SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

(Mark One)

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934

                   For the fiscal year ended December 31, 1996
                                       or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934

              For the transition period from ________ to _________.

                         Commission File Number 0-21863

                               EPIX Medical, Inc.
             (Exact name of Registrant as Specified in its Charter)

           Delaware                                        04-3030815
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

         71 Rogers Street
      Cambridge, Massachusetts                                      02142
----------------------------------------                    --------------------
(Address of principal executive offices)                              (Zip Code)

       Registrant's telephone number, including area code: (617) 499-1400

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, $.01 par value per share
                     --------------------------------------
                                (Title of Class)

     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     No  X
                                             ---     ---
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     The aggregate market value, based upon the closing sale price of the shares
as reported by the Nasdaq National Market, of voting stock held by
non-affiliates (without admitting that any person whose shares are not included
in such calculation is an affiliate) at March 1, 1997 was $28,309,277.

     As of March 1, 1997, 8,628,739 shares of the registrant's Common Stock,
$.01 par value per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders to be held on June 20, 1997 are incorporated by
reference into Part III of this Report on Form 10-K.


                                       1
<PAGE>

                                     PART I

ITEM 1. BUSINESS DESCRIPTION

General

      EPIX Medical, Inc. ("EPIX" or the "Company") is developing targeted
contrast agents both to improve the capability and expand the use of magnetic
resonance imaging ("MRI") as a diagnostic tool for a variety of diseases. The
Company was incorporated in Delaware in 1988 and commenced operations in 1992.
The Company changed its name from Metasyn, Inc. in November 1996.


Background

      The Company is developing targeted contrast agents both to improve the
capability and expand the use of MRI as a diagnostic tool for a variety of
diseases. Contrast agents that are targeted or specific are designed to bind to
a particular organ or organ system. The Company's principal product under
development, MS-325, is an injectable vascular contrast agent designed for
multiple vascular imaging indications, including coronary artery disease("CAD")
and peripheral vascular disease ("PVD"). The Company believes that MS-325 will
significantly enhance the quality of images and provide physicians with a
clinically superior, noninvasive (i.e., no more invasive than a peripheral
intravenous injection ("I.V.")) and cost-effective method for diagnosing
cardiovascular disease. The Company further believes that MS-325 will simplify
the diagnostic pathway for a number of cardiovascular diseases and in many cases
replace highly invasive (i.e., more invasive than a peripheral I.V. up to and
including a surgical procedure) and expensive X-ray angiography, which is
currently considered the definitive diagnostic exam for assessing cardiovascular
disease. The Company is presently conducting Phase I clinical trials of MS-325,
and 35 subjects have received MS-325 to date with no clinically significant
adverse effects reported. The Company has entered into strategic alliances with
Mallinckrodt Group Inc. ("Mallinckrodt") and Daiichi Radioisotope Laboratories,
Ltd. ("Daiichi") for the development and commercialization worldwide of MS-325
and other vascular contrast agents. MS-325 is a magnetically active, injectable
small molecule. It binds to the blood protein albumin, remains at high
concentrations in the bloodstream throughout the MRI exam, and is designed to be
excreted safely through the kidneys over time. Because of its affinity for
albumin, MS-325 provides the image acquisition time and signal strength needed
to obtain a high contrast, high resolution image of the cardiovascular system.
The Company is also investigating additional imaging applications for MS-325,
including tumor imaging. The Company believes that its proprietary technology
platform will enable it to create additional contrast agents that target
particular tissue and fluid types. Research efforts are ongoing in the areas of
thrombosis (blood clots) and functional brain imaging.


Magnetic Resonance Imaging Background

      In MRI, images are obtained by placing a portion of the patient's body in
a magnetic field and applying safe, low-energy radio waves. The different organs
and tissues in the body respond uniquely to the MRI's electromagnetic field and
these responses are then scanned 



                                       2
<PAGE>

and converted into a three-dimensional image. MRI can easily provide high
contrast, high resolution images of anatomy deep inside the body.

      The use of MRI, which was developed in the 1970s, has grown steadily over
the past decade due to declining costs, increased clinical effectiveness,
reduced exam times and more comprehensive coverage by third-party payors. As an
example, a standard MRI brain exam, which in 1985 required 60 minutes and cost
approximately $1,500, now takes only 30 minutes, costs approximately half as
much and can identify tumors that are over 50% smaller than those detectable in
1985. The installed base of MRI scanners in the United States grew from fewer
than 400 scanners in 1985 to an estimated 3,900 in 1995, during which year there
were an estimated 8.5 million MRI exams performed.

Underlying MRI's economic and clinical advancement is the consistent and rapid
technological progress achieved by MRI equipment manufacturers such as General
Electric, Siemens and Philips. Over the past 10 years, MRI equipment
manufacturers have achieved significant improvements in both MRI hardware and
software while reducing the price of a new machine by more than 35%. The primary
hardware components in an MRI scanner are the magnet, gradients, radio frequency
coils and computer processors and memory. Since 1985, gradients have quadrupled
in speed and power, and enhancements in radio frequency coils have improved the
signal-to-noise ratio by over 100%. Improvements in computer processors, memory
and software, including new techniques to improve scanning, image processing and
motion compensation, have been even more dramatic.

      Images obtained in certain applications of MRI can be enhanced through the
use of contrast agents. Contrast agents are injected into a vein in the
patient's arm prior to a scan and are designed to amplify the contrast between
various tissues, organs and anatomic structures. Currently available MRI
contrast agents are primarily non-specific gadolinium compounds which diffuse
throughout the body following injection. They are effective at enhancing images
of certain tissue types, primarily in the brain and spine, but lack the efficacy
to be clinically useful for many vascular applications. Non-specific contrast
agents are used in an estimated 25% of MRI exams and their usage has grown
approximately 40% over the last four years.

      MRI has been established as the modality of choice for a broad range of
indications, including brain tumors, many spinal disorders and knee injuries.
Nevertheless, MRI has been used sparingly as an imaging modality for the
vascular system due to its limited ability to image arteries and veins in
patients. In particular, cardiac motion currently precludes MRI of the coronary
arteries. Several leading MRI manufactures, academic centers and others are
developing hardware and software solutions to the problem of cardiac motion. In
both CAD and PVD, clinically significant magnetic resonance images of the
arterial anatomy are also limited by MRI's inability to provide sufficient
contrast between the arteries and the surrounding tissues. Further, MRI studies
using the existing non-specific contrast agents are limited by their rapid
diffusion out of the vascular system. Consequently, many experts believe MRI
contrast agents which remain in the vascular system for extended periods of time
will be necessary to obtain sufficient contrast for clinically relevant vascular
images.



The EPIX Solution

      The Company believes that MS-325, together with the anticipated hardware
and software solutions to the cardiac motion problem, will enable widespread
clinical use of MRI to diagnose CAD. The Company also believes that MS-325 will
significantly expand the use of currently available MRI equipment in diagnosing
PVD. MS-325 has been designed to be used 



                                       3
<PAGE>

with MRI to provide physicians with a clinically superior, noninvasive and
cost-effective diagnostic pathway by eliminating many X-ray angiograms and
ancillary tests.


MS-325: Cardiology Indications

      Background. It is estimated that approximately 500,000 people in the
United States die of CAD each year, making it the leading cause of death. CAD is
characterized by the accumulation of plaque on the arterial walls, leading to a
disruption in blood flow to the heart muscle. This interruption of blood to the
heart can cause ischemia (lack of oxygen) or infarction (death of heart tissue)
and result in significant morbidity or death. In order to diagnose a patient who
exhibits apparent symptoms of CAD, prescribe an effective treatment and monitor
the results of intervention, a physician often requires information on the
anatomy and function of the heart and, specifically, the coronary arteries. Due,
in part, to the lack of cost-effective, noninvasive, comprehensive diagnostic
imaging procedures, diagnosis of CAD is currently a complex and expensive
process. Based on independent sources, the Company believes that in 1995 over
six million patients in the United States underwent over 11 million various
diagnostic tests for the diagnosis of CAD at an estimated cost of approximately
$7.0 billion. The Company believes that MRI-based cardiac evaluations using
MS-325 would simplify the process of diagnosing CAD, significantly improving
patient outcomes and lowering total medical costs.

      Traditional Approach to CAD Diagnosis. The current diagnostic process for
CAD is complex, expensive and can involve multiple, often inconclusive, tests.
While the specific diagnostic pathway may vary for any given patient, several
appointments for multiple diagnostic exams may be necessary prior to formulation
of a treatment plan. Figure 1 below outlines the traditional approach to CAD
diagnosis.

       Figure 1 - Coronary Artery Disease: Traditional diagnostic pathway
       
--------------------------------------------------------------------------------



<TABLE>
<S>            <C>                    <C>               <C>               <C>
                7% Acute/Critical                        60% Drug Therapy
              ----   Ischemia                           ----  or Rule Out
              |                                         |         CAD
              |                       Traditional       |
  Initial     |                       Non-Invasive      |
Chest Pain    |                         Imaging         |                  50%    Drug   
  Workup      |                       o Stress echo-    |                 ---- Therapy or
              |                         cardiogram      |                 |    No Therapy
o EKG         |    Indeterminate                        |                 |
o Exercise    |51%  Non-acute         o Nuclear stress  |                 |27%
  stress test ----  Myocardial   ----   perfusion study |    Coronary     ----  PTCA
              |     Infarction                          |40%  X-ray       |
6.75 Million  |42%                       3.44 Million   ---- Angiography  |
  Patients    ---- Rule Out CAD             Patients                      |23%
                                                             1.38 Million ----  CABG
                                                               Patients   

</TABLE>

--------------------------------------------------------------------------------

      Note: Percentages are estimates derived by the Company from both data
      compiled by the Company and data obtained from independent sources. Actual
      diagnostic outcomes could vary depending on numerous factors, including
      geographical location of the patient, type of medical setting in which the
      tests are administered and physician practice patterns.

      An estimated 6.75 million patients enter the CAD diagnostic pathway in the
United States after experiencing chest pain or shortness of breath. An
electrocardiogram ("EKG") is often performed at this stage. Approximately 7% of
these patients present with severe pain and acute or critical ischemia and are
immediately triaged for treatment. For the remaining 93%, the physician
completes a work-up, history and physical exam to determine whether the patient
exhibits symptoms consistent with CAD and has any of the risk factors for CAD,
such as smoking, high cholesterol, family history, excess weight, diabetes or
high blood pressure. A patient with an abnormal EKG or significant risk factors
will likely be referred to a cardiologist for further testing. The cardiologist
will typically continue the work-up with an exercise stress test. Based on EKG
and exercise stress test results, CAD is ruled out for approximately 42% of all
patients entering the diagnostic pathway. For the remaining 51% of all patients,
results of the exercise stress test are indeterminate and the cardiologist
generally will perform a stress echocardiogram and/or a nuclear stress perfusion
study. Approximately 60% of patients undergoing these tests receive either drug
therapy or no further treatment. For the remaining 40% of patients, for whom the
stress echocardiogram or a nuclear stress perfusion study is positive or
indeterminate, a coronary X-ray angiogram is often prescribed. Approximately 50%
of the patients who receive coronary X-ray angiograms are either treated 



                                       4
<PAGE>

with drugs or require no therapy. If the coronary X-ray angiogram indicates
surgically correctable disease, the patient will be scheduled for a percutaneous
transluminal coronary angioplasty ("PTCA"), a procedure designed to enlarge
partially blocked arteries, or referred to a cardiac surgeon for a coronary
artery bypass graft ("CABG"), a surgical procedure designed to circumvent a
blocked or partially blocked artery or arteries with a vascular graft.

As indicated above, the following tests are generally part of the traditional
diagnostic pathway for CAD:

   o  EKGs measure the electrical potential of the heart using several surface
      electrodes. Varying patterns of monitored electrical activity may indicate
      heart abnormalities, including ischemic heart disease or a previous heart
      attack.

   o  Exercise stress tests measure a patient's ability to exercise without
      chest pain. For certain patients with extreme results, the test can be
      used to confirm or exclude the presence of blockages which significantly
      decrease blood flow and sometimes to prescribe drug therapy. However, for
      most patients the test is inconclusive. The test provides no information
      on the anatomy of the coronary arteries.

   o  Stress echocardiograms use transthoracic ultrasound to measure motion of
      the walls of the heart under physical or pharmacological stress. In most
      cases, a lack of blood flow to a particular area of the heart will be
      reflected in atypical motion of the heart wall. The test is noninvasive
      and costs between $300 and $900. While a normal stress echocardiogram
      usually eliminates the possibility of blockages which significantly
      decrease blood flow, the test is often inconclusive and provides no
      information on the anatomy of the coronary arteries. Over 800,000 stress
      echocardiograms were performed in the United States in 1995 at an
      estimated cost of over $250 million.

   o  Nuclear stress perfusion studies, which measure the flow of blood to
      cardiac tissue, can be used either as the critical diagnostic test prior
      to X-ray angiography or to confirm the impact on blood flow of an
      intermediate blockage identified through X-ray angiography. These tests
      are noninvasive, use small quantities of ionizing radiation and cost
      between $600 and $1,400. A patient is injected with a radiopharmaceutical
      and then a gamma camera is used to detect uptake of the agent in the heart
      muscle. A deficiency in blood flow to particular regions of the heart is
      shown on the resultant images. While the test can identify the effects of
      CAD, it provides no information on the anatomy of the coronary arteries
      and it cannot determine the location of blockages. Approximately 2.7
      million nuclear stress perfusion studies were conducted in the United
      States in 1995 at an estimated cost of $1.9 billion.

   o  Coronary X-ray angiography is currently considered by many to be the
      definitive diagnostic exam for imaging the coronary artery anatomy. It
      uses conventional X-ray technology enhanced with iodinated contrast media.
      Coronary X-ray angiography is highly invasive and costs between $2,000 and
      $6,000 per procedure. The procedure requires an interventional
      cardiologist to puncture the femoral artery in the patient's groin area
      and feed a catheter up into the patient's heart. During X-ray imaging, up
      to 100 milliliters of contrast media are injected into the catheter,
      effectively replacing blood flow in the heart and associated arteries for
      approximately two seconds. This cardiac catheterization must be performed
      in a surgical setting and requires patient monitoring for at least six
      hours after the procedure.

      Approximately 5% of patients undergoing a coronary X-ray angiogram
experience serious side effects, including renal failure, limb loss and death,
which may be caused by both the insertion of the catheter and the high dosage of
iodinated radio-opaque dye. In addition, 



                                       5
<PAGE>

coronary X-ray angiography does not always provide sufficient information for
clinical decision-making. While the procedure identifies the location of
arterial blockages, in many cases it cannot conclusively determine their impact
on blood flow. Therefore, for many blockages, a nuclear stress perfusion study
must be performed to enable the physician to make a definitive diagnosis. Due to
the expensive nature of coronary X-ray angiography, its high risk of
complications, and the fact that approximately 50% of the patients undergoing
coronary X-ray angiograms ultimately are diagnosed as having conditions that do
not warrant invasive therapy, physicians employ a battery of tests to triage
patients in an effort to avoid this procedure. However, because a diagnostic
coronary X-ray angiogram is currently the only test that can image the coronary
artery anatomy, approximately 1.4 million such procedures were performed in the
United States in 1995 at an approximate cost of $3.8 billion.

      The EPIX Approach to CAD Diagnosis. The Company believes that MS-325,
coupled with anticipated advances in software and hardware for MRI equipment,
will enable physicians to use cardiac MRI to perform a noninvasive, integrated
cardiac exam for the diagnosis of CAD. Such a procedure is designed to provide
information on coronary artery anatomy, including location of arterial
blockages, perfusion and cardiac function, in one sitting early in the
diagnostic pathway. Because the procedure is intended to provide physicians with
more comprehensive diagnostic information at an earlier stage of the diagnostic
pathway, physicians will be able to make a more informed diagnosis, and arrange
for appropriate patient treatment, sooner than would otherwise be possible,
thereby achieving better patient outcomes at a lower cost. Although several
leading MRI manufacturers, academic centers and others are developing advanced
hardware and software, there can be no assurance when, or if, these techniques
will enable MS-325 to provide clinically relevant images in cardiac indications
currently being pursued. Figure 2 below outlines the EPIX approach to the
diagnosis of CAD.


           Figure 2 - Coronary Artery Disease: EPIX diagnostic pathway

--------------------------------------------------------------------------------


<TABLE>
<S>            <C>                    <C>               <C>               <C>
                7% Acute/Critical                        80%  Drug Therapy
              ----   Ischemia                           ---- or Rule Out CAD
              |                                         |                 
              |                       EPIX Solution     |
  Initial     |                        MS-325/MRI       |
Chest Pain    |                                         | 9% Coronary
  Workup      |                       o Anatomy         ----  X-ray       ---- CABG
              |                                         |    Angiography  
o EKG         |    Indeterminate      o Perfusion       |                 
o Exercise    |51%  Non-acute                           |    0.31 Million 
  stress test ----  Myocardial   ---- o Function        |      Patients   
              |     Infarction                          |11%              
6.75 Million  |42%                    3.44 Million      ---- PTCA         
  Patients    ---- Rule Out CAD         Patients

</TABLE>

--------------------------------------------------------------------------------


      Note: Percentages are estimates derived by the Company from both data
      compiled by the Company and data obtained from independent sources. Actual
      diagnostic outcomes could vary depending on numerous factors, including
      geographical location of the patient, type of medical setting in which the
      tests are administered and physician practice patterns.

      The Company believes that the use of MS-325 with MRI to perform integrated
cardiac exams will simplify and improve the diagnostic work-up for CAD by
enabling noninvasive cardiologists (approximately 80% of all cardiologists) to
visualize the coronary arteries noninvasively early in the work-up. Under the
EPIX approach for CAD assessment, a patient who has an indeterminate EKG and
exercise stress test would be referred for a noninvasive, integrated cardiac
exam. Unlike the invasive nature of coronary X-ray angiography, the patient
would receive a single injection of MS-325 in a vein in the arm prior to the
exam and then enter the MRI scanner.

      The exam is expected to provide the physician with three-dimensional
anatomic detail of the coronary arteries as well as the perfusion and functional
information currently provided by stress echocardiograms and nuclear stress
perfusion studies. Based on the results of the MS-325-based integrated cardiac
exam, the cardiologist would either prescribe no treatment, prescribe drug
therapy or refer the patient to an interventional cardiologist (i.e., a
cardiologist who performs invasive procedures) for a PTCA or surgical planning
for a CABG. Because the MRI exam using MS-325 is expected to provide all of the
anatomic information currently provided by a coronary X-ray angiogram, the need
for coronary X-ray angiography 



                                       6
<PAGE>

as a diagnostic tool will be reduced. Only in the limited number of cases where
CABG is deemed necessary would the patient be subjected to invasive coronary
X-ray angiography for surgical planning.

      The Company believes that the EPIX simplified diagnostic pathway could
result in significant cost savings to the United States healthcare system for
the diagnosis of CAD. These savings are predicated on providing noninvasive
coronary artery anatomic information earlier in the CAD work-up. In 1995, for
the approximately 3.44 million patients in the United States completing the
traditional diagnostic pathway, the total cost of the diagnostic work-up for CAD
was approximately $5.4 billion. Under the EPIX approach to diagnosis of CAD,
both stress echocardiograms and nuclear stress perfusion studies could be
eliminated. In addition, because an MRI exam with MS-325 is expected to provide
physicians with anatomic information early in the CAD work-up, the Company
believes that half of the patients who undergo coronary X-ray angiography but do
not ultimately require invasive therapy will be able to avoid a coronary X-ray
angiogram. The estimated total cost for the 3.44 million patients completing the
EPIX diagnostic pathway for CAD would be $3.2 billion, yielding approximately
$2.2 billion in savings to the United States healthcare system based on
estimated 1995 procedure costs.


