UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|ý                                                             | 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                                                           
|o                                                             | 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 0-27628

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SUPERGEN, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction
of incorporation or organization)                           |  | 91-1841574(IRS Employer
Identification Number)
|------------------------------------------------------------------------------------------------ |  | ----------------------------------------------
|4140 Dublin Blvd, Suite 200, Dublin, California(Address of principal executive offices)          |  | 94568(Zip Code)                               
|(925) 560 - 0100(Registrant's telephone number, including area code)                            
|Not applicable(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by checkmark whether Registrant is an accelerated filer (as defined in Rule 12B-2 of the
Act). Yes ý    No o

The number of shares of the registrant's Common Stock, $.001 par value, outstanding as of May 5, 2004 was 44,291,557.



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TABLE OF CONTENTS

|           |  |                       |                                                                                                           |  | Page
No.
|---------- |  | --------------------- | --------------------------------------------------------------------------------------------------------- |  | --------
|PART I     |  | FINANCIAL INFORMATION |                                                                                                           | 
|           |  | Item 1               | Financial Statements (Unaudited)                                                                          |  |         
|           |  |                       | Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003                          |  | 3       
|           |  |                       | Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2004 and 2003 |  | 4       
|           |  |                       | Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2004 and 2003 |  | 5       
|           |  |                       | Notes to Condensed Consolidated Financial Statements                                                      |  | 6       
|           |  | Item 2               | Management's Discussion and Analysis of Financial Condition and Results of Operations                     |  | 12      
|           |  | Item 3               | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 35      
|           |  | Item 4               | Controls and Procedures                                                                                   |  | 36      
|PART II    |  | OTHER INFORMATION     |                                                                                                           | 
|           |  | Item 6               | Exhibits and Reports on Form 8-K                                                                          |  | 37      
|SIGNATURES |  | 38                   

2

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SUPERGEN, INC.        CONDENSED CONSOLIDATED BALANCE SHEETS        (in thousands, except share and per share amounts)

|                                             |                                                                                                                                                                             | March 31,
2004                             |        | December 31,
2003 |       
|-------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ----------------- | ------
|
|ASSETS                                       |                                                                                                                                                                            
|Current assets:                              |                                                                                                                                                                             |                                            |        |                   |       
|                                             | Cash and cash equivalents                                                                                                                                                   |                                            | $      | 32,719            |       
|                                             | Marketable securities                                                                                                                                                       |                                            |        | 10,614            |       
|                                             | Restricted cash and investments                                                                                                                                             |                                            |        |                  |       
|                                             | Accounts receivable, net                                                                                                                                                    |                                            |        | 824               |       
|                                             | Due from related parties                                                                                                                                                    |                                            |        | 286               |       
|                                             | Inventories                                                                                                                                                                 |                                            |        | 4,477             |       
|                                             | Prepaid financing costs                                                                                                                                                     |                                            |        | 1,109             |       
|                                             | Prepaid expenses and other current assets                                                                                                                                   |                                            |        | 2,818             |       
|                                             |                                                                                                                                                                             |                                            |        |                   |       
|                                             |                                                                                                                                                                             | Total current assets                       |        |                   | 52,847
|Marketable securities, non-current           |                                                                                                                                                                             |                                            | 1,179  |                   |       
|Investment in stock of related parties       |                                                                                                                                                                             |                                            | 831    |                   |       
|Due from related parties, non-current        |                                                                                                                                                                             |                                            | 101    |                   |       
|Property, plant and equipment, net           |                                                                                                                                                                             |                                            | 4,252  |                   |       
|Developed technology at cost, net            |                                                                                                                                                                             |                                            | 221    |                   |       
|Goodwill, net                                |                                                                                                                                                                             |                                            | 731    |                   |       
|Other intangibles, net                       |                                                                                                                                                                             |                                            | 1,040  |                   |       
|Restricted cash and investments, non-current |                                                                                                                                                                             |                                            | 11,194 |                   |       
|Other assets                                 |                                                                                                                                                                             |                                            | 30     |                   |       
|                                             |                                                                                                                                                                             |                                            |        |                   |       
|                                             |                                                                                                                                                                             | Total assets                               |        | $                 | 72,426
|                                             |                                                                                                                                                                             |                                            |        |                   |       
|LIABILITIES AND STOCKHOLDERS' EQUITY         |                                                                                                                                                                            
|Current liabilities:                         |                                                                                                                                                                             |                                            |        |                   |       
|                                             | Accounts payable and accrued liabilities                                                                                                                                    |                                            | $      | 3,581             |       
|                                             | Convertible debt, current portion, net of discounts                                                                                                                         |                                            |        | 6,362             |       
|                                             | Derivative liability                                                                                                                                                        |                                            |        | 3,293             |       
|                                             | Payable to AVI BioPharma, Inc                                                                                                                                               |                                            |        | 565               |       
|                                             | Deferred revenue                                                                                                                                                            |                                            |        | 1,667             |       
|                                             | Accrued payroll and employee benefits                                                                                                                                       |                                            |        | 2,131             |       
|                                             |                                                                                                                                                                             |                                            |        |                   |       
|                                             |                                                                                                                                                                             | Total current liabilities                  |        |                   | 17,599
|Deferred rent                                |                                                                                                                                                                             |                                            | 839    |                   |       
|Deferred revenue, non-current                |                                                                                                                                                                             |                                            |       |                   |       
|                                             |                                                                                                                                                                             |                                            |        |                   |       
|                                             | Total liabilities                                                                                                                                                           |                                            |        | 18,438            |       
|                                             |                                                                                                                                                                             |                                            |        |                   |       
|Commitments and contingencies                |                                                                                                                                                                             |                                            |        |                   |       
|Stockholders' equity:                        |                                                                                                                                                                             |                                            |        |                   |       
|                                             | Preferred stock, $.001 par value; 2,000,000 shares authorized; none outstanding                                                                                             |                                            |        |                  |       
|                                             | Common stock, $.001 par value; 150,000,000 shares authorized; 44,269,382 and 37,022,356 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively |                                            |        | 44                |       
|                                             | Additional paid in capital                                                                                                                                                  |                                            |        | 365,175           |       
|                                             | Accumulated other comprehensive loss                                                                                                                                        |                                            |        | (5,828            | )     
|                                             | Accumulated deficit                                                                                                                                                         |                                            |        | (305,403          | )     
|                                             |                                                                                                                                                                             |                                            |        |                   |       
|                                             |                                                                                                                                                                             | Total stockholders' equity                 |        |                   | 53,988
|                                             |                                                                                                                                                                             |                                            |        |                   |       
|                                             |                                                                                                                                                                             | Total liabilities and stockholders' equity |        | $                 | 72,426
|                                             |                                                                                                                                                                             |                                            |        |                   |       

See accompanying notes to condensed consolidated financial statements

3

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SUPERGEN, INC.        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except per share amounts)        (unaudited)

|                                                                                        |                                      | Three months ended
March 31, |        
|--------------------------------------------------------------------------------------- | ------------------------------------ | ---------------------------- | -------
|
|Revenues:                                                                               |                                      |                              |        
|                                                                                        | Net sales revenue                    |                              | $      
|Operating expenses:                                                                     |                                      |                              |        
|                                                                                        | Cost of sales                        |                              |        
|                                                                                        | Research and development             |                              |        
|                                                                                        | Selling, general, and administrative |                              |        
|                                                                                        |                                      |                              |        
|                                                                                        |                                      | Total operating expenses     |        
|                                                                                        |                                      |                              |        
|Loss from operations                                                                    |                                      |                              | (12,451
|Interest income                                                                         |                                      |                              | 87     
|Interest expense                                                                        |                                      |                              | (948   
|Amortization of deemed discount on convertible debt                                     |                                      |                              | (4,019 
|Change in valuation of derivatives                                                      |                                      |                              | (1,404 
|                                                                                        |                                      |                              |        
|Net loss                                                                                |                                      | $                            | (18,735
|                                                                                        |                                      |                              |        
|Basic and diluted net loss per common share                                             |                                      | $                            | (0.48  
|                                                                                        |                                      |                              |        
|Weighted average shares used in basic and diluted net loss per common share calculation |                                      |                              | 39,229 
|                                                                                        |                                      |                              |        

See
accompanying notes to condensed consolidated financial statements

4

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SUPERGEN, INC.        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)        (unaudited)

|                                                 |                                                                             | Three months ended
March 31,                                                                     |                                       
|------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | --------------------------------------
|
|Operating activities:                            |                                                                             |                                                                                                  |                                       
|                                                 | Net loss                                                                    |                                                                                                  | $                                     
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                                                  |                                       
|                                                 |                                                                             | Depreciation                                                                                     |                                       
|                                                 |                                                                             | Amortization of prepaid financing costs                                                          |                                       
|                                                 |                                                                             | Amortization of intangible assets                                                                |                                       
|                                                 |                                                                             | Amortization of deferred compensation                                                            |                                       
|                                                 |                                                                             | Amortization of deemed discount on convertible debt                                              |                                       
|                                                 |                                                                             | Interest on convertible debt paid in common stock                                                |                                       
|                                                 |                                                                             | Change in valuation of derivatives                                                               |                                       
|                                                 |                                                                             | Stock compensation for modification of employee options                                          |                                       
|                                                 |                                                                             | Expense related to stock options and warrants granted to non-employees                           |                                       
|                                                 |                                                                             | Non-cash charge related to research or license agreements                                        |                                       
|                                                 |                                                                             | Cash option paid in modification of distribution agreement                                       |                                       
|                                                 |                                                                             | Changes in operating assets and liabilities:                                                     |                                       
|                                                 |                                                                             |                                                                                                  | Accounts receivable                   
|                                                 |                                                                             |                                                                                                  | Inventories                           
|                                                 |                                                                             |                                                                                                  | Prepaid expenses and other assets     
|                                                 |                                                                             |                                                                                                  | Due from related parties              
|                                                 |                                                                             |                                                                                                  | Restricted cash and investments       
|                                                 |                                                                             |                                                                                                  | Accounts payable and other liabilities
|                                                 |                                                                             |                                                                                                  |                                       
|Net cash used in operating activities            |                                                                             |                                                                                                  | (12,560                               
|                                                 |                                                                             |                                                                                                  |                                       
|Investing activities:                            |                                                                             |                                                                                                  |                                       
|                                                 | Purchases of marketable securities                                          |                                                                                                  |                                       
|                                                 | Sales or maturities of marketable securities                                |                                                                                                  |                                       
|                                                 | Purchase of intangible assets                                               |                                                                                                  |                                       
|                                                 | Release of restricted cash from collateral account                          |                                                                                                  |                                       
|                                                 | Purchases of property and equipment                                         |                                                                                                  |                                       
|                                                 |                                                                             |                                                                                                  |                                       
|Net cash provided by investing activities        |                                                                             |                                                                                                  | 7,357                                 
|                                                 |                                                                             |                                                                                                  |                                       
|Financing activities:                            |                                                                             |                                                                                                  |                                       
|                                                 | Proceeds from issuance of common stock, net of issuance costs               |                                                                                                  |                                       
|                                                 | Prepaid financing costs                                                     |                                                                                                  |                                       
|                                                 | Proceeds from issuance of convertible debt                                  |                                                                                                  |                                       
|                                                 | Repurchases of common stock                                                 |                                                                                                  |                                       
|                                                 |                                                                             |                                                                                                  |                                       
|Net cash provided by financing activities        |                                                                             |                                                                                                  | 32,867                                
|                                                 |                                                                             |                                                                                                  |                                       
|Net increase in cash and cash equivalents        |                                                                             |                                                                                                  | 27,664                                
|Cash and cash equivalents at beginning of period |                                                                             |                                                                                                  | 5,055                                 
|                                                 |                                                                             |                                                                                                  |                                       
|Cash and cash equivalents at end of period       |                                                                             | $                                                                                                | 32,719                                
|                                                 |                                                                             |                                                                                                  |                                       
|                                                 | Supplemental Disclosure of Non-Cash Financing Activities:                   |                                                                                                  |                                       
|                                                 |                                                                             | Valuation of warrants issued to placement agent in connection with convertible debt transactions |                                       
|                                                 |                                                                             | Beneficial conversion and deemed discount in connection with convertible debt                    |                                       
|                                                 |                                                                             | Conversion of convertible notes into common stock                                                |                                       

See accompanying notes to condensed consolidated financial statements

5

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SUPERGEN, INC.        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        MARCH 31, 2004        (Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying condensed unaudited consolidated financial statements of SuperGen, Inc. ("we," "SuperGen" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended
March 31, 2004 are not necessarily indicative of results that may be expected for the year ended December 31, 2004.

