. Our ability to achieve profitable
operations is dependent upon our successful commercialization of Aloxi injection, among other things, and therefore, we continue to maintain a valuation allowance against our deferred tax assets. If and when it is judged to be more-likely-than-not
that we will be able to utilize some or all of our deferred tax assets, the related valuation allowance will be reduced and 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. For subsequent tax periods, our tax provision would likely reflect normal statutory tax rates and utilization of our deferred tax attributes would reduce our deferred tax asset balance. The timing of when this valuation
allowance adjustment will occur is primarily dependent upon significant growth in sales of Aloxi injection and the consequent demonstration of a period of profitability. Given current operating expectations, it is possible that an adjustment to
reduce the valuation allowance would occur by 2005.



Net Loss



We had a net loss of $3,145,645 for the first quarter of 2004 and a
net loss of $6,627,939 for the first quarter of 2003. The decreased net loss from the first quarter of 2003 to the first quarter of 2004 reflects a 298 percent increase in revenues from 2003 to 2004, and a 130 percent increase in costs and expenses
from 2003 to 2004. We expect net income for 2004 to be approximately $9 million.



Liquidity and Capital Resources



At March 31, 2004, we
had cash, cash equivalents and marketable investments of $400.7 million and working capital of $383.9 million, compared with $177.8 million and $128.6 million, respectively, at December 31, 2003. A majority of the increase was due to net proceeds of
$252.1 million received from the issuance of convertible debt in March 2004.



Net Cash Used in Operating Activities



Net cash used in
operations was $21.5 million and $8.1 million for the three months ended March 31, 2004 and 2003, respectively. The increase in cash use was primarily due to an increase in accounts receivable and decreases in accounts payable and accrued expenses,
offset by decreases in net loss and inventories. The $17.9 million increase in accounts receivable is a result of increased sales and longer payment terms related to Aloxi injection. We expect receivable balances to increase significantly as a
result of increased Aloxi injection sales and credit terms.



Net Cash
Provided by Investing Activities



Net cash provided by investing was
$7.4 million and $3.0 million for the three months ended March 31, 2004 and 2003, respectively. The increase in cash provided was due to increased maturities of investments.



18



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##### Table of Contents

Net Cash Provided by Financing Activities



Net cash provided by financing was $244.8 million and $0.1 million for the three months ended March 31, 2004 and 2003, respectively. The
2004 amount was due to net proceeds $252.1 million received from the issuance of convertible debt in March 2004, $5.9 million from issuance of shares under stock award plans and $3.9 million upon the exercise of warrants and issuance of shares. This
total was reduced by the purchase of $17.1 million of restricted marketable securities, which were pledged as security for the first six scheduled interest payments related to issuance of convertible debt.



Cash Management and Requirements



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, plus we may seek other sources of funding, including additional equity or debt issuances as appropriate. We expect 2004 annual cash use to be approximately $120 million primarily related to
increased Aloxi injection accounts receivable and inventory. 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 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 through to positive
cash flow. The following table summarizes our contractual obligations at March 31, 2004 and the effect these obligations are expected to have on our liquidity and cash flow in future periods:



|                                     |  |                   |           |      |   |           |  |      |           |      |   |            |  |       |           |  |   |             |  |   |            
|------------------------------------ |  | ----------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | ---------- |  | ----- | --------- |  | - | ----------- |  | - | -----------
|                                     |  | Remainder of 2004 |           | 2005 |   | 2006      |  | 2007 |           | 2008 |   | Thereafter |  | Total
|Operating lease payments             |  | $                 | 1,494,000 |      | $ | 1,732,000 |  | $    | 1,461,000 |      | $ | 1,483,000  |  | $     | 622,000   |  | $ |            |  | $ | 6,792,000  
|Convertible debt                     |  |                   |          |      |   |          |  |      |          |      |   |           |  |       |          |  |   | 348,000,000 |  |   | 348,000,000
|Helsinn minimum sales obligation (a) |  |                   | 1,180,000 |      |   | 2,862,000 |  |      | 5,181,000 |      |   | 6,120,000  |  |       | 5,554,000 |  |   | 16,260,000  |  |   | 37,157,000 
|AloxiTMdevelopment milestone (b)     |  |                   | 2,500,000 |      |   |          |  |      |          |      |   |           |  |       |          |  |   |            |  |   | 2,500,000  
|                                     |  |                   |           |      |   |           |  |      |           |      |   |            |  |       |           |  |   |             |  |   |            
|Total                                |  | $                 | 5,174,000 |      | $ | 4,594,000 |  | $    | 6,642,000 |      | $ | 7,603,000  |  | $     | 6,176,000 |  | $ | 364,260,000 |  | $ | 394,449,000