            Figure 3 - Estimated Savings: Traditional CAD diagnostic
                     pathway versus EPIX diagnostic pathway

--------------------------------------------------------------------------------


Traditional

                   60% Drug Therapy
   $500           ----  or Rule Out
                  |         CAD
Traditional       |
Non-Invasive      |
  Imaging         |                  50%    Drug   
o Stress echo-    |                 ---- Therapy or
  cardiogram      |                 |    Rule Out CAD
                  |                 |
o Nuclear stress  |     $2,700      |27%
  perfusion study |    Coronary     ----  PTCA
                  |40%  X-ray       |
                  ---- Angiography  |
                                    |23%
  3.44 Million                      ----  CABG
    Patients              
                     1.38 Million 
                       Patients   

      Estimated Total U.S. Cost = $5.4 billion


--------------------------------------------------------------------------------


--------------------------------------------------------------------------------


EPIX

                   80%  Drug Therapy
                  ---- or Rule Out CAD
   $700           |                 
EPIX Solution     |
 MS-325/MRI       |     $2,700
                  | 9% Coronary
o Anatomy         ----  X-Ray       ---- CABG
                  |    Angiography  
o Perfusion       |                 
                  |    0.31 Million 
o Function        |      Patients   
                  |11%              
3.44 Million      ---- PTCA         
  Patients

   Estimated Total U.S. Cost = $3.2 billion


--------------------------------------------------------------------------------


      Note: Percentages are estimates derived by the Company from both data
      compiled by the Company and data obtained from independent sources. Actual
      diagnostic outcomes could vary depending on numerous factors, including
      geographical location of the patient, type of medical setting in which the
      tests are administered and physician practice patterns.


      Post-Intervention Monitoring and "Relooks." The Company believes that,
after either a PTCA or a CABG, optimal patient management would include
follow-up exams to determine re-forming of blockages ("restenosis") as well as
proper functioning of grafts. However, while it is estimated that approximately
400,000 PTCAs and 500,000 CABGs were performed in the United States in 1995,
only a small proportion of the patients undergoing these procedures received
follow-up coronary X-ray angiography ("relooks"). Due to the risk, discomfort
and expense associated with coronary X-ray angiography, follow-up imaging
currently is limited, which can lead to increased patient management costs and
poorer outcomes due to undiagnosed restenosis and other complications. The
Company believes that the availability of MS-325 may lead to an increase in
follow-up exams using MRI. Furthermore, the Company believes that MS-325 would
enable noninvasive cardiologists to visualize the coronary arteries of the
increasing number of patients who have been treated with thrombolytic therapy
(streptokinase and TPA).

MS-325: Radiology Indications

      Background. PVD affects arteries throughout the body and results in
significant morbidity and mortality. There are approximately 600,000 vascular
operations, 400,000 strokes and 100,000 amputations (primarily related to PVD)
each year in the United States. Similar to CAD, blockage of arteries outside the
heart can lead to ischemia (lack of oxygen) or infarction (death of tissue).
Complications from PVD include pain, limitations in mobility, amputation of the
extremities, hypertension, kidney failure in the case of renal arteries, or
stroke in the case of carotid or cerebral arteries. The need for imaging the
vascular system 



                                       7
<PAGE>

outside the heart extends to many areas of the body, including the carotid
arteries, vessels of the leg, the aorta and pulmonary arteries.

      Traditional Approach to PVD Diagnosis. A patient with PVD may present with
a wide range of symptoms, such as leg pain, gangrene, hypertension, renal
failure, stroke or transient ischemic attack ("TIA"), a brief episode of
cerebral ischemia usually characterized by blurred vision, slurred speech,
numbness or paralysis. The appropriate initial diagnostic tests vary according
to the particular PVD indication. Traditional imaging modalities for diagnosing
PVD, such as ultrasound, nuclear medicine and computer assisted tomography
("CT"), frequently do not provide definitive diagnostic information. For
example, ultrasound and renal nuclear scans have poor image quality, leading to
exams which are frequently indeterminate. CT can be used for certain
radiological applications, but can only image a limited area during each scan
due to the large amounts of potentially toxic X-ray contrast media required.

      With the exception of imaging carotid arteries, MRI has not made a
significant impact on the diagnosis of PVD to date. Non-contrast MRI studies of
the vascular system, which measure blood flow and not anatomy, are often
ineffective when used in patients with disease because of their limitations in
imaging the blood flow associated with PVD, which may be either minimal or
turbulent. Even for the imaging of carotid arteries, where flow-based MRI has
had a substantial clinical impact, the lack of direct anatomic data limits its
ability to provide a quantitative measurement of stenosis required for accurate
diagnosis. MRI studies using existing non-specific contrast agents are limited
by the rapid diffusion of the agents out of the vascular system.

      As with the diagnostic work-up of CAD, a peripheral X-ray angiogram is
generally considered to be the definitive diagnostic exam for radiological
indications. In the work-up of PVD of the lower extremities, for example, the
patient typically presents with leg pain, gangrene or limited mobility. The
surgeon checks the patient's pulse in the ankles and performs two noninvasive
exams, impedance plethysmography and ankle brachial index measurements, which
confirm that the patient has PVD and often localizes the disease within the
limb. An ultrasound exam is sometimes performed at this stage. Peripheral X-ray
angiography is then performed to visualize the extent of the disease and to plan
for surgery. Like coronary X-ray angiograms, peripheral X-ray angiograms are
performed in a surgical setting and involve the puncture of the femoral artery
in the groin area, the placement of a catheter in the artery and the replacement
of blood by X-ray contrast media. While peripheral X-ray angiograms have
slightly lower morbidity rates compared to coronary X-ray angiograms, the risks
are significant with complications, including limb loss and renal failure,
occurring at a rate of 1.7%. The cost of peripheral X-ray angiography is
estimated to range from less than $1,000 to almost $3,000 per procedure. Despite
the drawbacks of peripheral X-ray angiography, approximately 1.9 million of
these procedures were performed in the United States in 1995. Figure 4 below
outlines the traditional diagnostic pathway for various forms of PVD.


     Figure 4 - Peripheral Vascular Disease: Traditional diagnostic pathway

--------------------------------------------------------------------------------

<TABLE>
<S>                         <C>                              <C>              <C>
          Anatomic Area           Current Diagnostic Exams

----------------------                   
Carotid                            Ultrasound              
Artery                ----            MRI              ----|             |
----------------------                                     |             |
                                                           |             |
----------------------                                     |             |
Aorta                 ----            CT                   |             ----   Surgery
----------------------             Ultrasound          ----|             |
                                                           | Peripheral  |
----------------------                                     |   X-ray     |
Renal                          Renal nuclear scan          | Angiography |
Arteries              ----         Ultrasound          ----|             |    Percutaneous
----------------------                                     |             ---- Transluminal
                                                           |             |    Angioplasty
----------------------             Impedance               |             |       (PTA)
Extremities           ----    plethysmography (IPG)        |             |
----------------------      Ankle Brachial Index (ABI) ----|             |
                        |          Ultrasound              
                        |
                        |
                        |
          [GRAPHIC OF HUMAN BODY]

</TABLE>

--------------------------------------------------------------------------------


      The EPIX Approach to PVD Diagnosis. The Company believes that the use of
MS-325 with MRI will simplify and improve the PVD diagnostic pathway by enabling
radiologists to visualize peripheral arteries noninvasively early in the work-up
with resolution sufficient to provide a definitive diagnosis and surgical plan.
Although several available MRI contrast agents also provide high resolution,
they diffuse out of the cardiovascular system rapidly, 



                                       8
<PAGE>

making it possible to obtain detailed anatomic images only over a limited area.
MS-325 is designed to remain in the blood vessels for over an hour providing
sufficient time for detailed images of large portions of the vascular system. By
significantly increasing the contrast of the vascular system and using the MRI
equipment currently in widespread use, the Company believes that MS-325 will
enable MRI to overcome the principal problem that has limited its clinical
effectiveness in diagnosing PVD.

      An MRI exam utilizing MS-325 is intended to provide sufficient anatomic
detail for a definitive diagnosis and the anatomic data necessary for surgical
planning. Unlike peripheral X-ray angiography which, due to its invasive and
painful nature, high cost and risk of complications, is often deferred in favor
of noninvasive, often inconclusive exams, an MRI exam utilizing MS-325 is
intended for use early in the PVD work-up. Phase I clinical trials to date have
yielded measurements of signal intensity over time consistent with the Company's
belief that MRI with MS-325 will provide physicians with diagnostic information
clinically equivalent to peripheral X-ray angiography earlier in the diagnostic
pathway. Consequently, the Company believes that MS-325-based MRI exams would
not only replace a large portion of the approximately 1.9 million peripheral
X-ray angiograms performed in the United States each year, but would also be
used in a significant number of instances where ultrasound, nuclear medicine or
other noninvasive modalities are currently employed but lack definitive
diagnostic capability as described above. Based upon estimated 1995 procedure
costs, the Company believes that the use of MS-325 with MRI to diagnose PVD
could yield savings to the United States healthcare system of nearly $1.0
billion.

      Thrombosis is another vascular disease outside the heart that is diagnosed
with a variety of radiological imaging techniques. Commonly referred to as
"blood clots," thrombosis can occur in the legs, arms, pelvis, lungs and neck,
and is the cause of over 400,000 deaths per year in the United States. Blood
clots can cause death from a pulmonary embolus (an obstruction in the pulmonary
vasculature), stroke or heart attack. Ultrasound and nuclear stress perfusion
studies are used early in the work-up in an attempt to defer peripheral X-ray
angiography because of cost, mortality and complications. These noninvasive
modalities are often indeterminate. Although limited in use because of the
mortality and complication rate, peripheral X-ray angiography, as in PVD,
continues to be considered by many to be the definitive diagnostic tool. The
Company believes that an MRI exam using MS-325 will be able to noninvasively
provide diagnostic information which is clinically equivalent to peripheral
X-ray angiography for the diagnosis of blood clots in selected cases.


Business Strategy

      The Company's objective is to become a leader in MRI contrast agents. It
will seek to do so by pursuing a strategy based on commercializing MS-325 and
developing new applications for its proprietary technology platform.
The Company's key business objectives are to:

      Establish the safety and clinical utility of MS-325 for multiple vascular
imaging indications. The Company is conducting Phase I clinical trials to
establish the safety of MS-325 for human use, after which it intends to conduct
separate Phase II and Phase III clinical trials initially for radiology
indications to be followed by cardiology indications.

      Achieve market acceptance of MS-325. The Company intends to collect
pharmacoeconomic and clinical data that demonstrates that MRI enhanced with
MS-325 is superior to the traditional diagnostic pathway. Through its strategic
partners' extensive worldwide marketing and sales networks, the Company intends
to present this data to both physicians and third-party payors. The Company
believes that third-party payors will 



                                       9
<PAGE>

promote the use of MS-325 because of its potential for substantial cost savings
and clinical benefits.

      Broaden the use of MS-325 to additional clinical indications. The Company
intends to evaluate MS-325 for use in the diagnosis of various tumors. For
example, the Company is currently planning a Phase II clinical trial for the use
of MS-325 in the diagnosis of breast cancer. Based on the physical properties of
MS-325 and preclinical studies, the Company believes that MS-325 has potential
application as part of a noninvasive imaging procedure that would enable
physicians to discriminate between malignant and benign breast masses in
patients with indeterminate mammograms or palpable lumps.

      Develop new targeted MRI contrast agents. In addition to evaluating the
use of MS-325 in diagnosing thrombosis, the Company is developing
thrombosis-specific MRI contrast agents based on its proprietary technology
platform. The Company is also pursuing a discovery program for functional brain
imaging.

      Maximize the value of strategic alliances. The Company currently has
strategic alliances with Mallinckrodt and Daiichi. The Company entered into
these alliances, and will seek to enter into future strategic alliances with
pharmaceutical and imaging agent industry leaders, in order to obtain access to
resources and infrastructure to leverage the Company's strengths.


Technology

Background

      The products under development by the Company are based upon its
proprietary biophysics technology platform. The Company's product candidates are
small molecule chelates (soluble metal-organic complexes) containing a
magnetically active metal element which elicit a strong MRI signal and are
designed to be safely excreted through the kidneys over time. The Company has
developed significant expertise in the design, synthesis and characterization of
metal-containing complexes for in vivo use. While the contrast agents primarily
used in MRI today are non-targeted in that they diffuse indiscriminately
throughout the tissues of the body, the Company believes that its proprietary
technology platform will enable it to design contrast agents which are capable
of targeting specific tissues or organs by binding to particular proteins. The
Company's proprietary biophysics technology platform consists of two key
elements:

Receptor-Induced Magnetic Enhancement

      Receptor-induced magnetic enhancement ("RIME") technology, which was
developed by Dr. Randall Lauffer, the Company's founder, while at Massachusetts
General Hospital ("MGH"), allows targeting of a contrast agent to particular
tissue and fluid types in the body while simultaneously multiplying the signal
enhancing effect of the agent and is now exclusively licensed by the Company
under patents held by MGH. RIME technology involves the design of metal
complexes that bind to particular proteins and receptor molecules in the body.
This binding causes increased concentration and retention of the contrast agent
in the specific tissues and fluids that contain targeted receptor molecules. The
binding also causes a special magnetic effect based on the complex biophysics of
MRI contrast agents. One of the factors that determines an MRI contrast agent's
signal enhancing effect is its rotation, or tumbling rate, in solution. When an
agent binds to a large molecule through the RIME process, the agent's tumbling
rate decreases substantially, resulting in a corresponding increase in the
strength of the agent's magnetic signal, which is detectable by MRI.


                                       10
<PAGE>

Enzyme Sensing Technology

      Developed by EPIX scientists, enzyme sensing technology is an extension of
the RIME technology that allows MRI to probe biological events on the molecular
level for the first time, thereby increasing the sensitivity of MRI. The Company
is developing small molecule contrast agents that become active in the presence
of certain enzymes which allows them to bind to their target receptor molecules
and express their full RIME signal enhancement. Because the presence of elevated
levels of particular enzymes occur only in certain biological situations, enzyme
sensing technology would allow MRI to scan for specific biological events
currently undetectable with MRI.



EPIX Products and Development Programs

MS-325

      The Company's lead product candidate, MS-325, is a targeted vascular
contrast agent intended for use with MRI. MS-325 is a gadolinium-based small
molecule chelate, engineered with the Company's proprietary RIME technology.
Animal studies have demonstrated that, when injected into the bloodstream,
MS-325 binds reversibly to the blood protein albumin and is designed to be
excreted safely through the kidneys over time. This allows the agent to remain
at high concentrations in the bloodstream during the imaging procedure and then
be gradually excreted from the body. The Company has designed the half-life of
the agent to allow for the optimal imaging window of at least one hour. In
animal studies, MS-325 has exhibited signal enhancement that is significantly
stronger than currently available agents. In an image enhanced by MS-325 using
standard MRI techniques, the blood, which is infused with gadolinium, gives off
a strong magnetic signal and appears bright while the surrounding tissue gives
off a very low magnetic signal and appears dark.

      While MS-325 is based on the Company's proprietary technology platform,
its chemical composition is similar to currently available MRI contrast agents
which have a strong safety record and are known to cause few, if any, side
effects. Furthermore, due to the increased magnetic signal elicited by MS-325,
the Company expects it to be used at a similar or lower dose than currently
available MRI contrast agents. As a result of these factors, the Company
believes that MS-325 will have a safety profile comparable to currently
available MRI contrast agents.

      The Company submitted an IND application for MS-325 to the FDA on July 22,
1996 and commenced a Phase I clinical trial on September 6, 1996. Thirty-five
subjects participated in the clinical safety monitoring portion of the trial,
which ended on November 22, 1996. Eighteen of these subjects, who were divided
into three different dosing groups, participated in a typical Phase I safety
study in which the dose of MS-325 was gradually increased from one group to the
next. The remaining 17 subjects, who received the highest dose tested, were also
imaged in order to confirm the appropriateness of the dose and to evaluate the
imaging characteristics of MS-325. Vital signs, blood chemistries and other
biological and physical markers were monitored in all subjects. Based on
preliminary results, no clinically significant adverse effects have been
reported. The Company submitted its report on the Phase I Trial to the FDA in
February 1997 and expects to commence Phase II trials for radiology indications
in the second quarter of 1997.



                                       11
<PAGE>

      In addition to the diagnosis of CAD and PVD, the Company intends to pursue
the use of MS-325 for additional clinical indications, including thrombosis,
commonly referred to as "blood clots." The Company believes that MRI with MS-325
could eliminate the need for selected ultrasound and nuclear medicine studies of
thrombosis while providing, noninvasively, diagnostic information which is
clinically equivalent to that provided by peripheral X-ray angiography.

      The Company further believes that, based on the physical properties of
MS-325 and preclinical studies, MS- 325 has potential application as part of a
noninvasive imaging procedure that would enable physicians to discriminate
between malignant and benign breast masses in patients with indeterminate
mammograms or palpable lumps. Another potential application for MS-325 in the
diagnosis of breast cancer is in defining the size of malignant lesions. The
Company believes that an MRI breast exam using MS-325 could allow better
determination of eligibility for breast-conserving therapy.


Other Research and Development Programs

      Thrombosis Imaging. The Company is developing new agents designed
specifically for imaging blood clots. The Company is seeking to develop a
targeted contrast agent and protocol that would enable MRI to illuminate blood
clots against a dark background. The Company believes that its proprietary
technology platform could also enable MRI to differentiate old and new clot
formations and that such a product would change the diagnostic pathway for many
of the conditions associated with thrombotic disease, including pulmonary
embolism and deep vein thrombosis. The Company believes that use of the new
approach would lead to better medical outcomes due to earlier definitive
diagnosis. Early diagnosis is especially important for clots in the pelvis and
vena cava, the large vein through which blood returns to the heart, because of
their increased likelihood of migrating to the lungs where the clots can be
fatal. The Company believes that a thrombosis-specific contrast agent could
largely replace the noninvasive modalities currently in use, including nuclear
medicine ventilation/perfusion scans.

      Functional Brain Imaging. Functional brain imaging involves measuring
small changes in the brain to, in effect, "watch" the brain function in real
time. In the past, these cognitive function mapping studies were done using
modalities such as electro-encephalograms and nuclear medicine, both of which
are generally recognized to have low resolution and provide limited clinical
information. Recently however, investigators at a number of institutions,
including MGH, have developed a new brain imaging technique using MRI. Even in
its present experimental form, the technique is rapidly being adopted by many
leading neuroscience centers throughout the world. The technique detects small
increases in blood volume or flow that accompany the greater metabolic activity
in stimulated brain regions, thus allowing one to watch, in real time, different
regions of the brain "light up" as a person thinks, moves or views objects. At
present, studies are being conducted using a specialized MRI technique which
does not employ a contrast agent. However, these studies are currently difficult
to interpret since blood flow changes induced by cognitive activity are subtle
and associated signals are weak. Clinical applications of functional brain
imaging are potentially broad, including pre-surgical planning,
neurodegenerative disease diagnosis and psychiatry.

      EPIX is currently conducting preclinical testing of prototype brain
imaging agents with researchers at MGH based on the Company's proprietary
technology platform. The Company is seeking to establish the feasibility of
developing an agent that would be able to magnify the signal from small volume
changes in blood flow to particular areas of the brain. The Company believes
that such a contrast agent could enable highly illuminated three-dimensional MRI
scans of brain function.