The
balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.

Certain
balances in the Company's 2003 condensed consolidated financial statements have been reclassified to conform to the presentation in 2004.

For
further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K as amended for the year
ended December 31, 2003.

NOTE 2. STOCK-BASED COMPENSATION

We account for stock issued to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and comply with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure" ("SFAS 148"). Under APB 25, compensation expense of fixed stock options is
based on the intrinsic value on the date of the grant, which represents the difference, if any, between the fair value of the stock and the exercise price of the option. We account for stock issued to
non-employees in accordance with the provisions of SFAS 123 and EITF No. 96-18,"Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services."

Under
the intrinsic value method, when the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is
recognized. The following table illustrates the pro forma effect on net loss and loss per share for the three month

6

---



periods
ended March 31, 2004 and 2003 had we applied the fair value method to account for stock-based awards to employees (in thousands, except per share amounts):

Three months ended
March 31,2004

2003Net loss, as reported

$
(18,735
)
$
(11,666
)Add: Stock-based employee compensation expense included in the determination of net loss, as reported


429


7Deduct: Stock-based employee compensation expense that would have been included in the determination of net loss if the fair value method had been applied to all awards


(1,203
)

(779
)Pro forma net loss

$
(19,509
)
$
(12,438
)Basic and diluted net loss per common share:As reported

$
(0.48
)
$
(0.35
)Pro forma

$
(0.50
)
$
(0.38
)


NOTE 3. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES

Cash and cash equivalents include bank demand deposits, certificates of deposit, investments in debt securities with maturities of three months or less when
purchased, and an interest in money market funds which invest primarily in U.S. government obligations and commercial paper. These instruments are highly liquid and are subject to insignificant risk.

Investments
in marketable securities consist of equity securities and corporate or government debt securities that have a readily ascertainable market value and are readily marketable.
We report these investments at fair value. We designate all marketable securities as available-for-sale, with unrealized gains and losses included as a component of equity.

The
following is a summary of available-for-sale securities as of March 31, 2004 (in thousands):

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair ValueU.S. corporate debt securities

$
32,225

$
6

$
(1
)
$
32,230U.S. government debt securities


11,093


9





11,102Marketable equity securities


14,428


318


(6,160
)

8,586Total

$
57,746

$
333

$
(6,161
)
$
51,918


7

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The
available-for-sale securities are classified on the balance sheet as of March 31, 2004 as follows (in thousands):

|                                                           |       | Amortized
Cost |        | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |     | Fair Value
|---------------------------------------------------------- | ----- | -------------- | ------ | ---------------------- | - | ----------------------- | --- | ----------
|Amounts included in cash and cash equivalents              |       | $              | 31,990 |                        | $ | 2                       |     | $         
|Marketable securities, current                             |       |                | 10,607 |                        |   | 7                       |     |           
|Amounts included in investment in stock of related parties |       |                | 266    |                        |   |                        |     |           
|Amounts included in restricted cash and investments        |       |                | 14,028 |                        |   |                        |     |           
|Marketable securities, non-current                         |       |                | 855    |                        |   | 324                     |     |           
|                                                           |       |                |        |                        |   |                         |     |           
|                                                           | Total |                | $      | 57,746                 |   | $                       | 333 |           
|                                                           |       |                |        |                        |   |                         |     |           

Available-for-sale
securities by contractual maturity, are shown below (in thousands):

Fair ValueMarch 31,
2004

December 31,
2003Debt securities:Due in one year or less

$
42,606

$
21,887Due after one year through three years


726


1,57643,332


23,463Marketable equity securities


8,586


11,306Total

$
51,918

$
34,769


NOTE 4. INVENTORIES

Inventories consist of the following (in thousands):

March 31,
2004

December 31,
2003Raw materials

$
102

$
108Work in process


2,308


2,481Finished goods


2,067


1,376$
4,477

$
3,965


NOTE 5. STOCKHOLDERS' EQUITY

Issuance of Common Stock Upon Conversion of Convertible Notes

Our senior convertible notes issued in February and June 2003 (see Note 6 below) allow us to make payments of principal and interest in shares of
our common stock. During the quarter ended

8

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March 31,
2004, we issued 2,187,057 shares of our common stock upon payment of principal totaling $11,250,000 and interest of $242,200.

Private Placement

On March 5, 2004, we entered into a Securities Purchase Agreement with several investors for the private placement of shares of unregistered common stock
and warrants. In connection with this agreement, we issued 4,900,000 shares of our common stock to the investors at a per share price of $7.00, for an aggregate purchase amount of $34,300,000, and
warrants to purchase 735,000 shares of our common stock. The warrants have a term of five years and a per share exercise price of $10.00. As compensation to the placement agent, we paid the placement
agent $1,735,000 in cash, which was treated as part of the cost of the offering. Net proceeds from the offering were $32,525,000.

The
common stock and warrants we issued in the private placement transaction were initially unregistered. We filed a registration statement on Form S-3 with the
Securities and
Exchange Commission ("SEC") on March 23, 2004 to register the shares issued in the private placement as well as the shares to be issued upon exercise of the warrants. In accordance with EITF
00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," the warrants were included as a liability and valued at fair market
value until we met the criteria under EITF 00-19 for permanent equity. We valued the warrants at $3,307,000 on March 5, 2004 using the Black-Scholes method with the following
assumptions: a risk-free interest rate of 2.81%, volatility of 0.89, and a dividend yield of 0%. The registration statement on Form S-3 was declared effective by the SEC
on March 31, 2004. We re-valued the warrants on that date at $6,923,000 using the Black-Scholes method with the following assumptions: a risk-free interest rate of
2.81%, volatility of 0.89, and a dividend yield of 0%. The warrants were then transferred to permanent equity, and the change in the value of the warrant liability between March 5, 2004 and
March 31, 2004, or $3,616,000, was charged to Change in valuation of derivative.

NOTE 6. CONVERTIBLE DEBT FINANCING TRANSACTIONS

February Convertible Debt Transaction

On February 26, 2003 we entered into a Securities Purchase Agreement for the private placement of Senior Exchangeable Convertible Notes ("February Notes")
in the principal amount of $21.25 million and related warrants. The February Notes accrued interest at a rate of 4% per year. The principal amount of the February Notes was repayable in four
equal quarterly installments beginning nine months after the closing of the transaction. The February Notes were, at the option of the investors, in whole or in part, (a) convertible into
shares of our common stock at a fixed conversion price of $4.25 per share, and (b) exchangeable for up to 2,634,211 shares of common stock of AVI BioPharma, Inc. ("AVI") that we own (the
"AVI Shares") at a fixed exchange price of $5.00 per share.

June Convertible Debt Transaction and February Notes Restructuring

On June 24, 2003, we closed a private placement transaction in which we issued Senior Convertible Notes ("June Notes") in the aggregate principal amount of
$21.25 million, to the same holders of our

9

---



outstanding
February Notes. The June Notes are payable in four equal quarterly installments beginning March 31, 2004, and accrue interest at a rate of 4% per year. Pursuant to the terms of the
June Notes, the note holders may elect to convert, at any time prior to maturity, their June Notes into shares of our common stock at a fixed price $6.36, which was calculated based on the trading
prices of our common stock for the twenty trading days after issuance of the June Notes.

Concurrent
with the issuance of the June Notes, we restructured our outstanding February Notes. Pursuant to the restructuring, the holders of the February Notes converted half of the
principal amount into shares of our common stock at the fixed conversion price of $4.25, thereby causing the remaining $10,625,000 principal amount of the outstanding February Notes to have a final
maturity date of February 26, 2004. The remaining February Notes were amended to remove the feature permitting the holders to exchange such notes into the AVI Shares at an exchange price of
$5.00, and to remove our ability to use the AVI Shares valued at market at the time of repayment to repay the outstanding principal amount. However, in connection with the issuance of the June Notes
and the restructuring of the February Notes, we issued to the note holders warrants to purchase the 2,634,211 AVI Shares at an exercise price of $5.00 per share. The warrants represent a derivative
under SFAS 133 that must be recorded at fair value. Changes in the fair value of the derivative are recognized in earnings. During the quarter ended March 31, 2004, we recorded a change
in the value of this derivative of $1,404,000.

While
the full amount of the $21,250,000 proceeds from the June Notes was transferred to SuperGen, $10,625,000 of such funds were placed into an interest bearing collateral account, and
not available for our use until release. Absent certain defaults by us, $5,312,500 (one-half of the $10,625,000) was to be available to us on March 24, 2004, and the remaining
$5,312,500 was to be available on June 24, 2004. In connection with the private placement transaction completed in March 2004 (see Note 5 above), the holders of the June Notes
released the entire $10,625,000 plus accrued interest from the collateral account.

In
connection with the issuance of the warrants to acquire the 2,634,211 AVI Shares, we pledged the AVI Shares into a collateral account. The fair value of the AVI Shares of $7,982,000
is included in the accompanying consolidated March 31, 2004 balance sheet under Restricted cash and investments. We continue to hold all of the pledged AVI Shares and continue to reflect
changes in those share values in accumulated other comprehensive loss.

As
of March 31, 2004, all principal from the February Notes had been repaid, and the principal balance of the June Notes was $15,000,000.

In
connection with the February and June convertible note transactions, we recorded prepaid financing costs related to the placement agent fees, legal fees, and other cost associated
with the transactions. During the quarters ended March 31, 2004 and 2003, we recorded amortization of the prepaid financing costs totaling $702,000 and $115,000, respectively, to interest
expense.

Also
in connection with the February and June convertible note transactions, we recorded deemed discounts on the convertible debt. During the quarters ended March 31, 2004 and
2003, we recorded amortization of the deemed discount on convertible debt of $4,019,000 and $215,000, respectively.

10

---



NOTE 7. COMPREHENSIVE LOSS

For the three months ended March 31, 2004 and 2003, total comprehensive losses amounted to $21,463,000 and $15,866,000, respectively. Comprehensive losses
consisted primarily of the net losses and changes in unrealized gains or losses on investments. Changes in unrealized gains (losses) on investments were $2,728,000 and $4,200,000 for the three month
periods ended March 31, 2004 and 2003, respectively.