---

|(a) | In connection with the April 2001 in-licensing agreement with Helsinn Healthcare SA where we obtained the exclusive U.S. and Canadian oncology 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 and the
minimum sales targets peak at approximately $90 million in the fourth year of commercialization.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | In connection with expansion of our Aloxi rights in November of 2003, we agreed to make payments to Helsinn upon its achievement of certain development milestones leading to
marketing approvals. In April 2004, a $2.5 million milestone was achieved and continued successful development would result in additional payments totaling $22.5 million over the next several years.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 three
months ended March 31, 2004. See our most recent Annual Report filed on Form 10-K for the year ended December 31, 2003 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, forecast, estimated or budgeted by us in forward-looking statements made by us from time to time
in reports, proxy statements, registration statements and other written communications, or in oral forward-looking statements made from time to time by the Companys officers and agents. We do not intend to update any of these forward-looking
statements after the date of this Form 10-Q to conform them to actual results.



RISKS RELATED TO OUR BUSINESS



Our business is dependent on
the commercial success of Aloxi injection. If we are unable to successfully commercialize Aloxi injection we may be unable to continue our operations as planned.



The success of our business is dependent on the successful commercialization of Aloxi injection. Aloxi injection is new to the market and
may be unfamiliar to members of the medical community. Market acceptance will depend largely on our ability to demonstrate, to the oncology community in particular, the efficacy and safety of Aloxi injection as an alternative to currently marketed
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 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, such as unacceptable toxicities or side effects, with a product 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.



We must continually submit any labeling, advertising and promotional material to the FDA for review. There is risk that the FDA will prohibit use of the marketing
material in the form we desire. Unfavorable outcomes resulting from factors such as those identified above could limit sales of Aloxi injection or cause sales of Aloxi injection to decline. In those circumstances, our stock price would decline and
we may have to find additional sources of funding or scale back or cease operations.



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



We are not currently profitable and have a very limited history of profitability. 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 product candidates, including irofulven, and other product candidates and 3) continued
commercialization of Aloxi injection and our other marketed products. Therefore, we will not generate net income unless we are able to significantly increase revenues from sales of Aloxi injection or other products compared to our sales in 2003.
Furthermore, if we continue to sustain losses, we may be unable to fund development of our product candidates or to continue our business operations as planned.



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Sales of Aloxi injection accounted for a significant portion of our product revenues since its launch in September of
2003. If any factor adversely impacts sales of Aloxi injection, our product revenues will decrease.



Aloxi injection sales represented 72 and 24 percent of our total product sales and 69 and 20 percent of our total revenue for the quarter ended March 31, 2004 and year ended December 31, 2003, respectively. Any factor
adversely affecting sales of Aloxi injection could cause our product revenues to decrease and our stock price to decline significantly.



Sales of Salagen Tablets have accounted for a significant portion of our product revenues. If any factor adversely impacts sales of Salagen Tablets, our product
revenues will decrease.