                                       12
<PAGE>

Strategic Alliances

      The Company's strategy includes entering into alliances with leaders in
the pharmaceutical and diagnostic imaging industries to facilitate the
development, manufacture, marketing, sale and distribution of its products. To
date, the Company has formed strategic alliances with Mallinckrodt and Daiichi
for the development and commercialization of MS-325.


Mallinckrodt Group Inc.

      Pursuant to a collaboration agreement between the Company and
Mallinckrodt, which was executed in August 1996, the Company granted
Mallinckrodt an exclusive license to develop and commercialize MS-325 worldwide,
excluding Japan. The agreement also provides for potential collaboration and
cost sharing arrangements in connection with future MRI vascular agent programs,
whether developed by the Company or Mallinckrodt or in-licensed by either party.
The operations of the collaboration are supervised by a joint steering committee
comprised of an equal number of representatives of both parties. Mallinckrodt
and the Company will collaborate on the clinical development of MS-325,
beginning with Phase I clinical trials. The Company has primary responsibility
for conducting Phase I and Phase II clinical trials and for manufacturing MS-325
for such trials. Mallinckrodt will assume primary responsibility for development
and manufacturing starting with Phase III clinical trials. Mallinckrodt will
also be responsible for the marketing and distribution of MS-325 worldwide,
excluding Japan. The agreement imposes certain development due diligence
obligations on both of the parties and certain marketing due diligence
obligations on Mallinckrodt.

      The Company received a $6.0 million license fee upon execution of the
agreement with Mallinckrodt. The agreement provides for an additional $2.0
million payment upon the earlier of a specified date or the achievement of an
MS-325 milestone. Mallinckrodt and the Company will generally share equally in
the worldwide, excluding Japan, development and manufacturing scale-up and
product launch costs of MS-325 and all future MRI vascular agents which may be
covered by the agreement. The parties' current obligations with respect to
MS-325 development costs are limited to a specified amount. Under the
arrangement, the Company will share in future operating profits, if any.

      The agreement provides that Mallinckrodt may not develop, market or sell
any MRI vascular agent worldwide except Japan other than those that are part of
the collaboration without the approval of the joint steering committee (in which
case they, if approved, would become part of the collaboration).


Daiichi Radioisotope Laboratories, Ltd.

      Pursuant to a development and license agreement, which was entered into in
March 1996, the Company granted Daiichi an exclusive license to develop and
commercialize MS-325 in Japan. Under this arrangement, Daiichi will assume
primary responsibility for clinical development, regulatory approval, marketing
and distribution of MS-325 in Japan. The Company retained the right and
obligation to manufacture MS-325 for development activities and commercial sale
under the agreement. However, Daiichi may, under certain circumstances, elect to
formulate MS-325 purchased from the Company into a final product. The agreement
imposes certain development due diligence obligations on both parties and



                                       13
<PAGE>

marketing due diligence obligations on Daiichi. The agreement may be terminated
by Daiichi upon 30 days prior written notice if Daiichi determines in its
reasonable opinion that MS-325 lacks clinical efficacy, presents serious side
effects or otherwise exhibits unacceptable properties. In connection with this
strategic alliance, the Company received an up-front fee from Daiichi in the
amount of $3.0 million and Daiichi is required to make future payments to EPIX
up to an aggregate amount of $3.3 million, upon the achievement of certain
MS-325 development milestones. Daiichi also made a $5.0 million equity
investment in the Company. Daiichi will make royalty payments to the Company on
net sales of MS-325 in Japan.

      In 1992, the Company entered into an agency agreement with Sumitomo
Corporation ("Sumitomo") whereby the Company engaged Sumitomo as its exclusive
agent to assist the Company in entering into arrangements with third parties for
the development and commercialization of vascular, liver and tumor MRI agents in
Japan. Sumitomo assigned this agreement to Summit Pharmaceuticals International
Corporation ("Summit") in 1995. In accordance with the agreement, the Company
paid Summit a specified percentage on all amounts received by the Company from
Daiichi to date and will make payments to Summit on future milestone payments it
receives from Daiichi, if any. The Company will be obliged to make such payments
with respect to future arrangements with partners headquartered in Japan if
entered into prior to the first anniversary of the termination of the agency
agreement.



Competition

      The healthcare industry is characterized by extensive research efforts and
rapid technological change, and there are many companies that are working to
develop products similar to the Company's. There are currently no targeted
vascular contrast agents for use with MRI. However, there are a number of
non-specific MRI agents approved by the U.S. Food and Drug Administration
("FDA") for marketing in the United States and certain foreign markets that are
likely to compete with the Company's products for certain applications.
Magnevist(R) by Schering-AG, Dotarem(R) by Guerbet, S.A., Omniscan(R) by Nycomed
Imaging ASA, and ProHance(R) by Bracco S.p.A. are all such products. The Company
is aware of other agents under development that may have application in vascular
imaging. There can be no assurance that the Company's competitors will not
succeed in the future in developing products that are more effective than any
that are being developed by the Company. The Company believes that its ability
to compete within the MRI contrast agent market is dependent on a number of
factors, including the success and timeliness with which it completes FDA
trials, the breadth of applications, if any, for which it receives approval, and
the effectiveness, cost, safety and ease of use of the Company's products in
comparison to the products of the Company's competitors. The success of the
Company will also be based on physician acceptance of MRI as a primary imaging
modality for certain cardiovascular and other applications.

      The Company has many competitors including pharmaceutical, biotechnology
and chemical companies, a number of which, including both of the Company's
strategic partners, are actively developing and marketing products that, if
commercialized, would compete with the Company's product candidates. Many of
these competitors have substantially greater capital and other resources than
the Company and may represent significant competition for the Company. Such
companies may succeed in developing technologies and products that are more
effective or less costly than any of those that may be developed by the Company,
and such companies may be more successful than the Company in developing,
manufacturing and marketing products. Furthermore, there are several
well-established medical imaging modalities that currently compete, and will
continue to compete, with MRI, including X-ray 



                                       14
<PAGE>

angiography, CT, nuclear medicine and ultrasound. Other companies are actively
developing the capabilities of the competing modalities to enhance their
effectiveness in CVS imaging. There can be no assurance that the Company will be
able to compete successfully in the future or that developments by others will
not render MS-325 or the Company's future product candidates obsolete or
non-competitive or that the Company's collaborators or customers will not choose
to use competing technologies or products.


Patents and Proprietary Rights

      EPIX considers the protection of its proprietary technologies to be
material to its business prospects. The Company pursues a comprehensive patent
program in the United States and in other countries where it believes that
significant market opportunities exist.

      The Company owns or has exclusively licensed patents and patent
applications on the critical aspects of its core technology as well as many
specific applications of this technology. EPIX has exclusively licensed two
patents in the United States broadly covering RIME technology, albumin binding
with metal chelates, and liver targeting metal chelates, and has received notice
of allowance for similar patent applications in Japan and Europe. The Company
has exclusively licensed four additional patents in the United States and
received notice of allowance of an additional U.S. patent covering novel metal
chelates, with similar patent applications in Japan and Europe. Finally, the
Company has patent applications pending in the United States, Japan and Europe
covering various aspects of its RIME technology. The Company's patent protection
for MS-325 currently extends to 2007 in the United States, Japan and Europe. If
the currently pending patent applications issue, this protection will be
extended until 17 years after the date of issue in the United States, and until
2016 in Europe and Japan.

      An issued patent grants to the owner the right to exclude others from
practicing inventions claimed therein. In the United States, a patent filed
before June 8, 1995 is enforceable for 17 years from the date of issuance or 20
years from the deemed date of filing the underlying patent applications,
whichever is longer. Patents based on applications filed from June 8, 1995
expire 20 years from the deemed date. The General Agreement on Tariffs and Trade
provides that patents whose applications were filed on or after June 8, 1995 are
effective for 20 years from filing. This new rule is generally regarded as
unfavorable to pharmaceutical companies, where the time period between patent
filing and commercialization of the patented product may be extended many years
because of the lengthy development cycle and regulatory process.

      The patent positions of pharmaceutical and biopharmaceutical firms involve
complex legal and factual questions. There can be no assurance that the
Company's issued patents, or any patents that may be issued in the future, will
effectively protect the Company's technology or provide a competitive advantage.
There can be no assurance that any of the Company's patents or patent
applications will not be challenged, invalidated or circumvented in the future.

      The Company's commercial success will also depend on its ability to
operate without infringing upon the patents of others in the United States and
abroad. If any third-party patents are upheld as valid and enforceable in any
judicial or administrative proceeding, the Company could be prevented from
practicing the subject matter claimed in such patents, or would be required to
obtain licenses from the patent owners of each such patent, or to redesign its
products or 



                                       15
<PAGE>

processes, to avoid infringement. There can be no assurance that such licenses
would be available or, if available, would be available on terms acceptable to
the Company or that the Company would be successful in any attempt to redesign
its products or processes to avoid infringement. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.

      There are pending or issued patents, held by parties not affiliated with
the Company, relating to technologies used by the Company in the development or
use of certain of the Company's product candidates. In particular, the Company
is aware of certain patents in the United States, Japan and elsewhere owned by
or licensed to one party that relate to MRI contrast agents and which may cover
certain of the Company's MRI product candidates, including MS-325. Mallinckrodt,
one of the Company's partners, has rights from this third party under those
patents which the Company and Mallinckrodt believe will permit Mallinckrodt to
manufacture, market and sell MS-325 and other products developed pursuant to the
collaboration agreement between the Company and Mallinckrodt were MS-325 and
those other products to be held to fall within the claims of those third-party
patents. If the agreement with Mallinckrodt is terminated by either party, the
Company would be required to enter into a strategic alliance with another party
having a license from this third party or obtain a license from this third party
directly or from others licensed by this third party in order to manufacture,
market and sell MS-325 and other chelate-based MRI contrast agents. However,
there can be no assurance that the Company would be able to consummate a
strategic alliance with a party having this third-party license or obtain a
license on commercially reasonable terms, if at all. The patent rights of this
third party in Japan will expire in 2002, before such time as the Company
presently anticipates that Daiichi will have material sales of MS-325 in Japan
and, therefore, the Company believes that the existence of such patents in Japan
is unlikely to have a material adverse effect on the Company. However, in the
event that Daiichi commercializes MS-325 in Japan before 2002, it may be
required to obtain an appropriate license or take other measures to avoid
infringement of the third party patents, including delaying the commencement of
product sales. There can be no assurance that the Company's current or future
activities will not be challenged, that additional patents will not be issued
containing claims materially constraining the proposed activities of the
Company, that the Company will not be required to obtain licenses from third
parties, or that the Company will not become involved in costly, time-consuming
litigation regarding patents in the field of contrast agents, including actions
brought to challenge or invalidate the Company's own patent rights. At the same
time, the Company is aware of certain products under development by the third
party referred to above and others which it believes may infringe certain of the
Company's exclusively licensed patents. The Company intends to pursue license or
cross-license arrangements with or, if necessary and appropriate, infringement
proceedings against, these parties upon their seeking final regulatory approval
for the marketing and sale of any such products.

      Many of the Company's competitors are continuing to actively pursue patent
protection for activities and discoveries similar to the Company's. There can be
no assurance that these competitors, many of which have substantially greater
resources than the Company and have made substantial investments in competing
technologies, will not in the future seek to assert that the Company's products
or chemical processes infringe their existing patents and/or will not seek new
patents that claim to cover aspects of the Company's technology. Furthermore,
patent applications in the United States are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a specified period after filing. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and the
filing of related patent applications. In addition, patents issued and patent
applications filed relating to biopharmaceuticals are numerous. Therefore, there
can be no assurance that the Company is aware of all competitive patents, either
pending or issued, that relate to products or processes used or proposed to be
used by the Company.



                                       16
<PAGE>

      The Company and MGH have entered into a license agreement pursuant to
which MGH has granted the Company an exclusive worldwide license to the patents
and patent applications which relate to the Company's only product candidate,
MS-325. The MGH License imposed certain due diligence obligations with respect
to the development of products covered by the license, all of which have been
fulfilled to date. The MGH License requires the Company to pay royalties on net
sales of MS-325 by the Company. The Company must also pay MGH a percentage of
all royalties received by the Company from its sublicensees. Accordingly, the
Company will be required to make payments to MGH on profits generated under the
Mallinckrodt collaboration, if any, and on royalties received from Daiichi under
its license agreement, if any. Failure of the Company to comply with these
requirements could result in the conversion of the license from being exclusive
to non-exclusive in nature or termination of the license agreement itself. Any
such event would have a material adverse effect on the Company's business,
financial condition and results of operations.

      The pharmaceutical and biotechnology industries have been characterized by
extensive litigation regarding patents and other intellectual property rights.
Litigation may be necessary to enforce any patents issued to the Company and or
determine the scope and validity of others' proprietary rights. The Company may
have to participate in interference proceedings declared by the United States
Patent and Trademark Office or by foreign agencies to determine the priority of
inventions. Any involvement in litigation surrounding these issues could require
extensive costs to the Company as well as be a significant distraction for
management. Such costs could have a material adverse effect on the Company's
business, financial condition and results of operations.

      The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting or advisory relationships with the
Company. These agreements require disclosure and assignment to the Company of
ideas, developments, discoveries and inventions made by employees, consultants
and advisors. There can be no assurance, however, that these agreements will not
be breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.

      The Company intends to vigorously protect and defend its intellectual
property. Costly and time-consuming litigation brought by the Company may be
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company, or to determine the enforceability, scope, and
validity of the proprietary rights of others.


Manufacturing

      The Company currently manufactures, as part of its ongoing development
efforts, small batches of MS-325 (not made in compliance with Good Manufacturing
Practices ("GMP") ) in its laboratories located in Cambridge, Massachusetts. The
Company has contracted for the manufacture in accordance with GMP of MS-325 from
outside contractors for use in preclinical and Phase I and II clinical trials.
As part of its strategic alliance with the Company, Mallinckrodt will serve as
primary manufacturer for MS-325 thereafter. If Mallinckrodt is unable to produce
MS-325 in adequate amounts and at a reasonable cost or to comply with any
applicable regulations, including GMP, it could have a material adverse effect
on the Company's business, financial condition and results of operations.
Furthermore, should 



                                       17
<PAGE>

Mallinckrodt fail to fulfill its manufacturing responsibilities satisfactorily,
the Company could be forced to find an alternative manufacturer. There can be no
assurance that the Company would be able to find such an alternative
manufacturer. In the event the Company was forced to develop its own
FDA-approved full-scale manufacturing capability, it would require significant
expenditures of capital and management attention and resources and could require
the Company to obtain a license from a third party, and would result in a delay
in the approval or commercialization of MS-325. There can be no assurance that
the Company would be able to obtain such a license on commercially reasonable
terms, if at all. The Company currently procures the raw materials for the
various components of MS-325 from a broad variety of vendors and, wherever
possible, maintains relationships with multiple vendors for each component.
There are a number of components of MS-325 for which the largest suppliers may
have significant control over the market price due to controlling market shares.
If any one of the Company's suppliers decided to increase prices significantly
or reduce quantities of any component of MS-325 available for sale to the
Company, it could have a material adverse effect on the Company's ability to
commercialize MS-325 and on the Company's business, financial condition and
results of operations. See "Strategic Alliances."


Government Regulation

      The manufacture and commercial distribution of the Company's product
candidates are subject to extensive governmental regulation in the United States
and other countries. Pharmaceuticals, including contrast imaging agents for use
with MRI, are regulated in the United States by the FDA under the Food, Drug and
Cosmetic Act ("FD&C Act") and require FDA approval prior to commercial
distribution. Pursuant to the FD&C Act, pharmaceutical manufacturers and
distributors must be registered with the FDA and are subject to ongoing FDA
regulation, including periodic FDA inspection of their facilities and review of
their operating procedures. Noncompliance with applicable requirements can
result in failure to receive approval, withdrawal of approval, total or partial
suspension of production, fines, injunctions, civil penalties, recalls or
seizure of products and criminal prosecution, each of which would have a
material adverse effect on the Company's business, financial conditions and
results of operations.

      In order to undertake clinical trials and market pharmaceutical products
for diagnostic or therapeutic use in humans, the procedures and safety standards
established by the FDA and comparable agencies in foreign countries must be
followed. In the United States, a company seeking approval to market a new
pharmaceutical must obtain FDA approval of a new drug application ("NDA").
Before an NDA may be filed, however, a certain procedure is typically followed.
This includes: (i) performance of preclinical laboratory and animal studies;
(ii) submission to the FDA of an investigal new drug ("IND") application, which
must become effective before human clinical trials may commence; (iii)
completion of adequate and well-controlled human clinical trials to establish
the safety and efficacy of the pharmaceutical for its intended application; (iv)
submission to the FDA of an NDA; and (v) approval of the NDA by the FDA prior to
any commercial sale or shipment of the agent.

      Preclinical studies include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product and
its formulation. The results of the preclinical studies are submitted to the FDA
as part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA. Clinical trials are conducted in
accordance with protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol together with information about the clinical
investigators who will perform the studies and the institutions at which 



                                       18
<PAGE>

the trials will be performed are submitted to the FDA as part of the IND. An
independent institutional review board ("IRB") at each institution at which the
trial will be conducted will also be asked by the principal investigator at that
institution to approve, according to FDA regulations governing IRBs, the trials
that will be performed at that institution. The IRB will consider, among other
things, ethical factors, the protection of human subjects and the possible
liability of the institution.

      Clinical trials under the IND are typically conducted in three sequential
phases, but the phases may overlap. In Phase I, the initial introduction of the
pharmaceutical into humans, the pharmaceutical is tested for safety, dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology in
healthy adult subjects. Imaging agents may also be subject to a Phase IB trial
under which an agent's imaging characteristics in humans are first evaluated.
Phase II involves a detailed evaluation of the safety and efficacy of the agent
in a range of doses in patients with the disease or condition being studied.
Phase III clinical trials typically consist of evaluation of safety and efficacy
in a larger patient population and at more institutions.

      The Company submitted an IND for MS-325 to the FDA on July 22, 1996 and
commenced Phase I clinical trials on September 6, 1996. The clinical safety
monitoring portion of the trial ended on November 22, 1996. Upon the successful
completion of the Phase I clinical trials, the Company intends to conduct
concurrent but separate Phase II and Phase III clinical trials for different
cardiology and radiology indications. The process of completing clinical testing
and obtaining FDA approval for a new product is likely to take a number of
years. When the study as described in the IND is complete, and assuming that the
results support the safety and efficacy of the product for that indication, the
Company intends to submit an NDA to the FDA. The NDA approval process can be
expensive, uncertain and lengthy. Although the FDA is supposed to complete its
review of an NDA within 180 days of the date that it is filed, the review time
is often significantly extended by the FDA which may require more information or
clarification of information already provided in the NDA. During the review
period, an FDA advisory committee likely will be asked to review and evaluate
the application and provide recommendations to the FDA about approval of the
pharmaceutical. In addition, the FDA will inspect the facility at which the
pharmaceutical is manufactured to ensure compliance with GMP and other
applicable regulations. Failure of the third-party manufacturers to comply or
come into compliance with GMP requirements could significantly delay FDA
approval of the NDA. The FDA may grant an unconditional approval of an agent for
a particular indication or may grant approval conditioned on further
post-marketing testing and/or surveillance programs to monitor the agent's
efficacy and side effects. Results of these post-marketing programs may prevent
or limit the further marketing of the agent. In addition, additional studies and
a supplement to the initially approved NDA will be required to gain approval for
the use of an approved product in indications other than those for which the NDA
was approved initially.

      While the Company, because of its agreement with Mallinckrodt, does not
currently intend to manufacture any of its products itself once they are
approved, it may choose to do so in the future. Should the Company decide to
manufacture its products, the Company would be required to obtain a license from
a third party having rights to patents which may cover certain of the Company's
contrast agents. There can be no assurance that the Company would be able to
obtain such a license from the third party. Furthermore, the Company's
manufacturing facilities would be subject to inspection and approval by the FDA
before the Company could begin commercial distribution of product from its own
manufacturing facilities. See "Patents and Proprietary Rights."