NOTE 8. BASIC NET LOSS PER SHARE

Basic and diluted net loss per common share is computed by dividing net loss by the weighted average number of shares outstanding during the quarter.

As
we have reported operating losses each period since our inception, the effect of assuming the exercise of options and warrants would be anti-dilutive and, therefore, basic
and diluted net loss per share are the same.

The
computation of diluted net loss per share for the three months ended March 31, 2004 excludes the impact of options to purchase 6,333,000 shares of common stock, warrants to
purchase 7,070,000 shares
of common stock, and 2,357,000 shares of common stock issuable upon conversion of senior convertible notes at March 31, 2004, as such impact would be antidilutive.

The
computation of diluted net loss per share for the three months ended March 31, 2003 excludes the impact of options to purchase 4,685,000 shares of common stock, warrants to
purchase 6,647,000 shares of common stock, and 5,000,000 shares of common stock issuable upon conversion of senior convertible notes at March 31, 2003, as such impact would be antidilutive.

NOTE 9. ACQUISITION OF NIPENT EUROPEAN MARKETING RIGHTS

In February 2004, we entered into a Purchase and Sale Agreement with Pfizer Inc. to acquire European marketing rights for Nipent, our drug that is
currently approved for marketing in the United States for hairy cell leukemia. We paid Pfizer $1,000,000 under this agreement and have classified this amount in Other intangibles in the accompanying
condensed consolidated balance sheets. This amount is being amortized over 31 months, the estimated life of the benefit period.

NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities,"
("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. In December 2003, the FASB issued a revision to FIN 46, ("FIN 46R"). FIN 46R provides a broad deferral of the latest date by which all public entities must apply FIN 46 to certain
variable interest entities to the first reporting period ending after March 15, 2004. The adoption of FIN 46R did not have a material impact on our financial position, cash flows or results of
operations.

11

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Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our condensed consolidated financial statements and related notes included
elsewhere in this report. The results discussed below are not necessarily indicative of the results to be expected in any future periods. Our disclosure and analysis in this section of the report also
contain forward-looking statements. When we use the words "anticipate," "estimate," "project," "intend," "expect," "plan," "believe," "should," "likely" and similar expressions, we are making
forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. In particular, these statements include statements such as: the timing of
receiving FDA approval of our NDA for Orathecin; the timing of our filing of an NDA for Dacogen; our estimates about becoming profitable; our forecasts regarding our research and development expenses;
the impact of our outstanding indebtedness; and our statements regarding the sufficiency of our cash to meet our operating needs. Our actual results could differ materially from those predicted in the
forward-looking statements as a result of risks and uncertainties including, but not limited to, delays and risks associated with conducting and managing our clinical trials, developing products and
obtaining regulatory approval; ability to establish and maintain collaboration relationships; competition; ability to obtain funding; ability to protect our intellectual property; our dependence on
third party suppliers; risks associated with the hiring and loss of key personnel; adverse changes in the specific markets for our products; ability to launch and commercialize our products. Certain
unknown or immaterial risks and uncertainties can also affect our forward-looking statements. Consequently, no forward-looking statement can be guaranteed and you should not rely on these forward-
looking statements. For a discussion of the known and material risks that could affect our actual results, please see "Factors Affecting Future Operating Results" in this section of the report. We
undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the risk factors set
forth in this 10-Q and other reports or documents we file from time to time with the Securities and Exchange Commission.

Overview

We are a pharmaceutical company dedicated to the development and commercialization of therapies for solid tumors, hematological malignancies, and blood disorders.
Our strategy is to commercialize products by minimizing the time, expense and technical risk associated with drug research through identifying and acquiring pharmaceutical compounds in the later
stages of development. Our primary objective is to become a leading supplier of therapies for solid tumors, hematological malignancies, and blood disorders.

Since
our incorporation in 1991 we have devoted substantially all of our resources to our product development efforts. Currently we have three key compounds, Orathecin,
Dacogen and Nipent®, that are the focus of our efforts.

Orathecin.We recently completed three randomized Phase III studies for Orathecin and submitted a New Drug Application
("NDA") for filing with the United States Food and Drug Administration ("FDA") on January 26, 2004. The submission was accepted for filing by the FDA on March 26, 2004. The submission of
this NDA represents a significant milestone in our history and is the culmination of years of research and development. The FDA indicated that the user fee goal date for the Orathecin NDA is
November 26, 2004, which is the target date for the completion of the FDA's review and resulting action letter.

Dacogen.We have completed the compilation and validation of the results from the Phase III clinical studies of Dacogen in
the treatment of myelodysplastic syndromes ("MDS"). The data demonstrated that Dacogen met the primary endpoint of the study by producing what we believe is a clinically significant delay in
progression to acute myeloid leukemia ("AML") or death. The study

12

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results
were also statistically significant using the Wilcoxon method, but not the Log Rank test. Both statistical analyses were required by the study protocol. In May 2003, we were granted
"fast track" designation for Dacogen in the treatment of MDS. In April 2004, the FDA granted our request for a "rolling" NDA submission for Dacogen. The rolling submission is an FDA provision
available to drug candidates that have received fast track designation and allows for completed sections of an NDA to be submitted on an ongoing basis. We anticipate submitting the initial modules of
the rolling NDA to the FDA in the third quarter of 2004.

Nipent.Nipent is approved by the FDA and marketed by us for the treatment of hairy cell leukemia. Nipent has also shown
promise in other diseases and we are conducting a series of post-marketing Phase IV clinical trials for chronic lymphocytic leukemia ("CLL"), non-Hodgkins lymphoma ("NHL"), cutaneous and
peripheral T-cell lymphomas and graft versus host disease ("GvHD"). In February 2004 we acquired marketing rights to Nipent in Europe.

Other Products.Our portfolio of other products includes Partaject-delivered busulfan, and inhaled versions of Orathecin and
paclitaxel. We also market Surface Safe. We have also received regulatory approval to market our generic daunorubicin for a variety of acute leukemias and Mitozytrex (mitomycin for injection), for use
in the therapy of disseminated adenocarcinoma of the stomach or pancreas in proven combinations with other approved chemotherapeutic agents and as palliative treatment when other modalities have
failed. Moreover, we hold United States sales and marketing rights to the cancer vaccine Avicine. We are continually evaluating our product portfolio to determine whether it is appropriate for us to
dedicate the resources needed to commercialize these products ourselves or whether we would be better served selling or licensing the rights to develop these products to third parties.

To
date, our product revenues have been limited and are derived primarily from sales of Nipent, which we are marketing in the United States for the treatment of hairy cell leukemia. Most
of our products are still in the development stage, and we will require substantial additional investments in research and development, clinical trials, and in regulatory and sales and marketing
activities to commercialize current and future product candidates. Conducting clinical trials is a lengthy, time-consuming, and expensive process involving inherent uncertainties and
risks, and our studies may be insufficient to demonstrate safety and efficacy to support FDA approval of any of our product candidates.

As
a result of our substantial research and development expenditures and minimal product revenues, we have incurred cumulative losses of $305.4 million through March 31,
2004, and have never generated enough funds through our operations to support our business. We expect to continue to incur operating losses at least through 2005. This is due primarily to marketing
launch expenditures for Orathecin and Dacogen, if approved, as well as projected spending for the ongoing clinical trials and related development of our product candidates.

Ultimately,
our ability to become profitable will depend upon a variety of factors, including regulatory approvals of our products, the timing of the introduction and market acceptance
of our products and competing products, increases in sales and marketing expenses related to the launch of Orathecin and Dacogen, if approved, and our ability to control our costs. If the results from
our clinical trials are not positive, we may not be able to get sufficient funding to continue our trials or conduct new trials, and we would be forced to scale down or cease our business operations.
Moreover, if Orathecin or Dacogen are not approved or commercially accepted we will remain unprofitable for longer than we currently anticipate. Additionally, we might be forced to substantially scale
down our operations or sell certain of our assets, and it is likely the price of our stock would decline precipitously.

13

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Critical Accounting Policies

Our management discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and reported disclosures. On an on-going basis, we evaluate our estimates, including those related to revenue recognition,
intangible assets, valuation of investments and derivative instruments. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.

We
believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.



Our net sales relate principally to Nipent and, to a lesser extent, mitomycin. We recognize sales revenue upon shipment and related transfer of title to
customers, and collectibility is reasonably assured. Allowances are established for estimated product returns and exchanges. Cash advance payments received in connection with distribution agreements
or research grants are deferred and recognized ratably over the period of the respective agreements or until services are performed.

Allowances
for product returns and exchanges are based on historical information and known trends from external sources. The costs of product exchanges, which include actual product
costs and related shipping charges, are included in cost of sales. In estimating returns, we analyze historical returns and sales patterns, the remaining shelf life of inventory, and changes in
demand. We continually assess our historical experience and adjust our allowances as appropriate. If actual product returns and exchanges are greater than our estimates, additional allowances may be
required.



We have intangible assets related to goodwill and other acquired intangibles such as trademarks, covenants not to compete, and customer lists. The determination
of related estimated useful lives and whether or not these assets are impaired involves significant judgment. Changes in strategy and/or market conditions could significantly impact these judgments
and require adjustments to recorded asset balances. We review intangible assets, as well as other long-lived assets, for impairment whenever events or circumstances indicate that the
carrying amount may not be fully recoverable.



Investments in financial instruments are carried at fair value with unrealized gains and losses included in accumulated other comprehensive income or loss in
stockholders' equity. Our investment portfolio includes equity securities that could subject us to material market risk and corporate obligations that subject us to varying levels of credit risk. If
the fair value of a financial instrument has declined below its carrying value for a period in excess of six consecutive months or if the decline is due to a significant adverse event, such that the
carrying amount of these investments may not be fully recoverable, the impairment is considered to be other than temporary. An other than temporary decline in fair value of a financial instrument
would be subject to a write-down resulting in a charge against earnings. The determination of whether a decline in fair value is other than temporary requires significant judgment, and
could have a material impact on our balance sheet and results of operations. We review the securities within our portfolio for other than temporary declines in value on a regular

14

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basis.
The prices of some of our marketable securities, in particular AVI BioPharma ("AVI"), are subject to considerable volatility. Decreases in the fair value of these securities may significantly
impact our results of operations.

Investments
in equity securities without readily determinable fair value are carried at cost. We periodically review those carried costs and evaluate whether an impairment has occurred.
The determination of whether an impairment has occurred requires significant judgment, as each investment may have unique market or development opportunities.



In connection with the June 2003 convertible debt transaction, we issued to the note holders warrants to purchase 2,634,211 shares of common stock of AVI
at $5.00 per share. As of March 31, 2004, we owned sufficient shares of AVI to cover the potential obligation. These warrants are considered to be a derivative and have been recorded on the
balance sheet at fair value. The accounting for derivatives is complex, and requires significant judgments and estimates involved in determining the fair value in the absence of quoted market values.
These estimates are based on valuation methodologies and assumptions deemed appropriate in the circumstances. The fair value of the warrants is based on various assumptions input into the
Black-Scholes pricing model. Such assumptions include the estimated market volatility and interest rates used in the determination of fair value. The use of different assumptions may have a material
effect on the estimated fair value amount and the results of operations.