Historically we derived the majority of our
product revenues from the sale of Salagen Tablets. U.S. sales of Salagen Tablets represented 26 and 67 percent of our total product sales and 25 and 54 percent of our total revenue for the quarter ended March 31, 2004 and year ended December 31,
2003, respectively. Any factor adversely affecting sales of Salagen Tablets could cause our product revenues to decrease and our stock price to decline significantly. In March 2001, our orphan drug status for Salagen Tablets as a treatment for the
symptoms of radiation-induced xerostomia, or severe dry mouth, in head and neck cancer patients expired. Our orphan status for Salagen as a treatment of symptoms associated with Sjögrens syndrome expires in April 2005. Because Salagen
Tablets does not have patent protection, competing generic products may enter these markets. In addition, we are aware of two currently marketed products that compete in the same or similar markets as Salagen Tablets. If sales of Salagen Tablets
decline as a result of this competition, or for any other reason, our product revenues will decrease and our stock price could decline.



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



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



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



| |  | changing demand for our current products, particularly Salagen;
| | - | ---------------------------------------------------------------



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



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



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



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



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



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



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For the quarter ended March 31, 2004, we had a net loss of $3.1 million, compared to a net loss of $6.6 million for the
quarter ended March 31, 2003. For year ended December 31, 2003, we had a net loss of $61.9 million, compared to a net loss of $36.1 million for the year ended December 31, 2002. The continuing pattern of losses is primarily a result of spending for
research and development and spending for launch activities for Aloxi injection exceeding product revenue available from our currently marketed products.



Variations in the timing of our future revenue and expense could also cause significant fluctuations in our operating results from period to period and may result in
unanticipated earnings shortfalls or losses.



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 irofulven, we, or Helsinn
Healthcare SA in the case of the Aloxi products, 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 from Helsinn Healthcare SA,
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 Helsinn Healthcare SA, 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 phase 2 clinical trials are interim results and may not be predictive of future results, including final results from such phase 2 trials, because, among other factors, patient enrollment and the time period for
evaluating patient results are not complete. If we, or Helsinn Healthcare SA, 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 criteria for the study.
| | - | -----------------------------------



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.



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Since our product candidates such as irofulven may have many potential applications and we have limited resources, our
focus on a particular area may result in our failure to capitalize on more profitable areas and may not result in viable products.



We have limited financial and product development resources. This requires us to focus on product candidates in specific areas and forego opportunities with regard to
other product candidates or applications. For example, our most significant product candidate, irofulven, is in clinical and preclinical trials for a number of applications. We expect that a substantial portion of our product development efforts
over the next several years may be devoted to the 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 studies have indicated some effectiveness in
relation to the target medical conditions, additional clinical trials must be conducted before product registration may be requested.



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



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



We rely on Helsinn Birex Pharmaceuticals Ltd. as our sole and exclusive supplier of the Aloxi injection finished drug product. In addition, we rely on the Fine Chemicals
Division of 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 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 producing 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 could cause our
product revenues to decrease and our stock price to decline.



If our
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 do not have manufacturing facilities and we rely on Helsinn Birex
Pharmaceuticals Ltd. for the production of Aloxi injection, Patheon Inc. for the production of Salagen Tablets, and other third-party manufacturers for our other products. We intend to continue to rely on others to manufacture any future products,
including any



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products that we may acquire or license, and we have no plans to establish manufacturing facilities. 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 prescribed by the FDA or other standards
prescribed by the appropriate regulatory agency in the country of use. There is a risk that our manufacturers, including the current manufacturers of Aloxi injection and Salagen Tablets, will not comply with all applicable regulatory standards, and
may not be able to manufacture Aloxi injection, Salagen Tablets, or any other product for commercial sale. If this occurs, we might not be able to identify another third-party manufacturer on terms acceptable to us, or any other terms.



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



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



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



| |  | fines;
| | - | ------



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



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



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



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



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



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



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



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 fail to obtain, develop and successfully commercialize additional products, we may not achieve
expectations of our future performance and our stock price could decline. Because we do not directly engage in basic research or drug discovery, we must rely upon third parties to sell or license product opportunities to us. Other companies,
including some with substantially greater financial, marketing and sales resources, are competing with us to acquire or license such products or product candidates. We may not be able to acquire or license rights to additional products or product
candidates on acceptable terms, if at all. Furthermore, we may not be able to successfully develop any product candidates we acquire or license. In



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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.