      After an NDA is approved, the Company would continue to be subject to
pervasive and continuing regulation by the FDA, including record keeping
requirements, reporting of adverse experience from the use of the agent and
other requirements imposed by the FDA. FDA regulations also require FDA approval
of an NDA supplement for certain changes if they 



                                       19
<PAGE>

affect the safety and efficacy of the pharmaceutical, including, but not limited
to, new indications for use, labeling changes, the use of a different facility
to manufacture, process or package the product, changes in manufacturing methods
or quality control systems and changes in specifications for the product.
Failure by the Company to receive approval of an NDA supplement could have a
material adverse effect on the Company's business, financial condition and
results of operations.

      The advertising of most FDA-regulated products is subject to FDA and
Federal Trade Commission jurisdiction, but the FDA has sole jurisdiction over
advertisements for prescription drugs. The Company is and may be subject to
regulation under state and Federal law regarding occupational safety, laboratory
practices, handling of chemicals, environmental protection and hazardous
substance control. The Company also will be subject to other present and
possible future local, state, federal and foreign regulation. Failure to comply
with regulatory requirements could have a material adverse effect on the
Company's business, financial conditions and results of operations.

      Approval and marketing of pharmaceutical products outside of the United
States are subject to regulatory requirements that vary widely from country to
country. In the European Union ("EU"), the general trend has been towards
coordination of common standards for clinical testing of new agents, leading to
changes in various requirements imposed by each EU country. The level of
regulation in the EU and other foreign jurisdictions varies widely. The time
required to obtain regulatory approval from comparable regulatory agencies in
each foreign country may be longer or shorter than that required for FDA
approval. In addition, in certain foreign markets the Company may be subject to
governmentally mandated prices for its products.

      Regulations regarding the approval, manufacture and sale of the Company's
product candidates are subject to change. The Company cannot predict what
impact, if any, such changes might have on its business, financial condition or
results of operations.

      The Company's research, development and manufacturing processes require
the use of hazardous substances and testing on certain laboratory animals. As a
result, the Company is also subject to federal, state, and local laws,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials and
waste as well as the use of and care of laboratory animals. These laws and
regulations are all subject to change. The Company cannot predict what impact,
if any, such changes might have on its business, financial condition or results
of operations.


Reimbursement

      The Company expects that sales volumes and prices of its products will be
dependent in large measure on the availability of reimbursement from third-party
payors and that individuals seldom would be willing or able to pay directly for
all the costs associated with procedures which in the future may incorporate the
use of the Company's products. The Company expects that its products will be
purchased by hospitals, clinics, doctors and other users that bill various
third-party payors, such as Medicare, Medicaid and other government insurance
programs, and private payors including indemnity insurers, Blue Cross Blue
Shield plans and managed care organizations ("MCOs") such as health maintenance
organizations. Most of these third-party payors provide coverage for MRI for
some indications when it is medically necessary, but the amount that a
third-party payor will pay for MRI may not include a separate payment for a
contrast imaging agent that is used with MRI. Reimbursement rates vary depending
on the procedure performed, the third-party payor, the type of insurance plan
and other factors. For example, Medicare pays hospitals a 



                                       20
<PAGE>

prospectively determined amount for an in-patient stay based on a Medicare
beneficiary's discharge diagnosis related group ("DRG"). This payment includes
payment for any procedure, including MRI, that is performed while a beneficiary
is in the hospital. No additional payment is made for contrast agents used
during the procedure. Other third-party payors may pay a hospital an additional
amount for an MRI procedure performed on an in-patient according to another
methodology such as a fee schedule or a percentage of charge. Such payment may
or may not include a payment for a contrast imaging agent. In the outpatient
setting, Medicare and other third-party payors may pay for all, some portion of,
or none of the cost of contrast agents used with MRI.

      Third-party payors carefully review and increasingly challenge the prices
charged for procedures and medical products. In the past few years, the amounts
paid for radiology procedures in particular have come under careful scrutiny and
have been subject to decreasing reimbursement rates. In addition, an increasing
percentage of insured individuals are receiving their medical care through MCOs
which monitor and often require preapproval of the services that a member will
receive. Many MCOs are paying their providers on a capitated basis which puts
the providers at financial risk for the services provided to their patients by
paying them a predetermined payment per member per month. The percentage of
individuals covered by MCOs is expected to grow in the United States over the
next decade. Even Medicare is shifting many of its beneficiaries into managed
care plans. The Company believes that the managed care approach to healthcare
and the growth in capitated arrangements and other arrangements under which the
providers are at financial risk for the services that are provided to their
patients will facilitate the market acceptance of its products, as it believes
that the use of its products will significantly lower the overall costs and
improve the effectiveness of managing patient populations. There can be no
assurance, however, that the Company's products will be available, will lower
costs of care for any patients or that providers will choose to utilize them
even if they do, or if reimbursement will be available.

      In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have a material adverse effect on market
acceptance of the Company's product candidates in the international markets in
which such approvals are sought.

      The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to, and will continue to lead to,
increased pressures on the health care industry, both foreign and domestic, to
reduce the cost of products and services, including products offered by the
Company. There can be no assurance, in either the United States or foreign
markets, that third party reimbursement and coverage will be available or
adequate, that current reimbursement amounts will not be decreased in the future
or that future legislation, regulation, or reimbursement policies of third-party
payors will not otherwise adversely affect the demand for the Company's product
candidates or its ability to sell its product candidates on a profitable basis,
particularly if MRI exams enhanced with the Company's contrast agents are more
expensive than competing vascular imaging techniques that are equally effective.
The unavailability or inadequacy of third-party payor coverage or reimbursement
could have a material adverse effect on the Company's business, financial
condition and results of operations.


                                       21
<PAGE>

Product Liability Insurance

      The clinical and commercial development of pharmaceuticals, including
contrast imaging agents such as those being developed by the Company, may entail
exposure to product liability claims. While the Company has never been subject
to any liability claims stemming from the manufacture of or preclinical or
clinical trials of its products, there can be no assurance that it will not face
such claims in the future. While the Company currently has product liability
insurance coverage for the clinical research use of its product candidates,
there can be no assurance that such coverage limits will be adequate nor that a
successful product liability lawsuit would not have a material adverse effect on
the Company. The Company does not have product liability insurance coverage for
the commercial sale of its products but intends to obtain such coverage if and
when its products are commercialized. If and when MS-325 or other EPIX product
candidates are approved for marketing by the FDA, or similar foreign regulatory
bodies, there can be no assurance that sufficient product liability insurance
will be available on terms acceptable to the Company or at all.


Employees

      As of December 31, 1996 the Company employed 36 persons on a full-time
basis, of which 26 were involved in research and development and 10 in
administration and general management. Fifteen of the Company's employees hold
Ph.D. or M.D. degrees. The Company believes that its relations are good with all
of its employees. None of the Company's employees is a party to a collective
bargaining agreement.


Research and Development

      During the fiscal years ended December 31, 1996 and 1995 and March 31,
1995 the Company incurred research and development expenses of $6,878,666,
$4,164,940 and $2,407,113, respectively.


ITEM 2. PROPERTIES

      The Company leases a total of 17,050 square feet of space at 71 Rogers
Street and adjacent locations, all in Cambridge, Massachusetts. The leases for
such facilities expire on December 31, 1997. The description of the lease terms
is incorporated herein by reference from Note 5 of the Notes to Financial
Statements. The Company is currently negotiating a new lease for an additional
five year period. The Company believes that its current facilities are adequate
to meet its requirements for the foreseeable future.


ITEM 3.     LEGAL PROCEEDINGS

      The Company is not a party to any material legal proceedings.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      In December 1996, the holders of all of the outstanding shares of the
Company's Common Stock and preferred stock (specifically, the holders of
2,307,721 shares of the Company's Common Stock, 93,691 shares of the Company's
Series A Convertible Preferred Stock, 2,643,736 shares of the Company's Series B
Convertible Preferred Stock, 1,432,318 shares of the Company's Series C
Convertible Preferred Stock, 1,700,002 shares of the Company's Series D
Convertible Preferred Stock and 868,329 shares of the Company's Series E



                                       22
<PAGE>

Convertible Preferred Stock), voting as a single class, unanimously adopted the
votes and consented to the actions summarized below. There were no abstentions
or broker non-votes.

1.    Approval of Certificate of Amendment to the Company's Restated Certificate
      of Incorporation.

      To approve a Certificate of Amendment to the Restated Certificate of
      Incorporation (the "Certificate of Amendment") providing for an increase
      in the number of authorized shares of Common Stock from 11,500,000 shares
      to 15,000,000 shares and a 1-for-1.5 reverse stock split.

2.    Approval of Further Amendment to and Restatement of the Company's Restated
      Certificate of Incorporation Contemporaneously with Initial Public
      Offering.

      To approve a Restated Certificate of Incorporation of the Company (the
      "Restated Certificate"), subject to the closing of the Company's initial
      public offering, providing for, among other things, a decrease in the
      number of authorized shares of Preferred Stock from 6,813,393 shares to
      1,000,000 shares, blank check preferred stock, the elimination of all
      previously designated classes of preferred stock, classification of the
      Board of Directors and supermajority voting for certain corporate
      transactions.

3.    Approval of Amended and Restated By-laws.

      To approve and adopt the Amended and Restated By-laws of the Company,
      effective upon the closing of the Company's initial public offering,
      providing for, among other things, procedures for stockholder nominations
      and proposals and the elimination of the ability of stockholders to act by
      written consent.

4.    Election of Directors.

      To divide the Board of Directors into the following classes, effective
      upon the filing of the Restated Certificate, with each director to serve
      until the annual meeting of stockholders for the year indicated opposite
      such director's name and until his successor is elected and qualified or
      until his earlier resignation or removal:
                                                            Term
                        Name                              Expires

                  Class I
                  Randall B. Lauffer                        1997
                  Luke B. Evnin                             1997

                  Class II
                  Stanley T. Crooke                         1998

                  Class III
                  Michael D. Webb                           1999
                  Christopher F.O. Gabrieli                 1999

5.    Adoption of the Company's Amended and Restated 1992 Equity Incentive Plan.

      To approve and adopt the Company's Amended and Restated 1992 Equity
      Incentive Plan (the "1992 Plan").


                                       23
<PAGE>

6.    Reservation of Additional Shares for 1992 Plan.

      To ratify and confirm the increase in the number of shares of the
      Company's Common Stock reserved for issuance under the 1992 Plan from
      1,749,852 shares to 2,399,852 shares (subject to adjustment for stock
      splits and other similar capital changes).

7.    Adoption of the Company's 1996 Employee Stock Purchase Plan.

      To approve and adopt the Company's 1996 Employee Stock Purchase Plan (the
      "Purchase Plan") and ratify and confirm the reservation of 100,000 shares
      of the Common Stock for issuance under the Purchase Plan (subject to
      adjustment for stock splits and other similar capital changes).

8.    Adoption of the Company's 1996 Director Stock Option Plan.

      To approve and adopt the Company's 1996 Director Stock Option Plan (the
      "Director Plan") and ratify and confirm the reservation of 100,000 shares
      of the Common Stock for issuance under the Director Plan (subject to
      adjustment for stock splits and other similar capital changes).

9.    Approval of Form of Indemnification Agreement.

      To approve for use by the Company a form of Indemnification Agreement.


ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

      The following table sets forth certain information regarding the executive
officers, directors and key employees of the Company as of December 31, 1996:

  Name                        Age   Position

  Michael D. Webb             38    President, Chief Executive Officer, 
                                    Secretary and Director

  James E. Smith, Ph.D.       53    Executive Vice President, Research &
                                    Development

  Randall B. Lauffer, Ph.D.   39    Chief Scientific Officer and Director

  E. Kent Yucel, M.D.         40    Senior Vice President and Chief Medical 
                                    Officer

  Susan M. Flint              45    Vice President, Regulatory Affairs

  Stephen C. Knight, M.D.     36    Vice President, Strategic Planning &
                                    Corporate Development

  Jeffrey R. Lentz            43    Vice President, Finance & Administration,
                                    Chief Financial Officer, Treasurer and
                                    Assistant Secretary

Michael D. Webb joined the Company in December 1994 from Ciba-Corning
Diagnostics, Inc., a medical instrument company, where he was most recently
Senior Vice President, Worldwide Marketing and Strategic Planning. From 1984 to
1989, Mr. Webb was a senior consultant at



                                       24
<PAGE>

Booz, Allen & Hamilton, Inc., a consulting company, specializing in health care
and life sciences. Mr. Webb holds an MM degree in marketing and finance from the
J.L. Kellogg Graduate School of Management at Northwestern University.

Dr. James E. Smith joined the Company in February 1996. Prior to joining the
Company, Dr. Smith worked for 16 years at Du Pont Merck Pharmaceutical Company,
a pharmaceutical company, where his experience included research and
development, regulatory, QA/QC and manufacturing for the radio-pharmaceutical
division, most recently as Senior Director of Radiopharmaceutical Research and
Development. Dr. Smith has published and lectured on radiopharmaceutical
research and development. Dr. Smith received his Ph.D. degree in inorganic
chemistry from the University of Washington.

Dr. Randall B. Lauffer founded the Company in November 1988 and served as Chief
Executive Officer until December 1994 and as Chairman until October 1996. From
November 1983 to March 1992, Dr. Lauffer was a member of the faculty of Harvard
Medical School, serving most recently as Assistant Professor of Radiology from
1987 to 1992. During this time he was also Director of the NMR Contrast Media
Laboratory at MGH as well as an NIH Postdoctoral Fellow and an NIH New
Investigator. Dr. Lauffer holds a Ph.D. degree in inorganic chemistry from
Cornell University.

Dr. E. Kent Yucel joined the Company in June 1996. From March 1993 to July 1996,
he was Chief of Vascular and Interventional Radiology and Director of MRI at
Boston Medical Center and Professor of Radiology at Boston University Medical
School. From July 1988 to February 1993 he served as Assistant Professor of
Radiology at MGH and Harvard Medical School. Dr. Yucel is a Professor of 
Radiology at Boston University Medical School and retains a part time clinical 
appointment in the Radiology Department at Boston Medical Center. Dr. Yucel
received his M.D. degree from Harvard Medical School.

Ms. Susan M. Flint joined the Company in April 1995. She is a Regulatory Affairs
specialist with over twenty years of experience in regulatory submissions and
clinical trials. She was a regulatory affairs/clinical research consultant to
various companies, including EPIX, from April 1993 to April 1995. Ms. Flint
previously held the position of Director of Clinical Trials at Advanced
Magnetics, Inc. from February 1989 to March 1993 and Director of Regulatory
Affairs at Du Pont Pharmaceutical Company from June 1975 to January 1989. Ms.
Flint is certified by the Regulatory Affairs Professional Society. She received
her M.S. degree in pharmacology from Northeastern University.

Dr. Stephen C. Knight joined the Company in July 1996. From April 1991 to June
1996, Dr. Knight was a senior consultant with Arthur D. Little, a consulting
company, specializing in biotechnology, pharmaceuticals and valuation. Dr.
Knight was also a consultant at APM, Inc., a consulting company. Prior to 1990,
Dr. Knight performed research at AT&T Bell Laboratories, the National Institute
of Neurological and Communicative Diseases and Stroke, and Yale University. He
serves on the board of directors of Pharmos, Inc. Dr. Knight holds an M.D. from
the Yale University School of Medicine and an MPPM degree from the Yale School
of Organization and Management.

Jeffrey R. Lentz joined the Company in May 1996 as Vice President, Finance and
Administration. He is also the Company's Chief Financial Officer and Treasurer.
Prior to joining the Company, Mr. Lentz worked from August 1994 to May 1996 in
private practice as a consultant and in venture capital. Mr. Lentz served as
Director of Finance with Nova Biomedical Corporation, a medical instrument
company, from March 1993 to August 1994 and as a senior manager with Ernst &
Young LLP, an accounting firm, from November 1986 to November 1992. Mr. Lentz is
a certified public accountant and holds an M.S. degree from Northeastern
University.



                                       25
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's Common Stock, $.01 par value ("Common Stock") is traded on
the Nasdaq Stock Market under the symbol "EPIX", and is listed in Nasdaq's
National Market. There was no public market for the Company's Common Stock at
December 31, 1996. As of December 31, 1996 there were approximately 60 holders
of record of the Company's Common Stock.


ITEM 6.     SELECTED FINANCIAL DATA

      The following selected financial data for the period from inception
(November 29, 1988) through March 31, 1993, each of the two years in the period
ended March 31, 1995, the nine months ended December 31, 1995 and the year ended
December 31, 1996 are derived from Financial Statements of the Company. The
financial statements as of December 31, 1996, December 31, 1995 and March 31,
1995 and the nine months ended December 31, 1995 and for each of the two years
in the period ended March 31, 1995 are included elsewhere herein. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Financial Statements,
related Notes and other financial information included herein.

<TABLE>
<CAPTION>
                                        Period from inception     Year Ended            Nine Months
                                        (November 30, 1988)        March 31,               Ended          Year Ended
                                        through March 31,    --------------------       December 31,      December 31,
(in thousands, except per share data)           1993         1994            1995         1995 (2)           1996
                                                ----         ----            ----         --------           ----
<S>                                          <C>            <C>            <C>             <C>             <C>    
Statement of Operations Data:
Revenues ............................        $1,000         $1,700           $412            $900          $10,010
Operating income (loss) .............          (311)          (579)        (2,820)         (4,770)             269
Net income (loss) ...................          (270)          (617)        (2,778)         (4,893)             268
Net income (loss) per share (1) .....                                                      $(0.70)           $0.03
Shares used in per share calculations                                                       6,973            7,711

                                                            March 31,                               December 31,
                                              ------------------------------------         -------------------------
Balance Sheet Data:                            1993           1994           1995            1995            1996
                                               ----           ----           ----            ----            ----
Cash, cash equivalents and
marketable securities ..............           $114         $4,154         $1,079            $150          $10,664
Working capital (deficit) ..........           (142)         3,574            516          (1,327)           8,299
Total assets .......................          1,118          5,050          2,141           1,211           12,575
Capital lease obligations,
less current portion ...............             13            292            107             342              176
Redeemable convertible
preferred stock ....................              -          3,941          3,949           3,956           17,204
Total stockholders' equity (deficit)            773            200         (2,552)         (7,336)          (7,240)
</TABLE>

----------------------
(1)     See Note 2 to Notes to Financial Statements for a description of the
        calculation of net income (loss) per share. Reflects a 1-for-1.5 reverse
        stock split effected on December 6, 1996.

(2)     In 1995 the Company changed its fiscal year end from March 31 to
        December 31.




                                       26
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Overview

      Since commencing operations in 1992, the Company has been engaged
principally in the research and development of its product candidates as well as
seeking various regulatory clearances and patent protection. The Company has had
no revenues from product sales and has incurred losses since inception through
December 31, 1996 aggregating approximately $8.3 million. The Company has
received revenues in connection with various licensing and collaboration
agreements. In August 1996, the Company entered into a strategic alliance with
Mallinckrodt pursuant to which it received $6.0 million in up-front license
fees. The agreement provides for an additional $2.0 million payment upon the
earlier of a specified date or the achievement of an MS-325 development
milestone. In March 1996, the Company entered into a strategic alliance with
Daiichi. Under this agreement, the Company received $3.0 million in license fees
and $5.0 million from the sale of shares of the Company's preferred stock, and
is entitled to receive up to $3.3 million in future payments based upon the
Company's achievement of certain product development milestones.