Results of Operations

Three months ended March 31, 2004 compared to three months ended March 31, 2003:

Three months ended
March 31,

Change2004

2003

Dollar

Percent(in thousands)Revenues

$
1,098

$
2,176

$
(1,078
)
(49.5
)%


The
decrease in revenues in 2004 was due primarily to lower sales of Nipent, our drug currently approved for the treatment of hairy cell leukemia. The decline in Nipent sales was due to
a price increase that went into effect at the beginning of the fourth quarter 2003, which resulted in a significant decline in sales beginning in that quarter and continuing into the first quarter of
2004. The price increase had an impact on the average wholesale price, a key determining factor in Medicare reimbursement, and resulted in lower than expected demand for Nipent as the physician
reimbursement for Nipent was impacted. Sales in 2004 included approximately $528,000 in sales to Europe, compared to $116,000 in 2003. Unlike our Nipent sales efforts in the U.S. market where we call
on clinicians directly, our role in Europe has been limited to that of a supplier. As such, we have not had a direct influence on Nipent sales at the clinical level, making their timing and magnitude
difficult to predict and dependent on the efforts of our European distributor. During the first quarter of 2004, we acquired the marketing rights for Nipent in Europe, which allows us to charge a
higher unit price for Nipent in Europe compared to the previous supply agreement.

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Three months ended
March 31,

Change2004

2003

Dollar

Percent(in thousands)Cost of sales

$
551

$
754

$
(203
)
(26.9
)%


Cost
of sales as a percentage of net sales revenue was 50 percent in the first quarter of 2004 compared to 35 percent in the same period in 2003. The increase in cost of
sales percentage in 2004 is due to a
larger portion of our sales being related to generic mitomycin and Nipent in Europe, which are sold at lower margins than Nipent in the United States. In addition, raw material costs for mitomycin
have increased over 2003. Current margins may not be indicative of future margins due to possible variations in product mix, average selling prices, and manufacturing costs.

Three months ended
March 31,

Change2004

2003

Dollar

Percent(in thousands)Research and development

$
7,450

$
6,733

$
717

10.6
%


The
increase in research and development expenses was due to higher research and development costs for Dacogen, higher costs for Orathecin Phase I/II studies in indications other than
pancreatic cancer, as well as a $500,000 non-cash charge to be paid in shares of our common stock to the Stehlin Foundation ("Stehlin") as a milestone payment for the acceptance of the
submission of the NDA for Orathecin.

We
conduct research internally and also through collaborations with third parties, and we intend to maintain our strong commitment to our research and development efforts in the future.
Our research and development activities consist primarily of clinical development and the related advancement of our existing product candidates through clinical trials. Our major research and
development projects include Orathecin, Dacogen, and studies of other indications of Nipent. Conducting clinical trials is a lengthy, expensive and uncertain process. Completion of clinical trials may
take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. Our clinical trials may be suspended
at any time if we or the FDA believe the patients participating in our studies are exposed to unacceptable health risks. We may encounter problems in our studies which will cause us or the FDA to
delay or suspend the studies. Because of these uncertainties, we cannot predict when or whether we will successfully complete the development of our product candidates or the ultimate product
development cost.

Three months ended
March 31,

Change2004

2003

Dollar

Percent(in thousands)Selling, general and administrative

$
5,548

$
5,915

$
(367
)
(6.2
)%


The
decrease in selling, general and administrative expenses consists of decreases in general and administrative expenses of $567,000, offset by increases in sales and marketing expenses
of approximately $200,000. The decrease in general and administrative expenses was due to lower costs for investor relations and business development activities of $750,000, offset by higher legal
expenditures of $275,000. The increase in sales and marketing expenses relate primarily to higher expenditures for publications, market research, and advertising placement.

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Three months ended
March 31,

Change2004

2003

Dollar

Percent(in thousands)Interest income

$
87

$
129

$
(42
)
(32.6
)%Interest expense


(948
)

(186
)

762

409.7
%Amortization of deemed discount on convertible debt


(4,019
)

(216
)

3,803

1,760.6
%Change in valuation of derivative


(1,404
)

(167
)

1,237

740.7
%


The
decrease in interest income was due to lower available cash and marketable securities balances and a decline in interest rates in 2004, compared to the same period in 2003.

Interest
expense in the first quarter of 2004 included amortization of prepaid financing costs of $702,000, representing two months of amortization relating to our February Notes and
three months of amortization relating to our June Notes. Interest expense in the first quarter of 2003 of $186,000 included $115,000 of amortization of prepaid financing costs for one month relating
to our February Notes.

Non-cash
amortization of deemed discount on the convertible debt relates to the convertible notes issued in February and June 2003. The amortization in the first
quarter of 2004 represented amortization for two months on the February Notes and three months on June Notes. The amortization recorded in the first quarter of 2003 represented only one month of
amortization on the original $21.25 million February Notes.

The
change in derivative valuation of $167,000 recorded in the first quarter of 2003 represented the change in the valuation of the option feature that allowed holders of our February
exchangeable convertible notes to receive a portion of the principal and interest in the shares of AVI at $5.00 per share. The change in derivative valuation of $1,404,000 in the first quarter of 2004
represented the change in the valuation of two derivatives. As part of the June 2003 convertible debt transaction and the
February Notes restructuring, we issued to the note holders warrants to purchase 2,634,211 shares of AVI at $5.00 per share. These warrants represent a derivative instrument and are valued each
quarter using the Black-Scholes pricing model. During the first quarter of 2004, the value of this derivative had decreased from the December 31, 2003 value of $5,505,000 by $2,212,000, which
was recorded as other income in 2004. We also recorded an expense of $3,616,000 related to the derivative accounting treatment of initially unregistered warrants issued in connection with the private
placement of shares of our common stock completed in March 2004, in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company's Own Stock."

Liquidity and Capital Resources

Our cash, cash equivalents, and both short and long-term marketable securities totaled $44.5 million at March 31, 2004, compared to
$14.6 million at December 31, 2003. In addition, we held 2,684,211 shares of registered stock of AVI, most of which are held as security for the warrants we issued to convertible debt
holders to purchase the 2,634,211 AVI shares at $5.00 per share. The AVI shares had a market value of $8.0 million at March 31, 2004, and are classified on the balance sheet under
non-current "Restricted cash and investments."

The
net cash used in operating activities in the first quarter of 2004 was $12.6 million, which consisted primarily of the net loss of $18.7 million, less
$4.0 million non-cash amortization of deemed discount on our convertible debt, $0.7 million amortization of prepaid financing costs, and $1.4 million
non-cash change in the valuation of derivatives. The net cash used in operating activities in the first quarter of 2003 was $7.4 million, which consisted primarily of the net loss
of $11.7 million, less the decrease in accounts receivable of $3.7 million.

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Net
cash provided by investing activities was $7.4 million in the first quarter of 2004, which consisted primarily of $10.7 million from the release of restricted cash from
the collateral account, $7.4 million in proceeds from the sale or maturity of marketable securities, offset by $9.6 million from the purchase of marketable securities and
$1.0 million paid for the purchase of European product rights. Net cash provided by investing activities was $2.3 million for the first quarter of 2003, primarily related to the sales
and maturities of marketable securities.

Net
cash provided by financing activities was $32.9 million in the first quarter of 2004, consisting of proceeds from the issuance of common stock in a private placement
transaction and proceeds from exercises of stock options. Net cash provided by financing activities was $18.9 million for the first quarter of 2003, and was primarily from the issuance of
$21.3 million exchangeable convertible notes in February 2003, offset by the payment of $1.8 million of prepaid financing costs.

March 2004 Private Placement.On March 5, 2004, we entered into a Securities Purchase Agreement with several
investors for the private placement of shares of unregistered common stock and warrants. In connection with this agreement, we issued 4,900,000 shares of our common stock to the investors at a per
share price of $7.00, for an aggregate purchase amount of $34,300,000, and warrants to purchase 735,000 shares of our common stock. The warrants have a term of five years and a per share exercise
price of $10.00. As compensation to the placement agent, we paid the placement agent $1,735,000 in cash, which was treated as part of the cost of the offering.

We
have financed our operations primarily through the issuance of equity and debt securities and the receipt of milestone payments in connection with collaborative agreements. We believe
that our current cash, cash equivalents, marketable securities and other investments will satisfy our cash requirements through at least the first quarter of 2005. However, it is our intention to
pursue additional financing options, including the selling of additional shares of stock in a public or private offering and/or exploring marketing partnership opportunities for Orathecin, Dacogen and
Nipent.

We
believe that our need for additional funding will increase in the future, especially if we receive regulatory approval for Orathecin and Dacogen, and that our continued ability to
raise funds from external sources will be critical to our success. We continue to actively consider future contractual arrangements that would require significant financial commitments. If we
experience currently unanticipated cash requirements, we could require additional capital much sooner than presently anticipated. We may raise money by the sale of our equity securities or debt, or
the exercise of outstanding warrants and stock options by the holders of such warrants or options. However, given uncertain market conditions and the volatility of our stock price, we may not be able
to sell our securities in public offerings or private placements at prices and on terms that are favorable to us, if at all. We may also choose to obtain funding through licensing and other
contractual agreements. Such arrangements may require us to relinquish our rights to our technologies, products or marketing territories, or to grant licenses on terms that are not favorable to us. If
we fail to obtain adequate funding in a timely manner, or at all, we will be forced to scale back our product development activities or our operations in a manner that will ensure we can discharge our
obligations as they come due in the ordinary course of business at least through the first quarter of 2005.

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Factors Affecting Future Operating Results

The following section lists some, but not all, of the risks and uncertainties that may have a material adverse effect on our business,
financial condition and results of operations. You should carefully consider these risks in evaluating our company and business. Our business operations may be impaired if any of the
following risks actually occur, and by additional risks and uncertainties that we do not know of or that we currently consider immaterial. In such case, the trading price of our common stock could
decline.

This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in
the forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this report.

Risks Related to Orathecin, Dacogen and Nipent

Our future success is highly dependent on regulatory approval and successful commercialization of Orathecin. If our submission for Orathecin does not support approval of the
NDA by the FDA for any reason, our business will be substantially harmed.

On January 26, 2004, we submitted an NDA to the FDA for approval of Orathecin for the treatment of patients with refractory pancreatic cancer. The
submission was accepted for filing by the FDA on March 26, 2004. The FDA indicated that the user fee goal date for the Orathecin NDA is November 26, 2004, which is the target date for
the completion of the FDA's review and resulting action letter.

Even
though the FDA accepted our submission for filing, the FDA may not ultimately approve our NDA for Orathecin. The approval process may take a significant amount of time and the FDA's
approval of our application will be based on its review of Orathecin's safety and efficacy. Important factors that the FDA will take into account in its review and analysis include, among other
things, time to disease progression and objective tumor response as well as toxicities seen in patients who were treated with Orathecin.

Given
the large scale of the Orathecin clinical program, the complexity of the clinical trials and the inherent uncertainties associated with clinical trials of such magnitude and
complexity, the data and statistical analysis from these trials may not support regulatory approval or we may be required to perform additional studies before obtaining regulatory approval. For
example, the design of these trials allowed patients who initially were being treated with gemcitabine or other therapies to cross over to treatment with Orathecin. At the time the trials were
designed, we believed that the percentage of patients who would cross over for treatment with Orathecin would be in the range of ten percent to 20 percent of the total enrolled patients. The
number of patients in our trials who actually crossed over to treatment with Orathecin significantly exceeded the number anticipated and was nearly 50 percent in two of our Phase III studies.
The extent of this cross over has negatively affected the statistical analysis of the study, making it difficult to determine if the product is efficacious with respect to survival.