If we fail to obtain additional capital to grow our business, we will be unable to complete our product portfolio development and expansion plans.



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 may license;
| | - | ----------------------------------------------------



| |  | to develop irofulven and other acylfulvene analogs;
| | - | ---------------------------------------------------



| |  | 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 shareholders 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 third-party collaborators or enter into new relationships, we may not be able to develop any of our product candidates or commercialize our products in a timely
manner, if at all.



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



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



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



| |  | third-party 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Our third-party 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., and Merck KgaA to be significant. If any of our collaborators breaches or terminates its agreement with us, or otherwise fails to conduct its collaborative activities in a timely manner, we may experience significant
delays in the development or commercialization of the products or product candidates or the research program covered by the agreement and we may need to devote additional funds or other resources to these activities. If we are unable to enter into
new or alternative arrangements to continue research and development activities, or are unable to continue these activities on our own, we may have to terminate the development program. As a consequence, we may experience a loss of future commercial
product potential and a decline in our stock price.



We have licensed the
right to promote, sell and distribute Aloxi products in the United States and Canada from a third party. We are particularly dependent on that third party 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 Healthcare SA. 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,
which would leave us without rights to the pharmaceutical preparations, products and know-how required to produce Aloxi products. As a consequence of such a termination, we would lose all of our rights to sell and distribute Aloxi products, which
would harm our business and could cause our stock price to decline significantly.



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



With respect to products in which we own rights outside the United States, our strategy for commercialization of such products in markets
outside the United States is to enter into development and marketing alliances with multinational and foreign pharmaceutical companies. We have entered into alliances with various 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.



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We recognize licensing revenue from our marketing 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. Most of these products are
marketed by large, multinational competitors, including GlaxoSmithKline, Roche and Aventis. If Aloxi injection does not compete successfully with existing products on the market, our stock price could decline significantly. Additionally, MedImmune,
Inc. and Daichi Pharmaceutical 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 Aloxi injection or Salagen Tablets. Our competitors
could also develop and introduce generic drugs comparable to Aloxi injection or Salagen Tablets, or drugs or other therapies that address the underlying causes of the symptoms that Aloxi injection or Salagen Tablets treat. If a product developed by
a competitor is more effective than our product, or priced lower than our product, then our product revenue could decrease and our stock price could decline.



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



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



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



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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.



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 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 those 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 will expire in 2005 for the Sjögrens syndrome indication. Upon expiration of any of our orphan drug protection for Salagen Tablets, we
may face competition from manufacturers of generic versions of Salagen Tablets.



We hold an exclusive United States and Canada license on patents covering Aloxi injection proprietary rights.



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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 covering MG98 and inhibitors of DNA
methyltransferase. Protection of these rights and creation of additional rights involve joint responsibilities between us and the respective license party.



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 corporate collaborators may be prevented from pursuing product development or
commercialization.



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



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



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



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



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



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



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



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



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



There is much 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 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 reimbursement changes.



Salagen Tablets generally have been eligible for reimbursement from third-party payors and we have applied for, or in certain cases already received confirmation of,
reimbursement eligibility for Aloxi injection. Although



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third-party reimbursement previously has not been an issue for us, it becomes important to the commercialization of Aloxi
products. Reimbursement of newly approved health products is uncertain. There is a risk that reimbursement will not be available for Aloxi products or for our future products. If government entities and other third-party payors do not provide
adequate reimbursement levels for our products, our product and license revenues would be materially and adversely affected and our stock price could decline.



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



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



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



RISKS RELATED TO OUR OUTSTANDING SECURITIES



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



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



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



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



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



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



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



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



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



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



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



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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 $4.68 to $61.75 per share during the two-year period ended March 31, 2004. Broad market fluctuations may also
adversely affect the market price of our common stock.