      The Company reported profitable operating results for the year ended
December 31, 1996 due to significant license fees and milestone payments
received from Mallinckrodt and Daiichi. However, the Company expects continued
operating losses for the next several years as it incurs expenses to support
research, development and efforts to obtain regulatory approvals.

      The Company's initial product candidate, MS-325, is currently the
Company's only product candidate undergoing human clinical trials. The Company
filed an IND application for MS-325 in July 1996 and initiated Phase I clinical
trials in September 1996.

      In 1995, the Company changed its fiscal year end from March 31 to December
31. As a result, the fiscal year ended December 31, 1995 includes only nine
months of operations as compared to 12 months in 1996. The Company anticipates
fluctuation in its quarterly results of operations due to several factors,
including: the timing of fees and milestone payments received from strategic
partners; the formation of new strategic alliances by the Company; the timing of
expenditures in connection with research and development activities; the timing
of product introductions and associated launch, marketing and sales activities;
and the timing and extent of product acceptance for different indications and
geographical areas of the world.


Results of Operations

Comparison of Year Ended December 31, 1996 and Nine Months Ended December 31,
1995

Revenues. Revenues for the year ended December 31, 1996 were $10.0 million, as
compared to $900,000 for the nine-month period ended December 31, 1995. Revenues
for the year ended December 31, 1996 included $6.0 million in license fees and
approximately $1.0 million of development contract revenue from Mallinckrodt.
Revenues during 1996 also included $3.0 million in license fees (net of 10%
foreign withholding tax) received from Daiichi for the rights to commercialize
MS-325 in Japan. Revenues for the nine-month period ended December 31, 1995
consisted entirely of payments received from a pharmaceutical company as
consideration for an option for certain rights to the Company's future contrast
agents in



                                       27
<PAGE>

Japan. The option expired and the rights to the agent were subsequently licensed
to a third party.

Research and development expenses. Research and development expenses for the
year ended December 31, 1996 were $6.9 million, as compared to $4.2 million for
the nine-month period ended December 31, 1995. This increase was due primarily
to increased MS-325 development costs associated with the commencement of Phase
I clinical trials in September 1996.

General and administrative expenses. General and administrative expenses for the
year ended December 31, 1996 were $2.9 million, as compared to $1.5 million for
the nine-month period ended December 31, 1995. The $1.4 million increase was
largely due to increased personnel costs associated with recruitment and
compensation of additional senior management (approximately $390,000) and
increased expenses for strategic consulting and business development activities.
Significant secondary causes of the increase include higher patent costs as well
as increased agency fees and legal expenses associated principally with the
formation of collaborative agreements. In addition, general and administrative
expenses for 1996 included $250,000 of nonrecurring expense incurred in
connection with the restructuring of a liver agent development program which was
terminated by the Company in 1995. The Company had terminated the program after
reassessing the anticipated future product development costs under the program
measured against the size of the potential market for products. As part of a
negotiated termination of the agreement covering the development program, the
Company paid the contracting party $250,000 and gave a non-exclusive license to
the technology developed to date under the program in exchange for royalty
payments on future sales of products by the contracting party. The Company
expects total general and administrative expenses to increase as the Company's
product candidates advance through clinical trials and to eventual
commercialization.

Interest expense and income. Interest expense for the year ended December 31,
1996 was $289,000, as compared to $151,000, for the nine-month period ended
December 31, 1995. This increase was due to higher borrowings under promissory
notes and bridge loans. Interest income for the year ended December 31, 1996 was
$288,000, as compared to $28,000, for the nine-month period ended December 31,
1995. This increase was due to higher average cash available for investment
during 1996.


Comparison of Nine Months Ended December 31, 1995 and Year Ended March 31, 1995

Revenues. Revenues for the nine-month period ended December 31, 1995 consisted
of the aforementioned $900,000 received as consideration for an option for
certain rights to contrast agents which has since expired. Revenue for the year
ended March 31, 1995 of $411,000 consisted principally of research and license
fees received from a Japanese company in connection with a liver agent
development program which was terminated by the Company in 1995.

Research and development expenses. Research and development expenses were $4.2
million for the nine-month period ended December 31, 1995, as compared to $2.4
million for the year ended March 31, 1995. The increase was attributable to
increased payments to third parties for research studies, hiring of additional
staff and building the infrastructure required to perform research, development
and regulatory activities with respect to the Company's product candidates,
principally MS-325.

General and administrative expenses. General and administrative expenses were
$1.5 million for the nine-month period ended December 31, 1995, as compared to
$825,000 for the year 



                                       28
<PAGE>

ended March 31, 1995, reflecting the investment in personnel and facilities to
support the Company's expanded operations. General and administrative expenses
for the nine-month period ended December 31, 1995 exceeded those for the year
ended March 31, 1995 largely due to increased salaries ($150,000) and higher
legal costs ($117,000), due principally to the formation of various
collaborations. Also contributing to the increase were increased patent costs
attributable to the timing and increased scope of patent activities and
nonrecurring license fee expense incurred in connection with the development of
MS-325.

Interest expense and income. Interest expense for the nine-month period ended
December 31, 1995 was $151,000, as compared to $79,000 for the year ended March
31, 1995, The increase was due primarily to additional interest expense related
to the convertible promissory notes issued in May and November 1995. Interest
income for the nine-month period ended December 31, 1995 was $28,000, as
compared to $121,000 for the year ended March 31, 1995. The decrease was due to
lower average cash available for investment.

Liquidity and Capital Resources

      The Company has financed its operations since inception principally
through the sale of shares of its preferred stock, with proceeds therefrom
totaling approximately $18.4 million (including $3.8 million from convertible
debt securities that were converted to shares of the Company's preferred stock)
and payments aggregating $13.6 million received from third parties, including
Mallinckrodt and Daiichi, in connection with collaboration and license
arrangements. In addition, the Company arranged capital lease lines under which
it has borrowed $1.4 million to date to partially fund approximately $2.4
million of capital expenditures. From inception through December 31, 1996, the
Company has incurred $22.2 million of operating costs, including $15.3 million
related to the research and development of technology and new product
candidates, including MS-325.

      During the year ended December 31, 1996, operating activities provided
$1.7 million of cash, as license fees received in connection with collaboration
agreements more than offset operating expenses during the period. During the
same period, investing activities included $695,000 for the purchase of fixed
assets, consisting principally of laboratory and office equipment. During the
fourth quarter of 1996, the Company expanded its cash management program to
include the purchase of $8.0 million in short-term marketable securities
consisting principally of Federal Government and Agency Obligations. Financing
activities during 1996 provided $9.7 million of cash primarily in the form of
net proceeds from the sale of shares of the Company's preferred stock, totaling
$9.3 million, and the issuance of notes payable aggregating $900,000, which were
subsequently converted into shares of preferred stock of the Company.

      Operating activities during the nine-month period ended December 31, 1995
used $3.5 million in cash, primarily for continued spending on research and
development of MS-325 and for general and administrative expenses. Proceeds from
a sale leaseback arrangement more than offset capital expenditures during the
same period; consequently, investing activities provided $137,000 of cash during
the period. Other significant cash flow events during the period included $2.7
million of proceeds received from the issuance of promissory notes which were
subsequently converted in 1996 into shares of preferred stock of the Company.

      The Company does not anticipate the receipt of license fees from new
collaboration agreements at any time in the immediate future. Because of
anticipated spending to support development of MS-325 and new research programs,
the Company does not expect positive cash flow from operating activities for any
future quarterly or annual period prior to commercialization of MS-325. The
Company anticipates continued investments in fixed assets,



                                       29
<PAGE>

including equipment and facilities expansion to support new and continuing
research and development programs. The Company intends to seek additional debt
financing to support any necessary facilities expansion and equipment
requirements that may occur in the foreseeable future.

      Should the Company be unable to negotiate an extension of its existing
lease or obtain equipment lease financing at reasonable terms, the Company would
be required to find new facilities, modify its current capital plans, seek
alternative sources of debt or equity financing or use existing cash to fund
such expenditures.

      The Company has reported only tax losses to date and therefore has not
paid federal or state income taxes since inception. The Company accounts for
income taxes under Statement of Financial Accounting Standards No. 109 (FAS
109). Realization of deferred taxes is dependent on future events and earnings,
if any, the timing and extent of which are uncertain. Accordingly, the benefit
of deferred tax assets has been fully reserved as of December 31, 1996 and 1995.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $7.3 million available to offset future taxable income. These
amounts expire at various times through 2010. As a result of ownership changes
resulting from recent sales of equity securities, the Company's ability to use
the loss carryforwards is subject to limitations as defined in Sections 382 and
383 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company
currently estimates that the annual limitation on its use of net operating
losses through May 31, 1996 will be approximately $900,000. Pursuant to Section
382 of the Code, the change in ownership resulting from the Company's initial
public offering and any other future sale of stock may limit utilization of
future losses in any one year. The Company is also eligible for research and
development tax credits approximating $400,000 at December 31, 1996, which can
be carried forward to offset federal taxable income. The annual limitation and
the timing of attaining profitability may result in the expiration of net
operating loss and tax credit carryforwards before utilization.

      The Company's principal source of liquidity consists of cash, cash
equivalents and marketable securities totaling $10.7 million at December 31,
1996. The Company is eligible to receive an additional $2.0 million of revenues
from Mallinckrodt and $3.3 million from Daiichi upon the attainment of certain
product development milestones. The Company's agreement with Mallinckrodt
requires Mallinckrodt to fund a portion of the future development costs of
MS-325 up to a specified maximum amount. The Company expects that its cash needs
will increase significantly in future periods due to pending and planned
clinical trials and other increased operating expenses. The Company estimates
that the cash and cash equivalents available at December 31, 1996 will be
sufficient to meet the Company's capital requirements through June 1998. The
Company's future capital requirements will, however, depend on many factors,
including the progress of the Company's research and development programs and
clinical trials, the time and costs required to gain regulatory approvals, the
ability of the Company to obtain and retain continued funding from third parties
under collaborative agreements, the costs of filing, prosecuting and enforcing
patents, patent applications, patent claims and trademarks, the status of
competing products and the market acceptance of the Company's products, if and
when approved. The Company may be required to raise substantial additional funds
to complete development of any product candidate, whether or not it receives
milestone payments under its collaborations with Mallinckrodt and Daiichi, or to
commercialize any products if and when approved by the FDA. The Company may be
required to obtain such additional funds through future public or private sales
of equity securities, equipment lease financings or through strategic alliances.
There can be no assurance that additional financing will be available on
acceptable terms, if at all.

      The Company does not believe that inflation has had a material impact on
its operations.



                                       30
<PAGE>

      The discussion included in this section as well as elsewhere in the Annual
report on Form 10-K may contain forward-looking statements based on current
expectation of the Company's management. Such statements are subject to risks
and uncertainties which could cause actual results to differ from those
projected. See Factors Regarding Forward Looking Statements" attached hereto as
Exhibit 99.1 and incorporated by reference into this Form 10-K. Readers are
cautioned not to place undue reliance on the forward looking statements which
speak only as the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances occurring after the date hereof
or to reflect the occurrence of unanticipated events.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      Financial Statements and supplementary data appear at pages F-1 through
F-23 of this report on Form 10-K.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

      Not applicable.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Directors. The information required under this item is incorporated herein
by reference to the section entitled "Election of Officers" in the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
June 20, 1997 (the "1997 Proxy Statement") to be filed with the Commission not
later than April 30, 1997.

(b) Executive Officers. See Item 4A of Part I above.


ITEM 11.  EXECUTIVE COMPENSATION

      The information required under this item is incorporated herein by
reference to the section entitled "Executive Compensation" in the 1997 Proxy
Statement.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required under this item is incorporated herein by
reference to the section entitled "Share Ownership" in the 1997 Proxy Statement.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required under this item is incorporated herein by
reference to the section entitled "Certain Transactions" in the 1997 Proxy
Statement.




                                       31
<PAGE>



                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

a. Documents filed as part of this Report:

   1. Financial Statements:

      Index to Financial Statements                         F-1
      Report of Independent Auditors                        F-2
      Financial Statements
      Balance Sheets                                        F-3
      Statements of Operations                              F-5
      Statements of Redeemable Convertible
       Preferred Stock and Stockholders' Equity (Deficit)   F-6
      Statements of Cash Flows                              F-8
      Notes to Financial Statements                         F-10

   2. Financial Statement Schedules

   All schedules are omitted because they are not applicable or the required
   information is shown in the financial statements or notes thereto.

   3. Exhibits

   3.1      Restated Certificate of Incorporation of the Company. Filed as
            Exhibit 3.3 to the Company's Registration Statement on Form S-1
            (File No. 333-17581) and incorporated herein by reference.
   3.2      Amended and Restated By-Laws of the Company. Filed as
            Exhibit 3.5 to the Company's Registration Statement on Form S-1
            (File No. 333-17581) and incorporated herein by reference.
   4.1      Specimen certificate for shares of Common Stock of the Company.
            Filed as Exhibit 4.1 to the Company's Registration Statement on Form
            S-1 (File No. 333-17581) and incorporated herein by reference.
   10.1+    Agency Agreement between the Company and Sumitomo Corporation dated
            March 13, 1992. Filed as Exhibit 10.1 to the Company's Registration
            Statement on Form S-1 (File No. 333-17581) and incorporated herein
            by reference.
   10.2+    Amendment to the Agency Agreement between the Company and Sumitomo
            Corporation dated June 26, 1992. Filed as Exhibit 10.2 to the
            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.
   10.3     Short Form Lease from Trustees of the Cambridge East Trust to the
            Company dated July 1, 1992. Filed as Exhibit 10.3 to the Company's
            Registration Statement on Form S-1 (File No. 333-17581) and
            incorporated herein by reference.



                                       32
<PAGE>



   10.4     Form of Warrant to Purchase Shares of Series A Convertible Preferred
            Stock dated December 21, 1992. Filed as Exhibit 10.4 to the
            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.

   10.5     Dominion Ventures Master Lease Agreement No. 8050 dated December 21,
            1992. Filed as Exhibit 10.5 to the Company's Registration Statement
            on Form S-1 (File No. 333-17581) and incorporated herein by
            reference.

   10.6     First Amendment to Master Lease Agreement No. 8050 dated May 14,
            1993. Filed as Exhibit 10.6 to the Company's Registration Statement
            on Form S-1 (File No. 333-17581) and incorporated herein by
            reference.

   10.7     Second Amendment to Master Lease Agreement No. 8050 dated August 5,
            1993. Filed as Exhibit 10.7 to the Company's Registration Statement
            on Form S-1 (File No. 333-17581) and incorporated herein by
            reference.

   10.8     First Amendment Lease From Trustees of the Cambridge Trust to the
            Company dated October 20, 1993. Filed as Exhibit 10.8 to the
            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.

   10.9     Warrant to Purchase Shares of Series B Convertible Preferred Stock
            dated June 6, 1994. Filed as Exhibit 10.9 to the Company's
            Registration Statement on Form S-1 (File No. 333-17581) and
            incorporated herein by reference.

   10.10    Second Amendment to Master Lease Agreement No. 8050 dated June 6,
            1994. Filed as Exhibit 10.10 to the Company's Registration Statement
            on Form S-1 (File No. 333-17581) and incorporated herein by
            reference.

   10.11+   Amendment Agreement to the Agency Agreement between the Company and
            Sumitomo Corporation dated September 15, 1994. Filed as Exhibit
            10.11 to the Company's Registration Statement on Form S-1 (File No.
            333-17581) and incorporated herein by reference.

   10.12    Second Amendment Lease From Trustees of the Cambridge East Trust to
            the Company dated September 17, 1994. Filed as Exhibit 10.12 to the
            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.

   10.13    Convertible Promissory Note Purchase Agreement by and among the
            Company and certain purchasers named therein dated May 26, 1995.
            Filed as Exhibit 10.13 to the Company's Registration Statement on
            Form S-1 (File No. 333-17581) and incorporated herein by reference.

   10.14+   Amended and Restated License Agreement between the Company and The
            General Hospital Corporation dated July 10, 1995. Filed as Exhibit
            10.14 to the Company's Registration Statement on Form S-1 (File No.
            333-17581) and incorporated herein by reference.

   10.15    Warrant to Purchase Shares of Series C Convertible Preferred Stock
            dated August 2, 1995. Filed as Exhibit 10.15 to the Company's
            Registration Statement on Form S-1 (File No. 333-17581) and
            incorporated herein by reference.

   10.16    Third Amendment to the Master Lease Agreement No. 8050 dated August
            2, 1995. Filed as Exhibit 10.16 to the Company's Registration
            Statement on Form S-1 (File No. 333-17581) and incorporated herein
            by reference.

   10.17    Amendment No. 1 to Convertible Promissory Note Purchase Agreement by
            and among the Company and certain purchasers named therein dated
            January 19, 1996. Filed as Exhibit 10.17 to the Company's
            Registration Statement on Form S-1 (File No. 333-17581) and
            incorporated herein by reference.

   10.18+   Extension Agreement to Agency Agreement between the Company and
            Sumitomo Corporation dated March 5, 1996. Filed as Exhibit 10.18 to
            the Company's Registration Statement on Form S-1 (File No.
            333-17581) and incorporated herein by reference.

   10.19+   Development and License Agreement dated March 29, 1996 by and among
            the Company and Daiichi Radioisotope Laboratories, Ltd. Filed as
            Exhibit 10.19 to the 



                                       33
<PAGE>

            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.

   10.20    Third Amendment Lease From Trustees of the Cambridge East Trust to
            the Company dated May 1, 1996. Filed as Exhibit 10.20 to the
            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.

   10.21    Series D Convertible Preferred Stock Purchase Agreement by and among
            the Company and certain purchasers named therein dated May 29, 1996.
            Filed as Exhibit 10.21 to the Company's Registration Statement on
            Form S-1 (File No. 333-17581) and incorporated herein by reference.

   10.22    Third Amended and Restated Stockholders' Rights Agreement by and
            among the Company and certain of its stockholders named therein
            dated May 29, 1996. Filed as Exhibit 10.22 to the Company's
            Registration Statement on Form S-1 (File No. 333-17581) and
            incorporated herein by reference.

   10.23    Form of Warrant to Purchase Shares of Series D Preferred Stock dated
            May 29, 1996. Filed as Exhibit 10.23 to the Company's Registration
            Statement on Form S-1 (File No. 333-17581) and incorporated herein
            by reference.

   10.24    Amendment No. 1 to Third Amended and Restated Stockholders' Rights
            Agreement dated May 31, 1996. Filed as Exhibit 10.24 to the
            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.

   10.25    Series E Convertible Preferred Stock Purchase Agreement dated May
            31, 1996 between the Company and Daiichi Radioisotope Laboratories,
            Ltd. Filed as Exhibit 10.25 to the Company's Registration Statement
            on Form S-1 (File No. 333-17581) and incorporated herein by
            reference.

   10.26+   Strategic Collaboration Agreement between the Company and
            Mallinckrodt Medical, Inc. and Mallinckrodt Group Inc. dated August
            30, 1996. Filed as Exhibit 10.26 to the Company's Registration
            Statement on Form S-1 (File No. 333-17581) and incorporated herein
            by reference.

   10.27    Amendment No. 2 to Third Amended and Restated Stockholders' Rights
            Agreement dated December 6, 1996. Filed as Exhibit 10.27 to the
            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.

   10.28#   Amended and Restated 1992 Equity Incentive Plan. Filed as Exhibit
            10.28 to the Company's Registration Statement on Form S-1 (File No.
            333-17581) and incorporated herein by reference.

   10.29#   Form of Incentive Stock Option Certificate. Filed as Exhibit 10.29
            to the Company's Registration Statement on Form S-1 (File No.
            333-17581) and incorporated herein by reference.