In
May 2003, we announced data from one of our Phase III studies of Orathecin in patients with advanced pancreatic cancer, most of whom had previously failed two or more
chemotherapy treatments. The study randomized 409 patients to either Orathecin or "best medical therapy." The primary study end-point was overall survival with secondary
end-points, including objective tumor response and time to disease progression. We did not meet the primary end-point, although we did meet two of the secondary
end-points. The two secondary end-points were independent of a cross-over effect, whereas the primary end-point was not. The released data, and the data
from our other clinical trials, may not be sufficient to support regulatory approval for Orathecin, and additional trials may be required before we can obtain regulatory approval.

If,
for any reason, the FDA ultimately determines not to approve our application for Orathecin, we would be unable to proceed with our current plans for commercializing Orathecin.
Additionally, we

19

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might
be forced to substantially scale down our operations or sell certain of our assets, and it is likely the price of our stock would decline precipitously.

Even if we receive regulatory approval of Orathecin for the treatment of patients with refractory pancreatic cancer, Orathecin may not be commercially successful.

Even if Orathecin receives regulatory approval, patients and physicians may not readily accept it, which would result in lower than projected sales and
substantial harm to our business. Acceptance will be a function of Orathecin being clinically useful and demonstrating superior therapeutic effect with an acceptable side effect profile as compared to
currently existing or future treatments. In addition, even if Orathecin does achieve market acceptance, we may not be able to maintain that market acceptance over time if new products are introduced
that are more favorably received than Orathecin or render Orathecin obsolete.

If we do not receive regulatory approval for Dacogen, our future revenues may be limited and our business would be harmed.

We have completed the primary data analysis from our Phase III study of Dacogen. The patients who were randomized to the Dacogen arm of the study had an increased
time to progression to AML or death (p=0.042 Wilcoxon test, p=0.198 Log-rank test), compared to patients randomized to supportive care only. Both analyses were specified in the protocol.
Although the results from the Log-rank test were not statistically significant, we believe that these data are clinically significant and will form the basis of an NDA submission. In
addition, adverse events were
reported more frequently for patients randomized to the Dacogen arm, as compared to those receiving supportive care, specifically, Leucopenia, febrile neutropenia, nausea, constipation, diarrhea,
vomiting, pneumonia, arthralgia, headache and insomnia. Severe adverse events observed more frequently in patients randomized to Dacogen. The mortality rate for patients in the study was
12 percent for Dacogen and 9 percent for supportive care. Consequently, there is no assurance that the FDA will agree with our assessment that Dacogen provides a clinically significant
benefit, that the FDA will not take the position that the studies failed for statistical reasons, or that we will not be required to conduct additional large scale clinical trials. Even if this data
supports the submission of an NDA, the approval process may take a significant amount of time and we may never receive approval. If Dacogen is unsuccessful for any reason, including if the results of
the Phase III study are deemed insufficient from either a clinical or statistical basis by the FDA, our future revenues would be limited and our business would be harmed. Additionally, we might be
forced to substantially scale down our operations or sell certain of our assets, and it is likely the price of our stock would decline precipitously.

Neither the fast track designations of Orathecin and Dacogen nor the accelerated approval procedures for Orathecin will necessarily lead to a faster regulatory review or
approval.

If a drug is intended for the treatment of a serious or life-threatening condition for which there is no effective treatment, and the drug
demonstrates the potential to address unmet medical needs for the condition, the drug sponsor may apply for FDA "fast track" designation. The fast track designation does not apply to the product
alone, but instead to the combination of the product and the specific indication for which it is being studied. Under fast track provisions, the FDA is committed to working with the drug sponsor for
the purpose of expediting the clinical development and evaluating the drug safety and efficacy for that indication. A fast track designation allows the drug sponsor to submit a "rolling" NDA, whereby
the FDA initiates review of sections of the application before it is complete. In some cases, a fast track designated product may also qualify for "priority" review, or review within a
six-month time frame from the time an NDA is completed and filed, but this is not guaranteed.

Although
we have obtained fast track designations for Orathecin for the treatment of refractory pancreatic cancer and Dacogen for the treatment of MDS, we cannot guarantee a faster
development

20

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process,
review or approval compared to the conventional procedures. Our drug candidates may not be granted priority review, and our fast track designation may be withdrawn by the FDA if the FDA
believes that such designation is no longer supported by emerging data from our clinical development program. Our fast track designation does not guarantee that we will qualify for or be able to take
advantage of the accelerated approval procedures, which are procedures that allow the FDA to approve a drug intended to treat serious or life threatening illnesses based upon a surrogate end point
that is reasonably likely to predict clinical benefit. Even if the accelerated approval procedures are available to us, we may elect to use the traditional approval process for strategic and marketing
reasons. If Orathecin and Dacogen are approved under the accelerated approval procedures, we will most likely be required to conduct Phase IV studies to provide confirmatory evidence that these drugs
are safe, effective and provide a clinically meaningful benefit to patients. If we fail to provide such confirmatory evidence, the FDA can withdraw our approval on an expedited basis. Accelerated
approval also requires that we submit all promotional labeling and advertising to the FDA for pre-approval prior to dissemination of these materials. Furthermore, if serious adverse
effects are identified at any time after marketing, our approval may be rapidly revoked and we will not be allowed to continue to market the drug. If the regulatory approval for our drug candidates is
delayed, or the approval is withdrawn or revoked for any reason, our business will be substantially harmed.

If we are unable to expand our regulatory approval for use of Nipent to treat additional diseases our revenues will not expand as planned.

Part of our strategy involves expanding the market opportunities for our approved drugs, including Nipent, by seeking regulatory approval and/or clinical support
of their use for treatment of patients with additional diseases. We are currently marketing Nipent for the treatment of patients with hairy cell leukemia, and revenues from selling Nipent provided
over 90 percent of our revenues for the past three years. We are conducting a series of clinical trials with Nipent, including Phase IV trials for CLL, NHL, cutaneous and peripheral
T-cell lymphomas and Phase II/III studies for GvHD. If our Nipent clinical trials are not successful, we will not be able to seek additional regulatory approvals and we will not be able to
increase our revenue from Nipent.

Risks Related to Our Financial Condition and Common Stock

We have a history of operating losses and we expect to continue to incur losses for the foreseeable future.

Since inception, we have funded our research and development activities primarily from private placements and public offerings of our securities, milestone
payments and revenues generated primarily from sales of Nipent, which is marketed in the United States for the treatment of patients with hairy cell leukemia. Our substantial research and development
expenditures and limited revenues have resulted in significant net losses. We have incurred cumulative losses of $305.4 million from inception through March 31, 2004, and our products
have not generated sufficient revenues to support our business during that time. We expect to continue to incur substantial operating losses at least into 2005 and may never achieve profitability.

Whether
we achieve profitability depends primarily on the following factors:



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Our
products and product candidates, even if successfully developed and approved, may not generate sufficient or sustainable revenues to enable us to achieve or sustain profitability.

We will require additional funding to fully commercialize our products, and if we are unable to raise the necessary capital or to do so on acceptable terms, our planned
expansion and continued survival could be harmed.

We will continue to expend substantial resources commercializing Orathecin, Dacogen and Nipent, and conducting research and development, including clinical trials
for our products and product candidates. We anticipate that our capital resources will be adequate to fund operations and capital expenditures for at least the next 12 months. However, if we
experience unanticipated cash requirements during this period, we could require additional funds much sooner. We may raise money by the sale of our equity securities or debt, or the exercise of
outstanding warrants and stock options by the holders of such warrants and options. However, given uncertain market conditions and the volatility of our stock price, we may not be able to sell our
securities in public offerings or private placements at prices and on terms that are favorable to us, if at all. Also, the dilutive effect of additional financings could adversely affect our per share
results. We may also choose to obtain funding through licensing and other contractual agreements. Such arrangements may require us to relinquish our rights to our technologies, products or marketing
territories, or to grant licenses on terms that are not favorable to us. If we fail to obtain adequate funding in a timely manner, or at all, we will be forced to scale back our product development
activities, or be forced to cease our operations.

We substantially increased our outstanding indebtedness with the issuance of our senior convertible notes, which may make it more difficult for us to pay our debt and other
obligations and which notes contain certain restrictive covenants that limit our ability to finance our operations by new debt or equity financings.

On June 24, 2003, we privately placed senior convertible notes in the aggregate principal amount of $21.25 million with several institutional
investors, which we refer to as the June Notes.

At
March 31, 2004, we had outstanding indebtedness of $15.0 million from the June Notes. The remaining balance of the June Notes are due in quarterly installments on
June 30, September 30 and on December 31, 2004, which we also intend to pay in shares of our common stock.

Currently,
our revenues from operations will not generate sufficient cash flow to satisfy the principal payments under the Notes when they become due. We have the right to pay the
principal and interest then due under the June Notes through the issuance of shares of common stock at a conversion price tied to the then market price. Nevertheless, our principal payments through
issuance of shares of our common stock is subject to certain conditions, including limitations based on trading volumes in our common stock at such time. Therefore, we may be required to use cash to
pay the principal amounts when they are due. If we decide to make payments under the June Notes in cash, we would deplete our financial resources, which could adversely affect our product development.
If we are

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unable
to satisfy our payment obligations under the June Notes, we will default, which could result in our filing for bankruptcy protection.

In
addition, the holders of the June Notes have imposed certain restrictive covenants on us, including limits on our future indebtedness and limits on structuring equity financings with
variable pricing. As a result, our obligations under the June Notes may or will:



Holders
of the June Notes also have a right of first refusal to purchase their pro rata portion of the greater of one-third of the securities offered by us for sale in
offerings or $5.0 million worth of such offered securities.

Conversion of the notes, payments on the notes in stock or redemption of the notes upon a change in control would have a dilutive effect on our stockholders.

The holders may convert the June Notes at any time prior to their maturity at a fixed conversion price of $6.36, and we have the right, subject to certain
conditions, to pay the principal and interest then due under such Notes through the issuance of shares of common stock at a conversion price tied to the then market price. If we issue shares of our
common stock (a) upon the holders' conversion of the Notes, or (b) to make payments of principal and interest due on the Notes, such issuances will be dilutive to our stockholders. In
addition, if we decide to redeem the Notes in connection with a change of control, we will be required to issue to the holders certain warrants for the securities of the acquiror, which will be
dilutive and may negatively affect the deal consideration the stockholders would otherwise receive.

Our equity investment in AVI exposes us to equity price risk and any impairment charge would affect our results of operations.

We are exposed to equity price risk on our equity investment in AVI. Currently we own 2,684,211 shares of AVI. In the third quarter of 2002, we recorded an
other-than temporary loss of $8.2 million relating to our holding in AVI, resulting in a reduction of our cost basis in the AVI shares. Under our accounting policy, marketable
equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. As of September 30, 2002,
the AVI shares had been trading below our original cost basis for more than six months. Since there was no compelling evidence to the contrary, we recorded the impairment charge of $8.2 million
in our results of operations. The amount of the charge was based on the difference between the market price of the shares as of September 30, 2002 and our original cost basis. The public
trading prices of the AVI shares have fluctuated significantly since we purchased them and could continue to do so. If the public trading prices of these shares continue to trade below their new cost
basis in future periods, we may incur additional impairment charges relating to this investment, which in turn will affect our results of operations.