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



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



We routinely grant stock options to our employees and other individuals. At March 31, 2004,
we had options outstanding at option prices ranging from $3.38 to $60.78 for 3,993,846 shares of our common stock that have been registered for resale. We have also issued convertible debt and are seeking effectiveness of a registration statement in
relation to these securities and the common shares that may be issued in exchange for such debt. The convertible debt is convertible into 4,134,971 shares of common stock at an initial conversion price of $62.92 per share of common stock. Conversion
is contingent on a number of factors that have not yet been satisfied. Consequently, we are not able to estimate when, if ever, the convertible debt will be converted into common stock, but any such conversion would almost certainly dilute
shareholder value.



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



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



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



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



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The indenture does not prohibit or limit us and would not limit any of our subsidiaries from incurring senior
indebtedness or incurring other indebtedness and other liabilities. As of March 31, 2004, 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. In addition, this market-making activity will be subject to the limitations imposed by the Securities Act of 1933 and the Securities Exchange Act of 1934, and may be limited during the effectiveness of a registration
statement relating to the notes.



The notes were sold under an exemption from
registration under applicable federal and state securities laws. The notes have not been registered under the Securities Act and, therefore, until we fulfill our obligations under the registration rights agreement, the notes may only be offered or
sold pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws or pursuant to an effective registration statement. If no such exemption is available,
you will not be able to sell your notes and/or any common stock issuable upon conversion of the notes. In addition, even after we have registered the notes and shares of underlying common stock, we will 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 you 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 of subsidiaries that we may acquire in the future.



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



On March 2, 2011, March 2, 2014 and March 2, 2019, holders of the notes may require us to purchase their notes. 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.



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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.



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.



Our charter documents, our
shareholder 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 shareholder proposals and nominations; and
| | - | --------------------------------------------------------------------------



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



In addition, our board of directors has adopted a shareholder 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 shareholders 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 shareholders
would receive an attractive value for their shares or if a significant number of our shareholders believed such a proposed transaction to be in their best interests. As a result, shareholders who desire to participate in such a transaction may not
have the opportunity to do so.



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 $4.68 to $61.75 per share during the
two-year period ended March 31, 2004. 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.



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Item 3.



Quantitative and Qualitative
Disclosure About Market Risk



Our operations are not subject to risks of
material foreign currency fluctuations, nor do we use derivative financial instruments in our treasury practices. We place our marketable investments in instruments that meet high credit quality standards, as specified in our investment policy
guidelines. We do not expect material losses with respect to our investment portfolio or exposure to market risks associated with interest rates. The impact on our net loss as a result of a 25, 50 or 100 basis point (where 100 basis points equals
1%) change in short-term interest rates would be approximately $1,050,000, $2,100,000 or $4,200,000 annually based on our cash, cash equivalents, marketable investment and restricted marketable investment balances at March 31, 2004.



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 Executive Vice President and Chief Financial Officer, William C. Brown, we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period (the Evaluation Date) covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us required to be included in our periodic SEC filings.



(b) Changes in Internal Controls Over Financial Reporting



During the period covered by this report, there were no significant changes
made in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected or are reasonable likely to materially affect our internal controls over financial reporting.



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MGI PHARMA, INC.



PART II 
OTHER INFORMATION



Item 2.



Changes in Securities, Use of
Proceeds and Issuer Purchases of Equity Securities



Deerfield Notes and
Warrants



On January 5 and February 6, 2004, Deerfield
International Limited and Deerfield Partners, L.P. (Deerfield) converted 3% Convertible Subordinated Notes issued in December 2002 (2002 Notes) into an aggregate of 2,571,428 shares of our common stock. We received no
proceeds from the conversion. Also on February 6, 2004, Deerfield exercised warrants that were issued in connection with the 2002 Notes for 400,000 shares of our common stock. We received gross proceeds of $3.85 million upon the exercise of the
warrants. The offer and sale of the 2002 Notes and the warrants were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D.