   10.30    Form of Nonstatutory Stock Option Certificate. Filed as Exhibit
            10.30 to the Company's Registration Statement on Form S-1 (File No.
            333-17581) and incorporated herein by reference.

   10.31#   1996 Director Stock Option Plan. Filed as Exhibit 10.31 to the
            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.

   10.32#   1996 Employee Stock Purchase Plan. Filed as Exhibit 10.32 to the
            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.

   10.33    Form of Consulting and Confidentiality Agreement between the Company
            and certain consultants of the Company. Filed as Exhibit 10.33 to
            the Company's Registration Statement on Form S-1 (File No.
            333-17581) and incorporated herein by reference.

   10.34    Form of Invention and Non-Disclosure Agreement between the Company
            and certain employees of the Company. Filed as Exhibit 10.34 to the
            Company's Registration Statement on Form S-1 (File No. 333-17581)
            and incorporated herein by reference.

   10.35    Form of Non-Competition and Non-Solicitation Agreement between the
            Company and certain employees of the Company. Filed as Exhibit 10.35
            to the Company's Registration Statement on Form S-1 (File No.
            333-17581) and incorporated herein by reference.



                                       34
<PAGE>

   10.36    Form of Common Stock Purchase Agreement. Filed as Exhibit 10.36 to
            the Company's Registration Statement on Form S-1 (File No.
            333-17581) and incorporated herein by reference.

   10.37    Form of Stock Purchase and Right of First Refusal Agreement. Filed
            as Exhibit 10.37 to the Company's Registration Statement on Form S-1
            (File No. 333-17581) and incorporated herein by reference.

   11.1     Statement re: computation of per share earnings. Filed herewith.

   24.1     Power of Attorney. Contained on signature page hereto.

   27.1     Financial Data Schedule. Filed herewith.

   99.1     Important Factors Regarding Forward-Looking Statements. Filed
            herewith.

-------------
+     Certain confidential material contained in the document has been omitted
      and filed separately with the Securities and Exchange Commission pursuant
      to Rule 406 of the Securities Act of 1933, as amended.

#     Identifies a management contract or compensatory plan or agreement in
      which an executive officer or director of the Company participates.




                                       35

<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)


                          INDEX TO FINANCIAL STATEMENTS

                                                                        Page
Report of Independent Auditors                                          F-2
Financial Statements
Balance Sheets                                                          F-3
Statements of Operations                                                F-5
Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)                                F-6
Statements of Cash Flows                                                F-8
Notes to Financial Statements                                           F-10












                                      F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
EPIX Medical, Inc.

We have audited the accompanying balance sheets of EPIX Medical, Inc. (a company
in the development stage) as of December 31, 1996 and 1995, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit), and cash flows for the year ended December 31,
1996, the nine months ended December 31, 1995, the year ended March 31, 1995,
and the period from inception (November 29, 1988) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EPIX Medical, Inc. at December
31, 1996 and 1995, and the results of its operations and its cash flows for the
year ended December 31, 1996, the nine months ended December 31, 1995, the year
ended March 31, 1995, and the period from inception (November 29, 1988) to
December 31, 1996, in conformity with generally accepted accounting principles.

                                                         Ernst & Young LLP


Boston, Massachusetts
January 11, 1997
except for Note 15, which
the date is February 13, 1997



                                      F-2
<PAGE>




                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          December 31
                                                                 1996                    1995
                                                             -----------            ----------

<S>                                                          <C>                    <C>         
Assets:
Current assets:
   Cash and cash equivalents                                 $ 2,667,892            $  149,686
   Marketable securities                                       7,996,186
   Prepaid expenses                                               57,135                58,940
   Other current assets                                           12,221                13,178
                                                             -----------            ----------
        Total current assets                                  10,733,434               221,804

Property and equipment, net                                      994,179               856,912

Notes receivable from officer                                    295,344                51,878

Other assets                                                     551,610                80,171
                                                             ===========            ==========
        Total assets                                         $12,574,567            $1,210,765
                                                             ===========            ==========

Liabilities and Stockholders' Deficit
Current liabilities:
   Current portion of capital lease obligations              $   208,571            $  304,416
   Accounts payable and accrued expenses                       2,225,713             1,244,201
                                                             -----------            ----------
        Total current liabilities                              2,434,284             1,548,617

Capital lease obligations, less current portion                  176,269               342,256
Promissory notes                                                                     2,700,000

Redeemable convertible preferred stock:
   Series B, $.01 par value, 2,655,138 shares
     authorized; 2,643,736 shares issued and
     outstanding at December 31, 1996
     and December 31, 1995 ($6,416,368
     liquidation value at December 31, 1996)                   3,963,682             3,955,505
   Series C, $.01 par value, 1,445,536 shares
     authorized; 1,432,318 shares issued and
     outstanding at December 31, 1996 ($3,565,063
     liquidation value at December 31, 1996)                   3,251,444
   Series D, $.01 par value, 1,740,002 shares
     authorized; 1,700,002 shares issued and
     outstanding at December 31, 1996 ($5,641,777
     liquidation value at December 31, 1996)                   5,072,575
   Series E, $.01 par value, 868,329 shares
     authorized; 868,329 shares issued and
     outstanding at December 31, 1996 ($4,916,106
     liquidation value at December 31, 1996)                   4,916,106
</TABLE>



                                      F-3
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                            December 31
                                                                   1996                     1995
                                                               -----------              -----------
<S>                                                            <C>                      <C>        
Stockholders' deficit:
   Series A convertible preferred stock,
     $.01 par value, 104,388 shares authorized;
     93,691 shares issued and outstanding at
     December 31, 1996 and December 31, 1995                   $ 1,037,664              $ 1,037,664
   Common stock, $.01 par value, 15,000,000
     shares authorized; 1,563,808 and 1,564,451 shares
     issued and outstanding at December 31, 1996
     and December 31, 1995, respectively                            15,644                   15,638
  Additional paid-in capital                                       112,960                  198,418
  Accretion of redeemable convertible
     preferred stock to redemption value                          (101,059)                 (14,269)
   Deficit accumulated during the development stage             (8,305,002)              (8,573,064)
                                                               -----------              -----------
Total stockholders' deficit                                     (7,239,793)              (7,335,613)
                                                               -----------              -----------

Total liabilities and stockholders' deficit                    $12,574,567              $ 1,210,765
                                                               ===========              ===========
</TABLE>


See accompanying notes.




                                      F-4
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                                                   Period from
                                                                                                                    Inception
                                                                     Nine months                                  (November 29,
                                             Year ended                 ended                Year ended              1988) to
                                            December 31,             December 31,             March 31,             December 31,
                                                 1996                    1995                    1995                   1996
                                            ------------             -----------             -----------            ----------- 
<S>                                         <C>                       <C>                     <C>                    <C>         
Revenues                                     $10,009,739              $   900,000             $   411,509            $14,021,248

Research and development                       6,878,666                4,164,940               2,407,113             15,301,923
General and administrative                     2,861,906                1,504,811                 824,769              6,930,009
                                            ------------              -----------             -----------            ----------- 
Total operating expenses                       9,740,572                5,669,751               3,231,882             22,231,932
                                            ------------              -----------             -----------            ----------- 
Operating income (loss)                          269,167               (4,769,751)             (2,820,373)            (8,210,684)

Interest expense                                (288,776)                (151,057)                (78,672)              (585,481)
Interest income                                  287,671                   27,880                 120,845                506,630
                                            ------------              -----------             -----------            ----------- 
Net income (loss)                           $    268,062              $(4,892,928)            $(2,778,200)           $(8,289,535)
                                            ============              ===========             ===========            =========== 

Earnings per share:
Pro-forma net income
  (loss)  per share                                $0.03                   $(0.70)
                                            ============              ===========
Weighted-average common
  stock and stock equivalents                  7,711,000                6,973,000
                                            ============              ===========
</TABLE>



                                      F-5
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)


  STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
                                    (DEFICIT)


<TABLE>
<CAPTION>
                                   Redeemable Convertible                                                        
                                      Preferred Stock         Convertible Preferred          Common Stock        
                                     Shares      Amount        Shares       Amount       Shares       Amount     
                                  ------------------------------------------------------------------------------ 
<S>                                <C>          <C>              <C>       <C>          <C>             <C>      
Issuance of common stock in May                                                           333,330       $3,333   
   1989
Issuance of Series A preferred
   stock in March 1992 (net of
   legal costs of $12,336)                                       93,691   $1,037,664                             
Cumulative net loss for the
   period November 29, 1988
   (date of inception) through                                                                                   
   March 31, 1992
                                  ------------------------------------------------------------------------------ 
Balance at March 31, 1992                                        93,691    1,037,664      333,330        3,333   
Issuance of common stock in
   April 1992 as payment for                                                                5,186           52   
   consulting services received
Net loss                                                                                                         
                                  ------------------------------------------------------------------------------ 
Balance at March 31, 1993                                        93,691    1,037,664      338,516        3,385   
Issuance of common stock in
   February 1994  as payment
   for consulting services                                                                  5,186           52   
   received
Three-for-one stock dividend
   declared and paid in March                                                           1,031,118       10,311   
   1994
Issuance of Series B preferred
   stock in March 1994, net of
   issuance costs of $58,764       2,643,736   $3,941,236
Issuance of warrants in
   conjunction with financing                                                                                    
Net loss                                                                                                         
                                  ------------------------------------------------------------------------------ 
Balance at March 31, 1994          2,643,736    3,941,236        93,691    1,037,664    1,374,820       13,748   
Issuance of common stock upon
   exercise of options                                                                     66,866          669   
Issuance of warrants in
   conjunction
   with financing                                                                                                
Accretion of redeemable
   convertible
   preferred stock to                               8,147                                                        
   redemption value
Net loss                                                                                                         
                                  ------------------------------------------------------------------------------ 
Balance at March 31, 1995          2,643,736    3,949,383        93,691    1,037,664    1,441,686       14,417   
</TABLE>





<TABLE>
<CAPTION>
                                                       Accretion of
                                                         Dividends         Deficit
                                                       Dividends on      Accumulated
                                                        Redeemable       Development          Total
                                        Additional      Convertible         in the         Stockholders'
                                         Paid in         Preferred       Development          Equity
                                         Capital           Stock            Stage           (Deficit)
                                       ----------------------------------------------------------------
<S>                                        <C>             <C>           <C>               <C>        
Issuance of common stock in May 1989       $1,667                                              $5,000
Issuance of Series A preferred
   stock in March 1992 (net of
   legal costs of $12,336)                                                                  1,037,664
Cumulative net loss for the
   period November 29, 1988
   (date of inception) through                                             $(27,911)         (27,911)
   March 31, 1992                      ----------------------------------------------------------------
Balance at March 31, 1992                   1,667                           (27,911)        1,014,753
Issuance of common stock in
   April 1992 as payment for                   26                                                  78
   consulting services received
Net loss                                                                   (242,078)        (242,078)
                                       ----------------------------------------------------------------
Balance at March 31, 1993                   1,693                          (269,989)          772,753
Issuance of common stock in
   February 1994  as payment
   for consulting services                     26                                                  78
   received
Three-for-one stock dividend
   declared and paid in March               5,156                           (15,467)
   1994
Issuance of Series B preferred
   stock in March 1994, net of
   issuance costs of $58,764
Issuance of warrants in
   conjunction with financing              43,391                                              43,391
Net loss                                                                   (616,480)        (616,480)
                                       ----------------------------------------------------------------
Balance at March 31, 1994                  50,266                          (901,936)          199,742
Issuance of common stock upon
   exercise of options                     27,415                                              28,084
Issuance of warrants in
   conjunction
   with financing                           6,925                                               6,925
Accretion of redeemable
   convertible
   preferred stock to                                      (8,147)                            (8,147)
   redemption value
Net loss                                                                 (2,778,200)       (2,778,200)
                                       ----------------------------------------------------------------
Balance at March 31, 1995                  84,606          (8,147)       (3,680,136)       (2,551,596)
</TABLE>


                                      F-6
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

  STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
                                   (DEFICIT)

<TABLE>
<CAPTION>
                                                                                                                
                                                                                                                
                                                                                                                
                                   Redeemable Convertible                                                       
                                      Preferred Stock         Convertible Preferred          Common Stock       
                                                                      Stock                                     
                                      Shares      Amount        Shares       Amount       Shares       Amount    
                                  ------------------------------------------------------------------------------
<S>                                <C>         <C>               <C>      <C>           <C>            <C>      
Issuance of common stock upon
   exercise of options                                                                     38,399          384  
Issuance of common stock in
   July 1995 under license                                                                 83,723          837  
   agreement
Accretion of redeemable
   convertible preferred stock                      6,122                                                       
   to redemption value
Issuance of warrants in
   conjunction with financing                                                                                   
Net loss                                                                                                        
                                  ------------------------------------------------------------------------------
Balance at December 31, 1995       2,643,736    3,955,505        93,691    1,037,664    1,563,808       15,638  
Issuance of common stock upon
   exercise of options                                                                     67,309          673  
Issuance of Series C preferred
   stock upon conversion of
   convertible notes and
   interest thereon in May         1,432,318    3,210,177
   1996, net of issuance costs
   of $12,560
Issuance of warrants in
   conjunction with financing                                                                                   
Issuance of Series D preferred
   stock for cash in May 1996,
   net of issuance costs of        1,500,002    4,468,963
   $31,043
Issuance of Series D preferred
   stock upon conversion of          200,000      600,000
   Bridge Notes in May 1996
Issuance of Series E preferred
   stock in May and August
   1996, net of issuance costs       868,329    4,882,372
   of $117,628
Issuance of compensatory stock
   option grants                                                                                                
Repurchase of common stock from
   officer in May 1996                                                                   (66,666)        (667)  
Accretion of redeemable
   convertible preferred stock                     86,790                                                       
   to redemption value
Net income                                                                                                      
                                  ------------------------------------------------------------------------------
Balance at December 31, 1996       6,644,385   $17,203,807       93,691   $1,037,664    1,564,451      $15,644  
                                  ==============================================================================
</TABLE>



<TABLE>
<CAPTION>
                                                       Accretion of
                                                         Dividends         Deficit
                                                       Dividends on      Accumulated
                                                        Redeemable       Development          Total
                                        Additional      Convertible         in the         Stockholders'
                                         Paid in         Preferred       Development          Equity
                                         Capital           Stock            Stage           (Deficit)
                                       ----------------------------------------------------------------
<S>                                       <C>            <C>              <C>             <C>
Issuance of common stock upon                                                             
   exercise of options                      16,874                                            17,258
Issuance of common stock in                                                               
   July 1995 under license                  68,235                                            69,072
   agreement                                                                              
Accretion of redeemable                                                                   
   convertible preferred stock                              (6,122)                          (6,122)
   to redemption value                                                                    
Issuance of warrants in                                                                   
   conjunction with financing               28,703                                            28,703
Net loss                                                                  (4,892,928)     (4,892,928)
                                       ----------------------------------------------------------------
Balance at December 31, 1995               198,418         (14,269)       (8,573,064)     (7,335,613)
Issuance of common stock upon                                                             
   exercise of options                      38,313                                            38,986
Issuance of Series C preferred                                                            
   stock upon conversion of                                                               
   convertible notes and                                                                  
   interest thereon in May                                                                
   1996, net of issuance costs                                                            
   of $12,560                                                                             
Issuance of warrants in                                                                   
   conjunction with financing               78,236                                            78,236
Issuance of Series D preferred                                                            
   stock for cash in May 1996,                                                            
   net of issuance costs of                                                               
   $31,043                                                                                
Issuance of Series D preferred                                                            
   stock upon conversion of                                                               
   Bridge Notes in May 1996                                                               
Issuance of Series E preferred                                                            
   stock in May and August                                                                
   1996, net of issuance costs                                                            
   of $117,628                                                                            
Issuance of compensatory stock                                                            
   option grants                            67,326                                            67,326
Repurchase of common stock from                                                           
   officer in May 1996                    (269,333)                                         (270,000)
Accretion of redeemable                                                                   
   convertible preferred stock                             (86,790)                          (86,790)
   to redemption value                                                                    
Net income                                                                    268,062        268,062
                                       ----------------------------------------------------------------
Balance at December 31, 1996              $112,960       $(101,059)       $(8,305,002)    $(7,239,793)
                                       ================================================================
</TABLE>



See accompanying notes.



                                      F-7
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                              Period from
                                                                                                               inception
                                                                   Nine months                               (November 28,
                                               Year ended             ended             Year ended              1988) to 
                                              December 31,         December 31           March 31,           December 31,
                                                  1996                1995                 1995                   1996
                                           -----------------    ------------------   ------------------    -----------------
<S>                                           <C>                   <C>                  <C>                   <C>         
Operating activities
Net income (loss)                             $    268,062          $(4,892,928)         $(2,778,200)          $(8,289,535)
Adjustments to reconcile net income
   (loss) to cash provided (used) by
   operating actives:
     Depreciation and amortization                 549,241              396,673              285,515             1,652,644
     Expenses paid with equity
       instruments                                 136,526               67,816                                    204,342
   Change in operating assets and
     liabilities:
       Prepaid expenses and other
         current assets                             14,517               16,411               (2,769)             (139,649)
       Accounts payable and accrued
         expenses                                  707,588              872,018              (36,009)            1,951,789
                                           -----------------    ------------------   ------------------    -----------------
Net cash provided (used) by operating
   activities                                    1,675,934           (3,540,010)          (2,531,463)           (4,620,409)

Investing activities
Purchase of fixed assets                          (694,893)            (324,429)            (367,830)           (2,383,052)
Proceeds from lease financing of 
   fixed assets                                     17,173              511,145               41,468             1,122,853
Purchase of  marketable securities              (7,996,186)                                                    (10,352,696)
Proceeds from sale of marketable
    securities                                                                             2,356,510             2,356,510
Issuance of notes receivable from 
   officer                                        (230,000)             (50,000)                                  (280,000)
                                           -----------------    ------------------   ------------------    -----------------
Net cash provided (used) by investing
   activities                                   (8,903,906)             136,716            2,030,148            (9,536,385)
                                           -----------------    ------------------   ------------------    -----------------
</TABLE>



                                      F-8
<PAGE>




                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                      STATEMENTS OF CASH FLOWS--(Continued)


<TABLE>
<CAPTION>
                                                                                                              Period from
                                                                                                               inception
                                                                    Nine months                              (November 28,
                                               Year ended              ended            Year ended              1988) to 
                                              December 31,         December 31,          March 31,            December 31,
                                                  1996                 1995                1995                    1996
                                           -----------------    ------------------   ------------------    -----------------
<S>                                           <C>                  <C>                  <C>                   <C>          
Financing activities
Repayment of capital lease obligations        $   (274,143)        $   (245,489)        $   (245,399)         $   (926,733)
Proceeds from issuance of promissory
   notes                                           300,000            2,700,000                                  3,000,000
Proceeds from issuance of bridge notes             600,000                                                         600,000
Proceeds from sale of Series B
   redeemable convertible preferred stock                                                                        3,941,236
Proceeds from sale of Series D
   redeemable convertible preferred stock        4,468,963                                                       4,468,963
Proceeds from sale of Series E
   redeemable convertible preferred stock        4,882,372                                                       4,882,372
Proceeds from sale of Series A
   convertible preferred stock                                                                                   1,037,664
Repurchase of stock from officer                  (270,000)                                                       (270,000)
Sale of common stock                                38,986               18,514               28,084                90,584
Proceeds from issuance of warrants                                          600                                        600
                                           -----------------    ------------------   ------------------    -----------------
Net cash provided (used) by financing
   activities                                    9,746,178            2,473,625             (217,315)           16,824,686
                                           -----------------    ------------------   ------------------    -----------------
Increase (decrease) in cash and cash
   equivalents                                   2,518,206             (929,669)            (718,630)            2,667,892
Cash and cash equivalents at beginning
   of period                                       149,686            1,079,355            1,797,985
                                           -----------------    ------------------   ------------------    -----------------
Cash and cash equivalents at end of
   period                                       $2,667,892             $149,686           $1,079,355            $2,667,892
                                           =================    ==================   ==================    =================

Supplemental cash flow information
Cash paid for interest                             $96,455              $51,441              $78,672              $293,544
                                           =================    ==================   ==================    =================
</TABLE>

See accompanying notes.