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In addition, in connection with the restructuring of our February Notes and the issuance of the June Notes, we issued three-year warrants to the June Note holders exercisable
into up to 2,634,211 of our AVI shares at an exercise price of $5.00 per share, and we pledged the AVI shares to secure our obligation under the June Notes.

Product Development and Regulatory Risks

Before we can seek regulatory approval of any of our product candidates, we must complete clinical trials, which are expensive and have uncertain outcomes.

Most of our products are in the developmental stage and, prior to their sale, will require regulatory approval and the commitment of substantial resources. Before
obtaining regulatory approvals for the commercial sale of any of our product candidates, we must demonstrate through pre-clinical testing and clinical trials that our product candidates
are safe and effective for use in humans.

We
have a portfolio of cancer drugs in various stages of development, including Nipent (for indications other than hairy cell leukemia, Phase IV), Partaject busulfan (Phase I/II),
inhaled Orathecin (Phase I), and we are conducting pre-clinical studies for Vascular Endothelial Growth Factor ("VEGF"), inhaled paclitaxel and Cremophor-free paclitaxel. In
addition, we expect to commence new clinical trials from time to time in the course of our business as our product development work continues. Conducting clinical trials is a lengthy,
time-consuming and expensive process and the results are inherently uncertain. We have incurred and will continue to incur substantial expense for, and we have devoted and expect to
continue to devote a significant amount of time to, pre-clinical testing and clinical trials. However, regulatory authorities may not permit us to undertake any additional clinical trials
for our product candidates. If we are unable to complete our clinical trials, our business will be severely harmed and the price of our stock will likely decline.

We
have ongoing research and pre-clinical projects that may lead to product candidates, but we have not begun clinical trials for these projects. If we do not successfully
complete our pre-clinical trials, we could not commence clinical trials as planned.

Our clinical trials may be delayed or terminated, which would prevent us from seeking necessary regulatory approvals.

Completion of clinical trials may take several years or more. The length of a clinical trial varies substantially according to the type, complexity, novelty and
intended use of the product candidate. For example, our three Phase III Orathecin clinical trials lasted from 1998 through the end of 2003. The length of time and complexity of these studies make
statistical analysis difficult and regulatory approval unpredictable. The commencement and rate of completion of our clinical trials may be delayed by many factors, including:



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If
we are unable to achieve a satisfactory rate of completion of our clinical trials, our business will be significantly harmed.

We may be required to suspend, repeat or terminate our clinical trials if they are not conducted in compliance with regulatory requirements, if the trial results are negative,
inconclusive or if they fail to demonstrate safety or efficacy.

Our clinical trials must be conducted in accordance with the FDA's regulations and are subject to continuous oversight by the FDA and institutional review boards
at the medical institutions where the clinical trials are conducted. We outsource certain aspects of our research and development activities to contract research organizations ("CROs"). We have
agreements with these CROs for certain of our clinical programs. We and our CROs are required to comply with current Good Clinical Practices ("GCPs"), regulations and guidelines enforced by the FDA
for all of our products in clinical development. The FDA enforces GCPs through periodic inspections of study sponsors, principal investigators, and study sites. If our CROs or we fail to comply with
applicable GCPs, the clinical data generated in our studies may be deemed unreliable and the FDA may require us to perform additional studies before approving our applications. In addition, our
clinical trials must be conducted with product candidates produced under Good Manufacturing Practices ("GMPs"), and may require a large number of test subjects. Our failure to comply with these
regulations may require us to repeat clinical studies, which would delay the regulatory approval process.

Even
if we achieve positive interim results in clinical trials, these results do not necessarily predict final results, and acceptable results in early trials may not be repeated in
later trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after achieving promising results in earlier trials. Negative or
inconclusive results or adverse medical events during a clinical trial could cause us to repeat or terminate a clinical trial. Our clinical trials may be suspended at any time if we or the FDA believe
the patients participating in our studies are exposed to unacceptable health risks or if the FDA finds deficiencies in the conduct of these trials.

We
may encounter other problems and failures in our studies that would cause us or the FDA to delay or suspend the studies. The potential failures would delay development of our product
candidates, hinder our ability to conduct related pre-clinical testing and clinical trials and further delay the commencement of the regulatory approval process. Moreover, we may then be
required to conduct other clinical trials for the product candidates, which would require substantial funding and time. We may be unable to obtain funding to conduct such clinical trials. The failures
or perceived failures in our clinical trials would delay our product development and the regulatory approval process, damage our business prospects, make it difficult for us to establish collaboration
and partnership relationships and negatively affect our reputation and competitive position in the pharmaceutical industry.

Our failure to obtain regulatory approvals to market our product candidates in foreign countries would adversely affect our anticipated revenues.

Sales of our products in foreign jurisdictions will be subject to separate regulatory requirements and marketing approvals. Approval in the United States, or in
any one foreign jurisdiction, does not ensure approval in any other jurisdiction. The process of obtaining foreign approvals may result in significant delays, difficulties and expenses for us, and may
require additional clinical trials. So far, we have applied through a subsidiary for regulatory approval to market mitomycin and paclitaxel in the United Kingdom and in other countries within the
European Union. Although many of the regulations applicable to our products in these foreign countries are similar to the FDA's, many of these requirements also vary widely from country to country,
which could delay the introduction of our

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products
in those countries. Failure to comply with these regulatory requirements or to obtain required approvals would impair our ability to commercialize our products in foreign markets.

Nipent
is currently sold in Europe, and we recently acquired the rights to distribute and market Nipent there directly. However, our revenue from sales of Nipent in Europe is currently
insignificant. Our strategy is to obtain regulatory approvals to sell our products in Europe and elsewhere, and we intend to contract with third-party licensees or distributors for sales outside the
United States. Delays in obtaining regulatory approval from foreign jurisdictions will impair the commercialization of our products and would delay anticipated revenues.

Even if we obtain regulatory approval, we will continue to be subject to extensive government regulation that may cause us to delay the introduction of our products or withdraw
our products from the market.

Even if regulatory approval of our products is obtained, later discovery of previously unknown problems may result in restrictions of a product, including
withdrawal of that product from the market. Further, governmental approval may subject us to ongoing requirements for post-marketing studies. For
example,despite receipt of governmental approval, the facilities of our third-party manufacturers are still subject to unannounced inspections by the
FDA and must continue to comply with GMPs and other regulations. These regulations govern all areas of production, record keeping, personnel and quality control. In the past, our third-party
manufacturers have experienced delayed FDA approval, which adversely affected our ability to supply Nipent in 2002. If we or our third-party manufacturers fail to comply with any of the manufacturing
regulations, we may be subject to, among other things, product seizures, recalls, fines, injunctions, suspensions or revocations of marketing licenses, operating restrictions and criminal prosecution.

Physicians
may prescribe drugs for uses that are not described in a product's labeling for uses that differ from those tested by us and approved by the FDA. While such
"off-label" uses are common and the FDA does not regulate physicians' choice of treatments, the FDA does restrict a manufacturer's communications on the subject of off-label
use. Companies cannot actively promote FDA-approved drugs for off-label uses, but they may disseminate to physicians articles published in peer-reviewed journals.
To the extent allowed by law, we intend to disseminate peer-reviewed articles on our products to our physician customers. If, however, our promotional activities fail to comply with the
FDA's regulations or guidelines, we may be subject to warnings and/or enforcement action by the FDA. For example, in November 2002 we issued a press release announcing our receipt of FDA
approval to market Mitozytrex. In March 2003, the FDA issued a "Talk Paper" regarding this press release, taking the position that we made certain unsupported claims about the drug and did not
disclose the serious side effects such as suppression of bone marrow activity. We revised our internal procedures to help ensure our promotional activities and public disclosure will meet regulatory
requirements. Nonetheless, any warning or enforcement actions by the FDA could harm our reputation in the market, result in significant fines or have other results that would harm our business.

The continuing efforts of government and third-party payers to contain or reduce the costs of healthcare may adversely affect our revenues.

Sales of our products depend in part upon the availability of reimbursement from third-party payers, such as health administration authorities like
Medicare/Medicaid, managed care providers and private health insurers. Third-party payers are increasingly challenging the price and examining the cost effectiveness of medical products and services,
which may effectively limit physicians' ability to select products and procedures.

In
addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. For example, currently Medicare does not reimburse
self-administered products, which could cover some of our product candidates. Adequate third-party reimbursement may not be

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available
to enable us to maintain price levels sufficient to realize an appropriate return on our investment in a particular product. In addition, we believe government agencies will continue to
propose and pass legislation designed to reduce the cost of healthcare, which could further limit reimbursement for pharmaceuticals, and we anticipate that there will continue to be proposals in the
United States to implement government control over the pricing or profitability of prescription pharmaceuticals, as is currently the case in many foreign markets. If our current and proposed products
are not considered cost-effective, reimbursement to the consumer may not be available or be sufficient to allow us to sell products on a competitive basis. The failure of the government
and third-party payers to provide adequate coverage and reimbursement rates for our product candidates could adversely affect the market acceptance of our products, our competitive position and our
financial performance.

If we are unable to comply with environmental laws and regulations, our business may be harmed.

We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste
products. We currently maintain a supply of biohazardous materials at our facilities. We believe our safety procedures for these materials comply with all applicable environmental laws and
regulations, and we carry insurance coverage we believe is adequate for the size of our business. However, we cannot entirely eliminate the risk of accidental contamination or injury from these
materials. If an accident or environmental discharge occurs, we could be held liable for any resulting damages, which could exceed our insurance coverage and financial resources.

We
currently outsource certain of our research and development programs involving the controlled use of biohazardous materials. We believe our collaborators have in place safety
procedures for these materials that comply with governmental standards. Nevertheless, if an accident does occur, our research and product development will be negatively affected.

Additional Risks Associated with Our Business

If the third-party manufacturers upon whom we rely fail to produce our products in the volumes that we require on a timely basis, or to comply with stringent regulations
applicable to pharmaceutical drug manufacturers, we may face delays in the delivery of, or be unable to meet demand for, our products.

Because we have no manufacturing facilities, we rely on third parties for manufacturing activities related to all of our products. As we develop new products and
increase sales of our existing products, we must establish and maintain relationships with manufacturers to produce and package sufficient supplies of our finished pharmaceutical products, including
Orathecin, Dacogen and Nipent. Reliance on third party manufacturing presents the following risks:



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Any
of these factors could delay clinical trials or commercialization of our product candidates under development, interfere with current sales and entail higher costs. For example, a
failed production
batch of Nipent in the second quarter of 2003 affected our ability to supply Nipent and adversely affected our sales.

Currently
we store the majority of the unpurified, bulk form of Nipent at the manufacturer's location. Improper storage, fire, natural disaster, theft or other conditions at this
location may lead to the loss or destruction of the bulk concentrate. Even if the manufacturer's and our insurance coverage is adequate, such event would inevitably cause delays in distribution and
sales of our products and harm our operating results.

Our business may be harmed if the manufacture of our products is interrupted or discontinued.