Senior Subordinated Convertible Notes due 2024



On March 2, 2004, we sold $348.0 million aggregate principal amount of Senior Subordinated Convertible Notes due 2024 (the 2004
Notes). The initial purchasers were Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Piper Jaffray & Co. and UBS Securities LLC, who purchased the Notes from us at an issue price of $747.62 per $1,000
principal of the Notes at maturity, or an aggregate issue price of approximately $260.2 million. The aggregate underwriting commission was approximately $7.8 million.



Holders of the Notes may convert the Notes into shares of our common stock at a conversion rate of 11.8821 shares per $1,000 principal
amount of Notes under certain circumstances prior to maturity or their repurchase, subject to adjustment. The offer and sale of the Notes were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Rule
144A.



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Item 5.



Other Information



(b) Adoption of Procedures by which
Shareholders May Recommend Nominees to Our Board of Directors



During the
first quarter of 2004, we adopted procedures by which our shareholders may recommend nominees to our Board of Directors. These procedures, and the procedures and criteria generally used for the identification and evaluation of nominees, are
described below.



Our nominating and governance committee, which
operates under a written charter adopted by the Board of Directors, will consider qualified candidates for possible nomination that are submitted by our shareholders. Shareholders wishing to make such a submission may do so by sending the following
information to the MGI PHARMA Nominating and Governance Committee c/o Corporate Secretary; 5775 West Old Shakopee Road, Suite 100; Bloomington, MN 55437-3174: (1) name of the candidate and a brief biographical sketch and resume; (2) contact
information for the candidate and a document evidencing the candidates willingness to serve as a director if elected; and (3) a signed statement as to the submitting shareholders current status as a shareholder and the number of shares
currently held.



In evaluating persons to be nominated for election or
appointment to the Board of Directors, the members of the nominating and governance committee meet to identify and present such persons for consideration by the Board of Directors. The nominating and governance committee does not currently utilize
the services of any third party search firm to assist in the identification or evaluation of Board of Directors candidates. All director nominees approved by the Board of Directors and all individuals appointed to fill vacancies created between our
annual meetings of shareholders are required to stand for election by our shareholders at the next annual meeting.



The nominating and governance committee determines the required selection criteria and qualifications of director nominees based upon our needs at the time nominees are
considered. In general, a candidate must possess the ability to apply good business judgment and must be in a position to properly exercise his or her duties of loyalty and care. Candidates should also exhibit proven leadership capabilities, high
integrity and experience with a high level of responsibilities within their chosen fields, and have the ability to quickly grasp complex principles of the pharmaceutical industry. The nominating and governance committee will consider these criteria
for nominees identified by the nominating and governance committee, by shareholders, or through some other source. When current members of the Board of Directors are considered for nomination or reelection, the nominating and governance committee
also takes into consideration their prior MGI PHARMA Board of Directors contributions, performance and meeting attendance records.



The nominating and governance committee conducts a process of making a preliminary assessment of each proposed nominee based upon the resume and biographical information,
an indication of the individuals willingness to serve and other background information. This information is evaluated against the criteria set forth above and our specific needs at that time. Based upon a preliminary assessment of the
candidate(s), those who appear best suited to meet our needs may be invited to participate in a series of interviews, which are used as a further means of evaluating potential candidates. On the basis of information learned during this process, the
nominating and governance committee determines which nominee(s) to recommend to the Board of Directors to submit for election at the next annual meeting. The nominating and governance committee uses the same process for evaluating all nominees,
regardless of the original source of the nomination.