                                      F-9
<PAGE>

                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                          NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

EPIX Medical, Inc. ("EPIX" or the "Company") was formed on November 29, 1988 as
a Delaware corporation and commenced operations in 1992. The Company is
developing targeted contrast agents both to improve the capability and expand
the use of magnetic resonance imaging ("MRI") as a tool for diagnosing a variety
of diseases. The Company's principal product under development, MS-325, is an
injectable contrast agent designed for multiple vascular imaging indications.

The Company is a development-stage enterprise, as defined in Statement of
Financial Accounting Standards No. 7, and has, since inception, been engaged in
the research and development of its product candidates as well as seeking
regulatory clearances and patent protection and raising capital to fund
operations.

As more fully described in Note 15, the Company completed an initial public
offering of 2,300,000 shares of its Common Stock at a price of $7.00 per share.
The net proceeds, after underwriter discounts and offering expenses, aggregated
approximately $14.3 million which the Company expects to use for research and
development and funding of clinical trials in support of regulatory approvals
and for general corporate purposes.

Change of Year End

Subsequent to March 31, 1995, the Company elected to change its fiscal year end
from March 31 to December 31.


Reverse Stock Split

A reverse stock split was approved by the Board of Directors and Stockholders of
the Company in December 1996, whereby one share of Common Stock is outstanding
after the split for each 1.5 shares of Common Stock outstanding prior to the
split. All share and per share amounts related to Common Stock presented in the
accompanying financial statements have been restated to reflect the reverse
stock split.


Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.


Significant Revenues

For the year ended December 31, 1996, one source represented 70% of revenues and
another source represented 30% of revenues. All of the revenues received during
the nine-month period ended December 31, 1995 were derived from a single source.
For the year ended March 31, 1995, one source represented 61% and another source
represented 39% of the total revenues.



                                      F-10
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


2. SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

The Company considers all investments with original maturities of three months
or less to be cash equivalents. Cash equivalents consist of money market
accounts and short-term investments.


Property and Equipment

Property and Equipment are recorded at historical cost. Depreciation on
laboratory equipment and furniture, fixtures and other equipment is determined
using the straight-line method over the estimated useful lives of the related
assets, ranging from 3 to 5 years. Leasehold improvements are amortized using
the straight-line method over the shorter of the asset life or the remaining
life of the lease. Expenditures for maintenance and repairs are charged to
expense; betterments are capitalized.


Capital Lease Obligations

Assets and liabilities relating to capital leases are recorded at the present
value of the future minimum rental payments using interest rates appropriate at
the inception of the lease.


Income Taxes

The Company provides for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
taxes are recognized using the liability method, whereby tax rates are applied
to cumulative temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes based on when and how they are expected to affect the tax return. A
valuation allowance is provided to the extent that there is uncertainty as to
the Company's ability to generate taxable income in the future to realize the
benefit from its net deferred tax asset.


Fair Value of Financial Instruments

In 1995, the Company adopted SFAS No. 107, "Disclosure About the Fair Value of
Financial Instruments," which requires the disclosure of the fair value of
financial instruments. At December 31, 1996 and 1995, the Company's financial
instruments consist of cash, cash equivalents, marketable securities, notes
receivable from a related party, accounts payable and accrued expenses, capital
lease obligations, promissory notes payable and mandatorily redeemable preferred
stock. Fair value of issued equity instruments is based upon negotiated prices
and includes cash and the fair value of other consideration received. The fair
value of available-for-sale securities at December 31, 1996 approximates cost.




                                      F-11
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Mandatorily Redeemable Preferred Stock

Mandatorily redeemable preferred stock is recorded upon issuance at fair value,
net of issuance costs, and periodically accreted to redemption value using the
interest method.


Revenue Recognition

Revenues from non-refundable license fees are recognized upon execution of the
underlying license agreement. Option, license and milestone payments under
collaborative agreements are recorded as earned based upon the provisions of
each agreement. Payments received for which revenue has not been earned are
recorded as deferred revenue.


Technology, Licenses and Patents

Costs associated with technology, licenses and patents are expensed as incurred.


Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
stock-based compensation plans, rather than the alternative fair value
accounting method provided for under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." ("SFAS 123"). The Company
will provide the required discosures as put forth in SFAS 123. Under APB 25,
when the exercise price of options granted under these plans equals the market
price of the underlying stock on the date of grant, no compensation expense is
required.


Pro-forma Net Income (Loss) Per Share

Pro-forma net income (loss) per share is computed using the weighted-average
number of outstanding shares of common stock and common stock equivalents,
assuming conversion of all convertible preferred stock into common stock (as of
their original date of issuance). Common stock equivalents are excluded from the
pro-forma net income (loss) per share computation when their effect is
anti-dilutive; however, pursuant to the requirements of the Securities and
Exchange Commission, common stock equivalent shares relating to stock options
and warrants (using the treasury stock method and an assumed initial public
offering price) and convertible preferred stock issued during the twelve-month
period prior to the initial public offering are included for all periods
presented, whether or not they are anti-dilutive. Earnings per share have not
been presented for all historical periods because such amounts are not
considered meaningful due to the significant change in the Company's capital
structure that would occur in connection with the Company's proposed initial
public offering.





                                      F-12
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Pronouncement

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which establishes criteria
for the recognition and measurement of impairment loss associated with
long-lived assets. The Company has adopted this standard in 1996, and its
adoption did not have a material impact on the Company's financial position or
results of operations.


3.  MARKETABLE SECURITIES

Marketable Securities consist of the following:

                                                            December 31
                                                               1996
                                                            -----------
Available-for-sale securities:
   Federal agency obligations                               $ 7,496,886
   Bank Obligations                                             499,300
                                                            -----------
                                                            $ 7,996,186
                                                            ===========

The fair value of available-for-sale securities at December 31, 1996
approximates cost. The above marketable securities all mature within one year or
less.


4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                          December 31
                                                     1996            1995
                                                  -----------     -----------

Laboratory equipment                               $1,520,170      $1,163,370
Leasehold improvements                                516,160         462,099
Furniture, fixtures and other equipment               470,169         215,869
                                                  -----------     -----------
                                                    2,506,499       1,841,338
Less accumulated depreciation and amortization      1,512,320         984,426
                                                  -----------     -----------
                                                  $   994,179     $   856,912
                                                  ===========     ===========





                                      F-13
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


5. LEASES

The Company has entered into a number of capital leases for equipment, including
sale and leaseback transactions involving certain equipment. Assets under
capital leases, the majority of which are laboratory equipment, totaled
$1,382,350 and $1,320,994 at December 31, 1996 and 1995, respectively.
Accumulated amortization relating to assets under capital leases was $993,437
and $661,257 at December 31, 1996 and 1995, respectively. In December 1996 the
Company arranged a new lease facility which provides for additional lease
financing up to an aggregate of $1 million.

Additionally, the Company leases office space under operating lease
arrangements. The initial term of the lease expires in December 1997 and is
renewable with 12 months notice for an additional five year term.

Future minimum commitments under leases with non-cancelable terms of one or more
years are as follows at December 31, 1996:

                                        Capital             Operating
                                         Leases              Leases
                                        ---------           ---------

1997                                     $252,161             $197,556
1998                                      186,555
1999                                       10,761
                                         --------             --------
Total minimum lease payments              449,477             $197,556
                                                              ========
Less amounts representing interest         64,637
                                         --------
Present value minimum lease payments      384,840
Less amounts due within one year          208,571
                                         --------
                                         $176,269
                                         ========

Rent expense amounted to approximately $174,666, $86,100 and $94,600 for the
twelve months ended December 31, 1996, the nine months ended December 31, 1995
and the twelve months ended March 31, 1995, respectively, and approximately
$487,000 for the period from inception (November 29, 1988) to December 31, 1996.

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

                                                      December 31
                                                  1996         1995
                                               ----------    ----------

Accounts payable                               $  428,746    $  615,174
Accrued development expenses                      963,447       435,562
Accrued interest expense                                         99,616
Accrued legal expense                             176,209
Accrued public offering costs                     294,893
Accrued license restructuring cost                250,000
Other accrued expenses                            112,418        93,849
                                               ----------    ----------
Total accounts payable and accrued expenses    $2,225,713    $1,244,201
                                               ==========    ==========



                                      F-14
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


7. PROMISSORY NOTES

During 1995, the Company issued 10% Promissory Notes ("Promissory Notes") in an
aggregate amount of $2,700,000 which became due upon demand on or after February
15, 1996.

In January 1996, the Company issued convertible promissory notes for an
aggregate amount of $3,015,862 ("Convertible Notes") in exchange for $300,000 of
cash and cancellation of the Promissory Notes and accrued interest thereon. The
Convertible Notes were issued at an annual interest rate of 10% and became due
upon demand on or after February 15, 1996.

In February 1996, the Company issued additional convertible promissory notes for
an aggregate amount of $600,000 ("Bridge Notes") which became due upon demand,
with interest at a rate of 10% per year.

In May 1996 the Promissory Notes and Bridge Notes were converted to Redeemable
Convertible Preferred Stock (see Note 8). Because it was contemplated that the
Convertible Notes for which the Promissory Notes were subsequently exchanged
would be converted during 1996, the Promissory Notes were classified as
long-term at December 31, 1995.


8. CAPITAL STOCK

In addition to the sale of its Common Stock, the Company has authorized and
issued one series of convertible preferred stock ("Series A Preferred Stock")
and four series of redeemable, convertible preferred stock ("Series B , Series
C, Series D and Series E Preferred Stock").

In May 1996, the Convertible Notes (see Note 7) and accrued interest thereon
were converted at a conversion price of $2.25 into 1,432,318 shares of the
Company's Series C Preferred Stock.

In May 1996, the Company issued 1,700,002 shares of Series D Preferred Stock,
priced at $3.00 per share, in exchange for cash and cancellation of the Bridge
Notes (see Note 7) and accrued interest thereon.

The sale of the Series E Preferred Stock, was completed in two separate
closings, one in May 1996 and the other in August 1996, for a total of 868,329
shares at a price of $5.76 per share.

Conversion Rights of Preferred Stockholders

The following table shows the number of shares of Common Stock into which
outstanding shares of each Series of Preferred Stock are convertible at December
31, 1996:

                    Series A                        320,723
                    Series B                      1,762,484
                    Series C                        954,872
                    Series D                      1,133,325
                    Series E                        578,885
                                                  ---------
                      Total                       4,750,289
                                                  =========




                                      F-15
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

8.  CAPITAL STOCK (Continued)

The number of shares of Common Stock into which shares of Preferred Stock are
convertible is subject to adjustment upon the occurrence of certain events
principally related to changes in the capital structure, such as stock splits,
stock dividends, business combination or other recapitalization or
reorganization affecting such shares. All shares of Preferred Stock
automatically convert to Common Stock upon an initial public offering meeting
certain criteria related to size and share price.

Redemption Rights

Under the Company's Restated Certificate of Incorporation adopted in May 1996,
at any time on or after May 29, 2001, holders of two thirds of the then
outstanding shares of the Series B, Series C, Series D and Series E Preferred
Stock may require the Company to redeem such series of preferred stock at
specified redemption prices (equal, as of December 31, 1996, to the original
purchase price of each such series) plus any undeclared but unpaid dividends
thereon. The consent of the holders of a majority of the outstanding shares of
Series D Preferred Stock is required to effect a redemption of any securities
prior to the redemption of Series D Preferred Stock. The holders of Series C and
Series E Preferred Stock are entitled to a $.05 per share annual dividend if,
when and as declared by the Board of Directors which must be paid prior to
payment of any other dividends.

Voting Rights and Election of Directors

Each holder of Preferred Stock shall be entitled to the number of votes equal to
the number of shares of Common Stock into which the Preferred Stock is
convertible. The Series A Preferred Stockholders with the Common Stockholders,
voting as a single class, have the right to elect two directors of the Company.
The holders of Series B and Series C Preferred Stock, voting as a single class,
are also entitled to elect two directors. All other directors are elected by the
Preferred Stockholders and Common Stockholders voting together as a single
class.

Liquidation Preferences

In the event of a liquidation, dissolution or winding up of the Company the
holders of Preferred Stock are entitled to receive a specified per share amount
(in each case subject to adjustment, in the event of any stock dividends, stock
split, combination or other similar recapitalization affecting such shares) plus
any other declared but unpaid dividends thereon. In addition, holders of Series
B, Series C, Series D and Series E Preferred Stock are entitled to receive a
preferential, cumulative cash dividend of 18% per annum, compounded annually
from the date of issuance. In the event of liquidation, the holders of Series D
Preferred Stock rank senior to all other Series of Preferred Stock. The
following table shows, by Series, the specified per share amount and accrued
dividends payable to Preferred Stockholders upon liquidation as of December 31,
1996:

                                   Per share                 Total
                                  Liquidation             Accumulated
                                    Price                  Dividends

             Series A               $11.21
             Series B                $1.51                 $22,446
             Series C                $2.25                 $41,267
             Series D                $3.00                  $3,612
             Series E                $5.76                 $33,734



                                      F-16
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

8.  CAPITAL STOCK (Continued)

On December 10, 1996, the Company filed a registration statement with the
Securities and Exchange Commission in order to permit the Company to sell shares
of its Common Stock to the public. Upon consummation of the offering, all of the
Preferred Stock issued and outstanding will automatically convert into 4,750,289
shares of Common Stock. Immediately following such conversion, all currently
outstanding shares of Preferred Stock will be canceled, retired and eliminated
from the Company's authorized shares of capital stock and the number of
authorized shares of Preferred Stock will be decreased to 1,000,000 shares.


9. WARRANTS

In connection with a master lease line (see Note 5), the Company has issued
warrants to purchase shares of Series A, Series B and Series C Preferred Stock.
In connection with the issuance of Bridge Notes and the sale of Series D
preferred stock, the Company issued warrants to purchase shares of Series D
Preferred Stock (see Note 6). Information on warrants issued through and
outstanding as of December 31, 1996 is as follows:

                   Exercisable
                    Warrants                    Exercised Warrants
                 ----------------     ---------------------------------------
                 
                    Shares of                            
                    Preferred          Shares of Common     Warrant Exercise
  Description    Stock Reserved         Stock Reserved           Price
-----------------------------------------------------------------------------
   Series A           10,697                   36,618            $11.21
   Series B           11,402                    7,601            $ 1.51
   Series C           13,218                    8,812            $ 4.54
   Series D           40,000                   26,665            $ 3.00

Warrants for the purchase of 9,365 and 1,332 shares of the Company's Series A
Preferred Stock expire the earlier of five years from the date of an initial
public offering or on December 21, 2002 and August 5, 2002, respectively.
Warrants to purchase 11,402 shares of the Company's Series B Preferred Stock and
13,218 shares of the Company's Series C Preferred Stock expire on the earlier of
five years from the date of an initial public offering or June 6, 2004 and
August 2, 2005, respectively.

The value ascribed to the warrants aggregating $79,019 has been accounted for as
additional paid in capital.





                                      F-17
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


10.  EQUITY PLANS

Equity Incentive Plan

On July 1, 1992, the Company adopted the 1992 Equity Incentive Plan, which
provides stock awards to purchase shares of Common Stock to be granted to
employees and consultants under incentive and non-statutory stock option
agreements. In December 1996, the Company amended the 1992 Equity Incentive Plan
(as amended, "the Equity Plan") to, among other things, increase the number of
shares reserved for issuance pursuant to grants. The Equity Plan provides for
the grant of stock options (incentive and non-statutory), stock appreciation
rights, performance shares, restricted stock or stock units for the purchase of
an aggregate of 1,599,901 shares of Common Stock, subject to adjustment for
stock-splits and similar capital changes. Awards under the Equity Plan can be
granted to officers, employees and other individuals as determined by the
committee of the Board of Directors which administers the Equity Plan. The
Compensation Committee selects the participants and establishes the terms and
conditions of each option or other equity right granted under the Equity Plan,
including the exercise price, the number of shares subject to options or other
equity rights and the time at which such options become exercisable.

Stock option information relating to the Equity Incentive Plan is as follows:

<TABLE>
<CAPTION>
                                                                    Weighted                                          Weighted
                                Options         Option price         average      Available for                        average
                              Outstanding      range per share   exercise price       Grant        Exercisable    exercisable price
                             -------------------------------------------------------------------------------------------------------
<S>                               <C>           <C>                  <C>             <C>            <C>                <C>  
March 31, 1993                      107,926        $0.42             $0.42           725,259         6,975             $0.42
   Granted                          142,648        $0.42             $0.42
                                  ---------
March 31, 1994                      250,624        $0.42             $0.42           582,611         34,592            $0.42
   Granted                          359,131        $0.45             $0.43
   Exercised                        (66,866)       $0.42             $0.42
   Canceled                          (1,400)       $0.42             $0.42
                                  ---------
March 31, 1995                      541,489     $0.42-$0.45          $0.43           224,880        143,207            $0.43
   Granted                          133,993     $0.45-$0.83          $0.55
   Exercised                        (38,399)    $0.42-$0.45          $0.45
   Canceled                         (40,933)    $0.42-$0.45          $0.45
                                  ---------
December 31, 1995                   596,150     $0.42-$0.83          $0.47           131,820        200,631            $0.44
   Granted                          753,896     $0.83-$8.50          $3.59
   Exercised                        (67,309)    $0.42-$0.83          $0.58
   Canceled                          (4,934)    $0.42-$0.45          $0.45
                                  ---------
December 31, 1996                 1,277,803     $0.42-$8.50          $2.30           149,524        392,933            $1.21
                                  =========
</TABLE>

1996 Employee Stock Purchase Plan

In December 1996, the Company adopted the Company's 1996 Employee Stock Purchase
Plan (the "Purchase Plan") under which employees may purchase shares of Common
Stock at a discount from fair market value. There are 66,666 shares of Common
Stock reserved for issuance under the Purchase Plan. To date, no shares of
Common Stock have been issued under the Purchase Plan. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the code. Rights to purchase Common Stock under the Purchase Plan
are granted at the discretion of the Compensation Committee, which determines
the frequency and




                                      F-18
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


10.  COMMON STOCK (Continued)

duration of individual offerings under the Purchase Plan and the dates when
stock may be purchased. Eligible employees participate voluntarily and may
withdraw from any offering at any time before stock is purchased. Participation
terminates automatically upon termination of employment. The purchase price per
share of Common Stock in an offering is 85% of the lesser of its fair market
value at the beginning of the offering period or on the applicable exercise date
and may be paid through payroll deductions, periodic lump sum payments or a
combination of both. The Purchase Plan terminates in December 2006.


1996 Directors Stock Option Plan

In December 1996, the Board of Directors and stockholders of the Company adopted
the Company's 1996 Director Stock Option Plan (the "Director Plan"). All of the
directors who are not employees of the Company (the "Eligible Directors") are
currently eligible to participate in the Director Plan. There are 66,666 shares
of Common Stock reserved for issuance under the Director Plan. Upon the election
or reelection of an Eligible Director, such director is automatically granted an
option to purchase 6,666 shares of Common Stock (the "Option"). Each Option
becomes exercisable with respect to 1,333 shares on each anniversary date of
grant for a period of five years, provided that the option holder is still a
director of the Company at the opening of business such date. The Options have a
term of ten years. The exercise price for the Options is equal to fair value at
the date of grant. The exercise price may be paid in cash or shares of Common
Stock or combination of both.