We may be unable to maintain our relationships with our third-party manufacturers. If we need to replace or seek new manufacturing arrangements, we may have
difficulty locating and entering into arrangements with qualified contract manufacturers on acceptable terms, if at all. We are aware of only a limited number of companies on a worldwide basis who
operate manufacturing facilities in which our products can be manufactured to our specifications and in compliance with GMPs. It could take several months, or significantly longer, for a new contract
manufacturing facility to obtain FDA approval and to develop substantially equivalent processes for the production of our products. We may not be able to contract with any of these companies on
acceptable terms, if at all. For example, the company that had been purifying Nipent filed for bankruptcy in mid 2001. Shortly thereafter we contracted with a new manufacturer for the purification of
Nipent, and that manufacturer was qualified by the FDA by May 2002. We experienced unusually low inventory levels during the first quarter of 2002, while we were waiting for the new company to
be qualified. Nipent is currently being purified at Hauser Technical Services, Inc. Hauser's parent company and its wholly-owned subsidiaries filed for reorganization under Chapter 11 in
April 2003. To date this filing has not significantly impacted our supply agreement and our ability to manufacture Nipent, although there can be no assurance in this regard.

If our suppliers cannot provide the components we require, our product sales and revenue could be harmed.

We rely on third-party suppliers to provide us with numerous components used in our products under development, including Orathecin and Dacogen. Relying on
third-party suppliers makes us vulnerable to component failures and interruptions in supply, either of which could impair our ability to conduct clinical trials or to ship our products to our
customers on a timely basis. Using third-party suppliers makes it difficult and sometimes impossible for us to maintain quality control, manage inventory and production schedules and control
production costs. Vendor lead times to supply us with ordered components vary significantly and can exceed six months or more. Both now and as we expand our need for manufacturing capacity, we cannot
be sure that our suppliers will furnish us with required components when we need them. These factors could make it difficult for us to effectively and efficiently manufacture our products, and could
adversely impact our clinical trials, product development and sales of our products.

Some
suppliers are our only source for a particular component, which makes us vulnerable to cost increases and supply interruptions. We generally rely on one manufacturer for each
product. We rely on one manufacturer for Nipent, a sole source supplier for the processing of pentostatin, which is used in the manufacturing of Nipent, and a sole source supplier for the ingredient
used in the purification of pentostatin. We also rely on sole source suppliers for mitomycin products and Surface Safe.

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Vendors
may decide to limit or eliminate sales of certain products to the medical industry due to product liability or other concerns. For example, one component used in the purification
of pentostatin is no longer commercially available. In the event one of our sole source suppliers decides not to manufacture the component, goes out of business, or decides to cut off our supply, we
may be unable to locate replacement supply sources, or the sources that we may locate may not provide us with similar reliability or pricing and our business could suffer. If we cannot obtain a
necessary component, we may need to find, test and obtain regulatory approval for a replacement component, produce the component or redesign the related product, which would cause significant delay
and could increase our manufacturing costs. Any of these events could adversely impact our sales and results of operations.

We have limited sales and marketing capabilities and may not be able to successfully commercialize our products.

We currently have limited sales and marketing resources. Although we have approximately 24 sales and marketing personnel focusing on the sale of our products to
hospitals and hospital buying groups, we must expand our sales and marketing organization to support commercialization of our new products. Building up our sales capabilities will require significant
expenditures. We may not succeed in expanding and enhancing our sales and marketing capabilities or have sufficient resources to do so. If we do develop such capabilities, we will compete with other
companies that have experienced and well-funded sales and marketing operations. We may not be able to upgrade our in-house sales expertise which may limit our ability to gain
market acceptance for our products worldwide and generate revenues. If we fail to establish successful sales and marketing capabilities, we will not be able to market or sell our products effectively
and our business, financial condition and results of operations will be materially and adversely affected.

We
intend to enter into strategic partnerships for the commercialization of our products outside of the United States. However, we may not be able to negotiate acceptable arrangements
with partners, if at all. Moreover, such arrangements may involve sharing of profits from sales, requirements to relinquish certain of our rights to our products or marketing territories and
impositions of other limitations on our operations.

If we are not able to maintain and successfully establish new collaborative and licensing arrangements with third parties, our product development and business will be harmed.

Our business model is based on establishing collaborative relationships with other parties both to license compounds upon which our products and technologies are
based and to manufacture our products or our collaborators' products. It is critical that we gain access to compounds and technologies to license for further development. For example, we licensed the
exclusive worldwide royalty-bearing rights to Orathecin from Stehlin. Due to the expense of the drug approval process we must have relationships with established pharmaceutical companies to offset
some of our development costs in exchange for a combination of development, marketing and distribution rights.

From
time to time we enter into discussions with various companies regarding the establishment of new collaborations. If we are not successful in establishing new partners for our
product candidates, we may not be able to pursue further development of such product candidates and/or may have to reduce or cease our current development programs, which would materially harm our
business. Even if we are successful in establishing new collaborations, they are subject to numerous risks and uncertainties including:



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In
addition, our collaborators may undergo business combinations, which could have the effect of making a collaboration with us less attractive to them for a number of reasons. For
example, if an existing collaborator purchases a company that is one of our competitors, that company may be less willing to continue its collaboration with us. A company that has a strategy of
purchasing companies with attractive technologies might have less incentive to enter into a collaboration agreement with us. Moreover, disputes may arise with respect to the ownership of rights to any
technology or products developed with any current or future collaborator. Lengthy negotiations with potential collaborators or disagreements between us and our collaborators may lead to delays in or
termination of the research, development or commercialization of product candidates or result in time consuming and expensive litigation or arbitration.

Our collaborative relationships with third parties could cause us to expend significant funds on development costs with no assurance of financial return.

From time to time we enter into collaborative relationships with third parties to co-develop and market products. For example, we entered into an
agreement with Peregrine Pharmaceuticals in February 2001, pursuant to which we licensed a drug-targeting technology known as Vascular Targeting Agent, which is a proprietary
platform designed to specifically target a tumor's blood supply and subsequently destroy the tumor with various attached therapeutic agents. The licensed technology is specifically related to VEGF.
Under the agreement, we made an up-front equity investment in Peregrine of $600,000 and will be obligated to make subsequent milestone payments that could ultimately total
$8.25 million. In addition, we will pay royalties to Peregrine based on the net revenues of any drugs we commercialize using the VEGF technology.

These
relationships require substantial financial commitments from us, and at the same time the product developments are subject to the same regulatory requirements, risks and
uncertainties associated with the development of our other product candidates. The compounds that are the subject of these collaborative agreements may prove to be ineffective, may fail to receive
regulatory approvals, may be unprotectable by patents or other intellectual property rights, or may not be otherwise commercially viable. If these collaborative relationships are not successful, our
product developments will be adversely affected, and our investments and efforts devoted to the product developments will be wasted.

The termination of our Orathecin-related agreements with Abbott may negatively impact our business and collaborative relationships.

In December 1999, we entered into agreements with Abbott Laboratories pursuant to which Abbott would market and distribute Orathecin, provide significant
milestone payments and invest in shares of our common stock. The Orathecin related agreements with Abbott were terminated by the parties in March 2002. As a result of the termination of the
agreements, we no longer have the opportunity to receive future milestone payments, equity investments and royalty payments from Abbott (in the aggregate amount of up to $52.5 million).
Moreover, we no longer have access to Abbott's worldwide sales capability. The termination of the agreements may have been perceived negatively by other potential partners and may negatively impact
our ability to establish future collaboration relationships with other pharmaceutical companies.

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Our ability to protect our intellectual property rights will be critically important to the success of our business, and we may not be able to protect these rights in the
United States or abroad.

The success of our operations depends in part on our ability to obtain patents, protect trade secrets, operate without infringing the proprietary rights of others
and enforce our proprietary rights against accused infringers.

We
actively pursue a policy of seeking patent protection when applicable for our proprietary products and technologies, whether they are developed in-house or acquired from
third parties. We attempt to protect our intellectual property position by filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that
are important to the development of our business. To date, we have acquired licenses to or assignments of over 40 U.S. patents covering various aspects of our proprietary drugs and technologies,
including 34 patents for various aspects of Orathecin and related products, five patents under our Nipent product portfolio, although none covers the use of Nipent for the treatment of patients with
hairy cell leukemia, five patents for our paclitaxel related products, one patent for Dacogen used in combination with an anti-neoplastic agent for the treatment of cancer, and two patents
for our Surface Safe product. These issued United States patents will begin to expire in October 2012. We have been granted patents and have received patent licenses relating to our proprietary
formulation technology, non-oncology and Partaject technologies, among which at least five patents are issued or licensed to us. In addition, we are prosecuting a number of patent
applications for drug candidates that we are not actively developing at this time.

We
also have patents, licenses to patents and pending patent applications in Europe, Australia, Japan, Canada, Mexico and New Zealand, among other countries. In addition, we have patent
applications pending in China, Hungary and Israel. Limitations on patent protection, and the differences in what constitutes patentable subject matter, may limit the protection we have on patents
issued or licensed to us in these countries. In addition, laws of foreign countries may not protect our intellectual property to the same extent as would laws in the United States. To minimize our
costs and expenses and to maintain effective protection, we focus our patent and licensing activities within the European Union, Canada and Japan. In determining whether or not to seek patent
protection or to license any patent in a foreign country, we weigh the relevant costs and benefits, and consider, among other things, the market potential and profitability, the scope of patent
protection afforded by the law of the jurisdiction and its enforceability, and the nature of terms with any potential licensees. Failure to obtain adequate patent protection for our proprietary drugs
and technology would impair our ability to be commercially competitive in these markets.

The
pharmaceutical industry is characterized by a large number of patent filings involving complex legal and factual questions, and therefore we cannot predict with certainty whether our
patents will be enforced effectively. Competitors may have filed applications for, or been issued patents on, products or processes that compete with or are similar to ours. We may not be aware of all
of the patents potentially adverse to our interests which may have been issued to others. In addition, third parties may challenge, invalidate or circumvent any of our patents. Thus, any patents that
we own or license from third parties may not provide adequate protection against competitors, if at all. Our pending patent applications and those we may file in the future, or those we may license
from third parties, may not result in patents being issued with adequate claim scope, if at all.

In
addition to pursuing patent protection in appropriate instances, we also rely on trade secret protection or regulatory marketing exclusivity for unpatented proprietary technology.
However, trade secrets are difficult to protect. Our trade secrets or those of our collaborators may become known or may be independently discovered by others.

In
the pharmaceutical industry there has been, and we believe that there will continue to be, significant litigation regarding patent and other intellectual property rights. Claims may
be brought

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against
us in the future based on patents held by others. These persons could bring legal actions against us claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the
affected product. If we become involved in litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If a lawsuit against us is successful, in
addition to any potential liability for damages, we could be required to obtain a license to continue to manufacture or market the affected product. We cannot assure you that we would prevail in a
lawsuit filed against us or that we could obtain any licenses required under any patents on acceptable terms, if at all.

Our
proprietary products are dependent upon compliance with numerous licenses and agreements. These licenses and agreements require us to make royalty and other payments, reasonably
exploit the
underlying technology of the applicable patents, and comply with regulatory filings. If we fail to comply with these licenses and agreements, we could lose the underlying rights to one or more of
these potential products, which would adversely affect our product development and harm our business.

If we fail to compete effectively against other pharmaceutical companies, our business will suffer.