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Item 6. Exhibits and Reports on Form 8-K



(a) LISTING OF EXHIBITS:



|              |  |                                                                                                                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                   
|              | 
|3.1           |  | Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form10-Q for the quarter ended June 30,
2002).                                                                                                           
|              | 
|3.2           |  | Restated Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form10-Q for the quarter ended June 30,
1998).                                                                                                              
|              | 
|4.1           |  | Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).                                                                                                 
|              | 
|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 on March 4, 2004).                    
|              | 
|4.8           |  | Registration Rights Agreement, dated March 2, 2004, by and between MGI PHARMA, INC. and Merrill Lynch, Pierce, Fenner & Smith(Incorporated by reference to Exhibit 4.3 to the
Companys Current Report on Form 8-K filed on March 4, 2004).                                                   



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|     |  |                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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 William C. Brown 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 William C. Brown Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    



|(b) | REPORTS ON FORM 8-K
|--- | -------------------



The Company filed a report on Form 8-K on January 7, 2004 to report under Item 5 that an aggregate of 1,497,100 shares of the Companys common stock
were issued to Deerfield International Limited and Deerfield Partners, L.P. pursuant to their election to convert $13,479,704 of the Companys 3% convertible subordinated notes issued in December of 2002.



The Company filed a report on Form 8-K on February 6, 2004 to report under
Item 5 that an aggregate of 1,474,328 shares of the Companys common stock were issued to Deerfield International Limited and Deerfield Partners, L.P. pursuant to their election to convert the remaining amount of the Companys 3%
convertible subordinated notes issued in December of 2002 and exercise the common stock purchase warrants that were issued in connection with that December 2002 financing.



The Company furnished (in accordance with Item 12 of Form 8-K) a report on Form 8-K on February 11, 2004 to
report under Items 7, 9 and 12 the Companys results of operations and financial condition for the quarter and fiscal year ended December 31, 2003.



The Company filed a report on Form 8-K on February 25, 2004 to report under Item 5 and 7 announcing the Companys intent to offer senior subordinated
convertible notes due 2024 for gross proceeds of approximately $200 million through an offering within the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933.



The Company filed a report on Form 8-K on February 26, 2004 to report under
Item 5 and 7 announcing the pricing of the Companys senior subordinated convertible notes due 2024 for gross proceeds of approximately $225 million through an offering within the United States to qualified institutional buyers pursuant to Rule
144A under the Securities Act of 1933. Total gross proceeds from the offering to the Company were approximately $260 million.



The Company filed a report on Form 8-K on March 3, 2004 to report under Item 5 and 7 announcing the Company had closed the previously announced private
placement of the Companys senior subordinated convertible notes due 2024 and the exercise by the placement agents of their option to purchase approximately $35 million gross proceeds of additional notes. Total gross proceeds from the offering
to the Company were approximately $260 million.



The Company
filed a report on Form 8-K on March 4, 2004 to report under Item 5 and 7 filing as exhibits certain documents related to the announcement we had closed the previously announced private placement of our senior subordinated convertible notes due 2024.



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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: May 6, 2004 |  | By:              |  | /s/ William C. Brown                                           
|                  |  |                  |  | William C. Brown,                                              
|                  |  |                  |  | Executive Vice President, Chief Financial Officer and Secretary
|                  |  |                  |  | (principal financial officer, and duly authorized officer)     



40



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##### Table of Contents

MGI PHARMA, INC.



Quarterly Report on Form 10-Q

for the

Quarter Ended March 31, 2004



EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                   
|              | 
|3.1           |  | Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form10-Q for the quarter ended June 30,
2002).                                                                                                           
|              | 
|3.2           |  | Restated Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form10-Q for the quarter ended June 30,
1998).                                                                                                              
|              | 
|4.1           |  | Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).                                                                                                 
|              | 
|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 on March 4, 2004).                    



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##### Table of Contents

|     |  |                                                                                                                                                                                                                                            
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|4.8  |  | Registration Rights Agreement, dated March 2, 2004, by and between MGI PHARMA, INC. and Merrill Lynch, Pierce, Fenner & Smith(Incorporated by reference to Exhibit 4.3 to the
Companys Current Report on Form 8-K filed on March 4, 2004).
|     | 
|31.1 |  | Certification of Leon O. Moulder, Jr. Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)                                                                                                                           
|     | 
|31.2 |  | Certification of William C. Brown 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 William C. Brown Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002