FAS 123 Pro Forma Information

The pro forma information as required by FAS 123 is presented below and has been
determined as if the Company accounted for its employee stock options under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model. For
pro forma purposes the fair value of the options is amortized over the options'
vesting period:

<TABLE>
<CAPTION>
                                                                             Nine Months
                                                             Year ended         ended
                                                            December 31      December 31
                                                               1996             1995
                                                            -----------      -----------
   <S>                                                       <C>             <C>         
   Assumptions:
        Risk free interest rates                                  6.34%             5.85%
        Dividend yields
        Volatility factors                                        0.60              0.60
        Weighted average option life (in years)                   5.53              4.92

    Pro forma amounts
        Weighted average fair value of options granted          $ 2.16            $ 0.31
        Weighted average contractual life (in years)              8.59              8.53

        Net income (loss)                                    $  48,866       $(4,896,608)
        Net income (loss) per share                          $    0.01       $     (0.70)
</TABLE>




                                      F-19
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

10.  COMMON STOCK (Continued)

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition option valuation models require the use of highly
subjective assumptions. Because the Company's stock options have characteristics
that are significantly different from traded options and because changes in the
valuation assumptions can materially affect the fair value estimate, in
Management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.


11. INCOME TAXES

The Company has incurred losses since inception and, due to the degree of
uncertainty related to the ultimate use of the loss carryforwards, fully
reserved this tax benefit. The Company has the following total deferred tax
assets as of December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                         1996                    1995
                                                       ----------              ---------- 
   <S>                                                 <C>                     <C>       
   Deferred tax assets
      Net operating loss carryforwards                 $2,921,000              $3,137,000
      Research and development tax credits                400,000                 300,000
      Book over  tax depreciation and amortization        383,000                 113,400
      Other                                                18,000                  19,900
                                                       ----------              ---------- 
   Total deferred tax assets                            3,722,000               3,570,300
   Valuation allowances                                (3,722,000)             (3,570,300)
                                                       ----------              ----------
   Deferred income taxes, net                          $  - 0 -                $  - 0 -
                                                       ==========              ========== 
</TABLE>

As of December 31, 1996, the Company has net operating loss carryforwards for
income tax purposes of approximately $7.3 million, which expire through the year
2010. The valuation allowance increased by $151,700 during the twelve months
ended December 31, 1996, $2,088,700 during the nine months ended December 31,
1995 and $1,212,900 during the twelve months ended March 31, 1995, due primarily
to the additional allowance for the net operating losses incurred in the
respective periods. The tax net operating loss carryforwards differ from the
accumulated deficit principally due to temporary differences in the recognition
of certain revenue and expense items for financial and tax reporting purposes.

As a result of an ownership change occurring in May 1996 (see Note 8), the
Company's ability to utilize its tax loss carryforwards and tax credits is
subject to limitations as defined in Internal Revenue Code Sections 382 and 383.
The Company currently estimates that their annual limitation on the use of tax
loss carryforwards through May 31, 1996 will be approximately $900,000. Research
and development tax credits through May 31, 1996 of approximately $300,000
cannot be utilized until such tax loss carryforwards are fully utilized.


12.  DEFINED CONTRIBUTION PLAN

During the year ended March 31, 1995, the Company began a defined contribution
401(k) plan which covers substantially all employees. The plan permits
participants to make contributions from 1% to 15% of their compensation (as
defined).



                                      F-20
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


13. RELATED PARTY TRANSACTION

During 1995 and 1996 the Company received promissory notes from one executive
officer and director. These transactions are summarized below:


<TABLE>
<CAPTION>
                                                                             Shares of Company Common Stock
          Date of                                            Interest            Provided as Collateral
           Note               Term           Amount            Rate
     ------------------    ------------    ------------    --------------    --------------------------------
     <S>                    <C>               <C>                  <C>                   <C>   
     June 26, 1995          10 years           $50,000             7.31%                 14,814
     April 5, 1996          10 years           $50,000             6.51%                 14,814
     May 31, 1996           10 years          $230,000             6.83%                 44,444
</TABLE>

The notes are subject to certain acceleration clauses. In May 1996, the Company
also repurchased from the same officer of the Company, 66,666 shares of Common
Stock at a price per share of $4.05.


14. SIGNIFICANT AGREEMENTS

The Company has a license agreement with Massachusetts General Hospital ("MGH")
for the exclusive license of a number of patents and patent applications on
which the Company's research and development efforts are significantly based. In
exchange, the Company will remit royalties based on a specified percentage of
revenues. Under this agreement, the Company is required to pay for all patent
application costs related to the licensed technology. On July 10, 1995, the
Company issued and sold to the MGH 83,723 shares of the Company's Common Stock
for $1,256 as consideration for certain modifications to the license. The
Company expensed the difference between proceeds received and fair value at the
time of issuance, approximately $68,000.

In March 1992, the Company entered into an Agency Agreement with Sumitomo Corp.
("Sumitomo") to assist the Company in entering into collaboration and licensing
arrangements with other companies in Japan for the development, manufacture,
distribution and sale of the Company's future products. At that time, Sumitomo
purchased 66,923 shares of the Company's Series A Preferred Stock, $.01 par
value, for $11.21 per share. In October 1995, Sumitomo assigned the Agency
Agreement and its shares to Summit Pharmaceutical International Corporation
("Agent"). Under the terms of the amended Agency Agreement, which expired and
was extended for one year in March 1996, the Company is required to pay the
Agent certain commissions and fees, based on a stipulated percentage of amounts
received by the Company as license fees, milestone payments or capital
investments.

Also, in March 1992, the Company entered into a $3.5 million development and
license agreement with, a Japanese manufacturer and distributor ("Japanese
Manufacturer and Distributor") of medical products. Under the terms of the
agreement, the Company received funding for research and development through the
sale of Preferred Stock and license rights to the Company's liver MRI contrast
agent product candidate. In March of 1992, the Japanese Manufacturer and
Distributor purchased an equity interest in the Company in accordance with the
agreement by acquiring 26,768 shares of Series A Preferred Stock for $11.21 per
share. As of December 31, 1996, the Company had received an aggregate of $2.7
million in revenues (net of withholding tax) under this agreement.




                                      F-21
<PAGE>



                               EPIX MEDICAL, INC.
                      (A Company in the Development Stage)

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


14.  SIGNIFICANT AGREEMENTS (Continued)

In December 1996, the Company and the Japanese Manufacturer and Distributor
agreed to restructure the existing agreement. In connection with the
restructuring, the parties terminated further collaboration efforts and the
Japanese Manufacturer and Distributor relinquished its exclusive rights in Japan
to the liver MRI agent in exchange for a non-exclusive technology license and a
$250,000 payment from the Company. The Company is entitled to receive royalties
based upon specified percentage of future revenues, if any, from the sale of
liver MRI contrast agents by the Japanese Manufacturer and Distributor.

In March 1996, the Company entered into marketing, development and license
agreements with Daiichi Radioisotope Laboratories Ltd., a Japanese
pharmaceutical company ("Daiichi") covering the Company's vascular MRI contrast
agent. During 1996, the Company received a license fee of $3.0 million (net of
withholding tax) upon execution of the agreement and proceeds from the issuance
of 868,329 shares of Series E Preferred Stock at price of $5.76 per share (see
Note 8). In addition, the Company is entitled to receive future milestone
payments of up to $3.3 million (net of withholding tax) The agreements also
provide for the Company to supply product to Daiichi and to receive royalties
for sales made by Daiichi in Japan.

In August 1996, the Company entered into a strategic collaboration agreement
with Mallinckrodt Group Inc. ("Mallinckrodt"), a U.S. pharmaceutical company,
involving research, development and marketing of MS-325 and future MRI vascular
contrast agents developed or in-licensed by either party. Under the terms of the
agreement, each party is obligated to fund a portion of the development cost of
MS-325 up to a specified maximum amount. Mallinckrodt will have the right to
manufacture MS-325 and to market the product worldwide except Japan. During
1996, the Company received a $6.0 million license fee payment upon execution of
the agreement is eligible to receive a future additional $2.0 million upon the
earlier of the completion of a specified milestone or a designated date. Under
the agreement, the Company will share in future operating profits from the sale
of products covered under the agreement.


15.  SUBSEQUENT EVENTS

On February 4, 1997 the Company completed an initial public offering of
2,000,000 shares of its Common Stock at a price of $7.00 per share. On February
13, 1997 the Company issued an additional 300,000 shares of its Common Stock at
a price of $7.00 per share to cover an underwriters over-allotment option. The
net proceeds, after underwriter discounts and offering expenses, aggregated
approximately $14.3 million which the Company expects to use for research and
development and funding of clinical trials in support of regulatory regulatory
and reimbursement approvals and for general corporate purposes.


                                      F-22



<PAGE>




                                   SIGNATURES

      Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.

                                                         EPIX MEDICAL, INC.

Date: March 27, 1997                                 By: /s/ Michael D. Webb
                                                         ----------------------
                                                         Michael D. Webb
                                                         President and Chief 
                                                         Executive Officer

      We the undersigned officer and directors of EPIX Medical, Inc., hereby
severally constitute Michael D. Webb, Jeffrey R. Lentz and William T. Whelan,
and each of them singly, our true and lawful attorneys, with full power to them
and each of them to sign for use, in our names and in the capacity indicated
below, any and all amendments to this annual report on this Form 10-K for the
fiscal year ended December 31, 1996, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorneys-in-fact
may cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.


<TABLE>
<CAPTION>
Signature                                 Title                                     Date
-----------------------------------------------------------------------------------------------------
<S>                                <C>                                              <C>
/s/ Michael D. Webb                President, Chief Executive Officer               March 27, 1997 
------------------------------     and Director (Principal Executive Officer)
Michael D. Webb

/s/ Jeffrey R. Lentz               Chief Financial Officer, and Vice                March 27, 1997
------------------------------     President, Finance and Administration
Jeffrey R. Lentz                   (Principal Financial Officer and
                                   Principal Accounting Officer)

/s/ Christopher F. O. Gabrieli     Chairman of the Board                            March 27, 1997
------------------------------     and Director
Christopher F. O. Gabrieli

/s/ Stanley T. Crooke, M.D., Ph.D.
------------------------------     Director                                         March 27, 1997
Stanley T. Crooke, M.D., Ph.D. 

/s/ Luke B. Evnin, Ph.D.
------------------------------     Director                                         March 27, 1997
Luke B. Evnin, Ph.D.

/s/ Randall B. Lauffer, Ph.D.
------------------------------     Director                                         March 27, 1997
Randall B. Lauffer, Ph.D.
</TABLE>






<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number     Description
--------------------------------------------------------------------------------
3.1        Restated Certificate of Incorporation of the Company. Filed as
           Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File
           No. 333-17581) and incorporated herein by reference.
3.2        Form of Amended and Restated By-Laws of the Company. Filed as Exhibit
           3.5 to the Company's Registration Statement on Form S-1 (File No.
           333-17581) and incorporated herein by reference.
4.1        Specimen certificate for shares of Common Stock of the Company. Filed
           as Exhibit 4.1 to the Company's Registration Statement on Form S-1
           (File No. 333-17581) and incorporated herein by reference.
10.1+      Agency Agreement between the Company and Sumitomo Corporation dated
           March 13, 1992. Filed as Exhibit 10.1 to the Company's Registration
           Statement on Form S-1 (File No. 333-17581) and incorporated herein by
           reference.
10.2+      Amendment to the Agency Agreement between the Company and Sumitomo
           Corporation dated June 26, 1992. Filed as Exhibit 10.2 to the
           Company's Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.3       Short Form Lease from Trustees of the Cambridge East Trust to the
           Company dated July 1, 1992. Filed as Exhibit 10.3 to the Company's
           Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.4       Form of Warrant to Purchase Shares of Series A Convertible Preferred
           Stock dated December 21, 1992. Filed as Exhibit 10.4 to the Company's
           Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.5       Dominion Ventures Master Lease Agreement No. 8050 dated December 21,
           1992. Filed as Exhibit 10.5 to the Company's Registration Statement
           on Form S-1 (File No. 333-17581) and incorporated herein by
           reference.
10.6       First Amendment to Master Lease Agreement No. 8050 dated May 14,
           1993. Filed as Exhibit 10.6 to the Company's Registration Statement
           on Form S-1 (File No. 333-17581) and incorporated herein by
           reference.
10.7       Second Amendment to Master Lease Agreement No. 8050 dated August 5,
           1993. Filed as Exhibit 10.7 to the Company's Registration Statement
           on Form S-1 (File No. 333-17581) and incorporated herein by
           reference.
10.8       First Amendment Lease From Trustees of the Cambridge Trust to the
           Company dated October 20, 1993. Filed as Exhibit 10.8 to the
           Company's Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.9       Warrant to Purchase Shares of Series B Convertible Preferred Stock
           dated June 6, 1994. Filed as Exhibit 10.9 to the Company's
           Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.10      Second Amendment to Master Lease Agreement No. 8050 dated June 6,
           1994. Filed as Exhibit 10.10 to the Company's Registration Statement
           on Form S-1 (File No. 333-17581) and incorporated herein by
           reference.
10.11+     Amendment Agreement to the Agency Agreement between the Company and
           Sumitomo Corporation dated September 15, 1994. Filed as Exhibit 10.11
           to the Company's Registration Statement on Form S-1 (File No. 
           333-17581) and incorporated herein by reference.
10.12      Second Amendment Lease From Trustees of the Cambridge East Trust to
           the Company dated September 17, 1994. Filed as Exhibit 10.12 to the
           Company's 



<PAGE>

           Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.13      Convertible Promissory Note Purchase Agreement by and among the
           Company and certain purchasers named therein dated May 26, 1995.
           Filed as Exhibit 10.13 to the Company's Registration Statement on
           Form S-1 (File No. 333-17581) and incorporated herein by reference.
10.14+     Amended and Restated License Agreement between the Company and The
           General Hospital Corporation dated July 10, 1995. Filed as Exhibit
           10.14 to the Company's Registration Statement on Form S-1 (File No.
           333-17581) and incorporated herein by reference.
10.15      Warrant to Purchase Shares of Series C Convertible Preferred Stock
           dated August 2, 1995. Filed as Exhibit 10.15 to the Company's
           Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.16      Third Amendment to the Master Lease Agreement No. 8050 dated August
           2, 1995. Filed as Exhibit 10.16 to the Company's Registration
           Statement on Form S-1 (File No. 333-17581) and incorporated herein by
           reference.
10.17      Amendment No. 1 to Convertible Promissory Note Purchase Agreement by
           and among the Company and certain purchasers named therein dated
           January 19, 1996. Filed as Exhibit 10.17 to the Company's
           Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.18+     Extension Agreement to Agency Agreement between the Company and
           Sumitomo Corporation dated March 5, 1996. Filed as Exhibit 10.18 to
           the Company's Registration Statement on Form S-1 (File No. 333-17581)
           and incorporated herein by reference.
10.19+     Development and License Agreement dated March 29, 1996 by and among
           the Company and Daiichi Radioisotope Laboratories, Ltd. Filed as
           Exhibit 10.19 to the Company's Registration Statement on Form S-1
           (File No. 333-17581) and incorporated herein by reference.
10.20      Third Amendment Lease From Trustees of the Cambridge East Trust to
           the Company dated May 1, 1996. Filed as Exhibit 10.20 to the
           Company's Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.21      Series D Convertible Preferred Stock Purchase Agreement by and among
           the Company and certain purchasers named therein dated May 29, 1996.
           Filed as Exhibit 10.21 to the Company's Registration Statement on
           Form S-1 (File No. 333-17581) and incorporated herein by reference.
10.22      Third Amended and Restated Stockholders' Rights Agreement by and
           among the Company and certain of its stockholders named therein dated
           May 29, 1996. Filed as Exhibit 10.22 to the Company's Registration
           Statement on Form S-1 (File No. 333-17581) and incorporated herein by
           reference.
10.23      Form of Warrant to Purchase Shares of Series D Preferred Stock dated
           May 29, 1996. Filed as Exhibit 10.23 to the Company's Registration
           Statement on Form S-1 (File No. 333-17581) and incorporated herein by
           reference.
10.24      Amendment No. 1 to Third Amended and Restated Stockholders' Rights
           Agreement dated May 31, 1996. Filed as Exhibit 10.24 to the Company's
           Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.25      Series E Convertible Preferred Stock Purchase Agreement dated May 31,
           1996 between the Company and Daiichi Radioisotope Laboratories, Ltd.
           Filed as Exhibit 10.25 to the Company's Registration Statement on
           Form S-1 (File No. 333-17581) and incorporated herein by reference.



<PAGE>

10.26+     Strategic Collaboration Agreement between the Company and
           Mallinckrodt Medical, Inc. and Mallinckrodt Group Inc. dated August
           30, 1996. Filed as Exhibit 10.26 to the Company's Registration
           Statement on Form S-1 (File No. 333-17581) and incorporated herein by
           reference.
10.27      Amendment No. 2 to Third Amended and Restated Stockholders' Rights
           Agreement dated December 6, 1996. Filed as Exhibit 10.27 to the
           Company's Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.28#     Amended and Restated 1992 Equity Incentive Plan. Filed as Exhibit
           10.28 to the Company's Registration Statement on Form S-1 (File No.
           333-17581) and incorporated herein by reference.
10.29#     Form of Incentive Stock Option Certificate. Filed as Exhibit 10.29 to
           the Company's Registration Statement on Form S-1 (File No. 333-17581)
           and incorporated herein by reference.
10.30      Form of Nonstatutory Stock Option Certificate. Filed as Exhibit 10.30
           to the Company's Registration Statement on Form S-1 (File No.
           333-17581) and incorporated herein by reference.
10.31#     1996 Director Stock Option Plan. Filed as Exhibit 10.31 to the
           Company's Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.32#     1996 Employee Stock Purchase Plan. Filed as Exhibit 10.32 to the
           Company's Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.33      Form of Consulting and Confidentiality Agreement between the Company
           and certain consultants of the Company. Filed as Exhibit 10.33 to the
           Company's Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.34      Form of Invention and Non-Disclosure Agreement between the Company
           and certain employees of the Company. Filed as Exhibit 10.34 to the
           Company's Registration Statement on Form S-1 (File No. 333-17581) and
           incorporated herein by reference.
10.35      Form of Non-Competition and Non-Solicitation Agreement between the
           Company and certain employees of the Company. Filed as Exhibit 10.35
           to the Company's Registration Statement on Form S-1 (File No.
           333-17581) and incorporated herein by reference.
10.36      Form of Common Stock Purchase Agreement. Filed as Exhibit 10.36 to
           the Company's Registration Statement on Form S-1 (File No. 333-17581)
           and incorporated herein by reference.
10.37      Form of Stock Purchase and Right of First Refusal Agreement. Filed as
           Exhibit 10.37 to the Company's Registration Statement on Form S-1
           (File No. 333-17581) and incorporated herein by reference.
11.1       Statement re: computation of per share earnings. Filed herewith.
24.1       Power of Attorney. Contained on signature page hereto.
27.1       Financial Data Schedule. Filed herewith.
99.1       Important Factors Regarding Forward-Looking Statements. Filed
           herewith.

---------------------------
+          Certain confidential material contained in the document has been
           omitted and filed separately with the Securities and Exchange
           Commission pursuant to Rule 406 of the Securities Act of 1933, as
           amended.

#          Identifies a management contract or compensatory plan or agreement in
           which an executive officer or director of the Company participates.