The pharmaceutical industry in general and the oncology sector in particular is highly competitive and subject to significant and rapid technological change. Our
competitors and probable competitors include companies such as Aventis SG, Berlex Laboratories, Bristol-Myers Squibb Company, Eli Lilly & Co., GlaxoSmithKline, Novartis AG, Pfizer, Pharmion
Corp. and others.

Many
of our competitors and research institutions are addressing the same diseases and disease indications and working on products to treat such diseases as we are, and have
substantially greater financial, research and development, manufacturing and marketing experience and resources than we do. Some of our competitors have received regulatory approval of, or are
developing or testing product candidates that compete directly with, our product candidates. For example, while we received orphan drug status for Orathecin and there is currently no competitor in the
oral delivery market for the treatment of pancreatic cancer, there are approved drugs for the treatment of pancreatic cancer, including gemcitabine by Eli Lilly. In addition, Berlex Laboratories'
fludarabine competes with Nipent in the leukemia market, and Dacogen faces potential competition from Pharmion's azacitidine, if approved by the FDA.

Many
of these competitors have significantly greater experience than we do in developing products, undertaking pre-clinical testing and clinical trials, obtaining FDA and
other regulatory approvals, and manufacturing and marketing products. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing products before
we do. If we commence sales of our product candidates, we will be competing against companies with greater marketing expertise and manufacturing capabilities, areas in which we have limited or no
experience.

We
also face intense competition from other companies for collaborative relationships, for establishing relationships with academic and research institutions, and for licenses to
proprietary technology.

Our
competitive positions in our generic drugs are uncertain and subject to risks. The market for generic drugs, including the pricing for generic drugs, is extremely competitive. As a
result, unless our generic drugs are the first or among the initial few to launch, there is a high risk that our products would not gain meaningful market share, or we would not be able to maintain
our price and continue the product line. Moreover, marketing of generic drugs is also subject to regulatory approval, and if we were not able to obtain such approval before our competitors, we would
lose our competitive advantage. Failure to maintain our competitive position could have a material adverse effect on our business and results of operations.

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The pharmaceutical industry in general and the oncology sector in particular is subject to significant and rapid technological change. Developments by competitors may render
our product candidates or technologies obsolete or non-competitive.

Our competitors may succeed in developing technologies or products that are more effective than ours. Additionally, our products that are under patent protection
face intense competition from competitors' proprietary products. This competition may increase as new products enter the market.

A
number of our competitors have substantially more capital, research and development, regulatory, manufacturing, marketing, human and other resources and experience than we have. As a
result, our competitors may:



We
will also face increasing competition from lower-cost generic products after patents on our proprietary products expire. Loss of patent protection typically leads to a
rapid decline in sales for that product and could affect our future results. As new products enter the market, our products may become obsolete or our competitors' products may be more effective or
more effectively marketed and sold than our products. Technological advances, competitive forces and loss of intellectual property protection rights for our products may render our products obsolete.

We are developing products based upon compounds that may be covered by patents held by third parties that are expected to expire or already expired. These compounds may also be
the subject of method, formulation, and manufacturing process patents held by third parties. If these patents do not expire as anticipated or are expanded in scope, we will not be able to develop our
products as planned.

We developed, or are in the process of developing, and are planning to market several generic and proprietary formulation products based on existing compounds.
Specifically, with respect to our generic products, we received approval of an Abbreviated New Drug Application ("ANDA"), for our generic mitomycin for solid tumors, and daunorubicin for a variety of
acute leukemias, and have filed an ANDA for our generic paclitaxel.

Our
proprietary formulation technology is a platform technology that employs the use of an inert chemical excipient, cyclodextrin, combined with a drug. Most anti-cancer
drugs are cytotoxic, and most must be administered intravenously. If a vein is missed on injection, the drug can leak to surrounding tissue, causing ulceration that sometimes requires plastic surgery
to correct. Our proprietary formulation technology is designed to "shield" the drug from the injection site, thus providing the patient protection from tissue ulceration. This technology may increase
the relative solubility of hard-to-dissolve anti-cancer drugs, hence increasing its stability or shelf life. However, each of these benefits must be supported by
appropriate data and approved by the FDA before we can make any claim in this regard. Our first product utilizing our proprietary formulation technology, a formulation of generic mitomycin, was
approved by the FDA in November 2002 as Mitozytrex (mitomycin for injection) for use in the therapy of disseminated adenocarcinoma of the stomach or pancreas in proven combinations with other
approved chemotherapeutic agents and as palliative treatment when other modalities have failed. We cannot promote Mitozytrex as providing any injection site ulceration protection, nor can we promote
any increased stability, solubility or shelf life extension, as compared to generic mitomycin. We would be required to develop and submit additional data to the FDA and receive FDA approval before we
could make these claims.

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Through
March 31, 2004, we have spent approximately $6.4 million on developing and marketing our generic and proprietary formulation products. We have completed our
pre-commercial investment in developing Mitozytrex, and as of now we have not committed to an internal budget for additional proprietary formulation development programs. In addition, we
have no further generic drug development commitments, as we are focusing on developing our proprietary drug candidates.

We
do not hold any intellectual property rights as to the underlying compounds on which our generic or proprietary formulation products are based. We may in the future evaluate the
generic drug market and develop additional generic or proprietary products based on these compounds, which may also be the subject of method, formulation and manufacturing process patents held by
third parties. Our development of generic or proprietary products may also take place prior to, but in anticipation of, the expected expiration of existing patent protection for drugs developed by
third parties. However, if existing patent protection on such products is otherwise maintained, extended or expanded, it is unlikely that we will be able to market our own generic or proprietary
formulation products without obtaining a license from the patent owner, which may not be available on commercially acceptable terms, if at all.

We may be subject to product liability lawsuits and our insurance may be inadequate to cover damages.

Clinical trials and commercial use of our current and potential products may expose us to liability claims from the use or sale of these products. Consumers,
healthcare providers, pharmaceutical companies and others selling such products might make claims of this kind. We may experience financial losses in the future due to product liability claims. We
have obtained limited product liability insurance coverage for our products and clinical trials, under which the coverage limits are $10.0 million per occurrence and $10.0 million in the
aggregate. We do not know whether this coverage will be adequate to protect us in the event of a claim. We may not be able to obtain or maintain insurance coverage in the future at a reasonable cost
or in sufficient amounts to protect us against losses. If third parties bring a successful product liability claim or series of claims against us for uninsured liabilities or in excess of insured
liabilities, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and our business and results of operations will be adversely
affected.

We are transitioning new members of the management team into the Company and if the transition is not smooth, our business will be disrupted. Further, if we are unable to
attract and retain additional, highly skilled personnel required for the expansion of our activities, our business will suffer.

We have recently undergone changes in our senior management. Dr. Joseph Rubinfeld, who served as our president and chief executive officer since 1991,
retired from this position on December 31, 2003, although he remains on our board of directors and serves as our chief scientist. Dr. James Manuso, who has served on our board of
directors since 2001, was appointed to the position of president and chief executive officer effective January 1, 2004. In addition, Edward Jacobs was recently appointed to the position of
chief operating officer, and Michael Molkentin was appointed to fill the position of chief
financial officer. Also, Craig S. Rosenfeld recently resigned from his position as our senior vice president, chief scientific officer. Changes in our senior management may be disruptive to our
business and may adversely affect our operations.

Further,
our success is dependent on key personnel, including members of our senior management and scientific staff. If any of our executive officers decides to leave and we cannot
locate a qualified replacement in time to allow a smooth transition, our business operation may be adversely affected. To successfully expand our operations, we will need to attract and retain
additional highly skilled individuals, particularly in the areas of sales, marketing, clinical administration, manufacturing and finance. We compete with other companies for the services of existing
and potential employees,

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however
to the extent these employees favor larger, more established employers, we may be at a disadvantage.

Earthquake or other natural or man-made disasters and business interruptions could adversely affect our business.

Our operations are vulnerable to interruption by fire, power loss, floods, telecommunications failure and other events beyond our control. In addition, our
operations are susceptible to disruption as a result of natural disasters such as earthquakes. So far we have never experienced any significant disruption of our operations as a result of earthquakes
or other natural disasters. Although we have a contingency recovery plan, any significant business interruption could cause delays in our drug development and sales and harm our business.

Provisions in our certificate of incorporation, bylaws and applicable Delaware law may prevent or discourage third parties or stockholders from attempting to replace our
management.

Anti-takeover provisions of our certificate of incorporation and bylaws make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. These provisions include:



Our
bylaws establish procedures, including notice procedures, with regard to the nomination, other than by or at the direction of our board of directors, of candidates for election as
directors or for stockholder proposals to be submitted at stockholder meetings.

We
are also subject to Section 203 of the Delaware General Corporation Law, an anti-takeover provision. In general, Section 203 of the Delaware General
Corporation Law prevents a stockholder owning 15 percent or more of a corporation's outstanding voting stock from engaging in business combinations with a Delaware corporation for three years
following the date the stockholder acquired 15 percent or more of a corporation's outstanding voting stock. This restriction is subject to exceptions, including the approval of the board of
directors and of the holders of at least two-thirds of the outstanding shares of voting stock not owned by the interested stockholder.

We
believe that the benefits of increased protection of our potential ability to negotiate with the proponents of unfriendly or unsolicited proposals to acquire or restructure us
outweigh the disadvantages of discouraging those proposals because, among other things, negotiation of those proposals could result in an improvement of their terms. Nevertheless, these provisions are
expected to discourage different types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of our company to first negotiate with us, and
may have the effect of preventing or discouraging third parties or stockholders from attempting to replace our management.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Due to the short-term nature of our interest bearing assets, which consist primarily of certificates of deposit, U.S. corporate obligations, and U.S.
government obligations, we believe that our exposure to interest rate market risk would not significantly affect our operations.

Our
investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio. Our marketable
securities portfolio is primarily invested in corporate debt securities with an average maturity of under one year and a

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minimum
investment grade rating of A or A-1 or better to minimize credit risk. Although changes in interest rates may affect the fair value of the marketable securities portfolio and cause
unrealized gains or losses, such gains or losses would not be realized unless the investments were to be sold prior to maturity.

As
part of our June 2003 convertible debt transaction, we issued to the note holders warrants to purchase 2,634,211 shares of common stock of AVI BioPharma at $5.00 per share.
These warrants are considered a derivative and were valued on the balance sheet at $10.1 million using the Black-Scholes method on June 24, 2003. On March 31, 2004, the value of
the derivative had declined to $3.3 million. As the fair value of the common stock of AVI has fluctuated significantly in the past two years, the valuation of the derivative may have a
significant impact on our results of operations.

We
operate primarily in the United States and all product sales are denominated in U.S. dollars. Accordingly, we do not have any exposure to foreign currency rate fluctuations.

Item 4. Controls And Procedures

Our
management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There
was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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SUPERGEN, INC.  PART IIOTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

| |  | Exhibit
No. |  | Description of Document                                                                                                                                                       
| |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.1*       |  | Purchase and Sale Agreement dated February 17, 2004 between Pfizer Inc. and SuperGen, Inc.                                                                                    
| |  | 31.1        |  | Certification of Chief Executive Officer under Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                               
| |  | 31.2        |  | Certification of Chief Financial Officer under Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                               
| |  | 32.1        |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002

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SIGNATURES

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

|      |  |              |  | SUPERGEN, INC.
|----- |  | ------------ |  | --------------
|Date: |  | May 10, 2004 |  | By:           
|      |  |              |  | By:           

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