If you started one degree and did not finish it, how do you put that on the C.V. ? Do I put it:
2004 One Semester in MBA program???
I won't finish, and the potential supervisor for my PhD is aware and does not seem to care, but still. Anyone have any idea on how to make that look smooth?

Something like this --- "Started MBA but later transferred to PhD."

But This is for the PhD. So I can't very well say I transferred to PhD until they offer me the spot. I'm just in prelim discussion now.
Otherwise that is a great idea and I think I'll definitely use it in the future- so thanks. It's a little strange to not finish a degree, but I had a good reason, and no one has questioned it as I had such a strong academic record..

if you had a good reason, then state it on your CV. if its too personal, say 'due to exceptional circumstances for which I am willing to provide evidence..bla bla bla.' if it was such a good reason, i wonder why you would have a problem putting it down. are you sure it was a good reason, such as a medical reason, financial circumstances, tragic happening? past records don't hold a lot of water. so be prepared for a good explanation as most unis will judge you on your latest achievement.

Yes, it was a good reason.
I left because the program lost several faculty in my key area- due to retirement and unexpected death (yikes). I was left with no one to advise me. I took a great job offer, getting unique experiences. The loss of instructors is well known, so my reason hasn't been questioned. My potential supervisor just emailed me telling me he's "Thrilled at the prospect of working with someone with your experience"
It's sort of a non-issue, as the supervisor wants me. But I want to be appropriate on the C.V.

How about...."Started MBA but considering transfer to PhD."

Ya its depend upon the CV for the purpose u r goin to use. If it demands some management skill, then definitely u can add ur unfinished MBA degree but tactically, coz one question may arise for what reason u left the MBA and joined PhD....

You can list it as X term, 1922 list the coursework you completed and then: Withdrew in (good, excellent, passing) academic standing due to personal reasons. Since the committee already seems to know, no need to "provide evidence (I mean it isn't a detective show!!!)
Since the professor is ready to work with you, you could probably put almost anything there and not worry about it.

evidence is always vital unlike what people like George think. it's the only way for the prospective supervisor to tell whether your reasons are honest. I like the mm idea tho...but with your reasons i don't see why you are worried at all. Get a letter from a referee saying that indeed that is what happened- you never know when you will need to explain the gap in ur CV.