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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2001

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from to

Commission file number: 0-21863

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EPIX MEDICAL, INC.

(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction
of incorporation or organization)

04-3030815(I.R.S. Employer Identification No.)71 Rogers Street, Cambridge Massachusetts(Address of principal executive offices)

02142(Zip Code)


Registrant's telephone number, including area code:(617) 250-6000

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

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, $.01 Par Value Per Share

(Title of Class)

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

Indicate
by 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. o

The
aggregate market value of the registrant's voting stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such
calculation is an affiliate) on March 21, 2002 was $203,253,048, based on the last sale price as reported by The Nasdaq National Market.

As
of March 21, 2002, the registrant had 16,874,602 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: Certain information
required in Part III of this Annual Report on Form 10-K is incorporated from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on
June 12, 2002.

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PART I

ITEM 1. BUSINESS

Overview

We are a specialty pharmaceutical company engaged in the development of targeted contrast agents to both improve the capability and expand the use of magnetic
resonance imaging, which we refer to as MRI, as a tool for diagnosing human disease. Our lead product under development, MS-325, is an injectable intravascular contrast agent designed for
multiple cardiovascular imaging applications, including peripheral vascular disease and coronary artery disease. We believe that MS-325 will significantly enhance the quality of MR images
and provide physicians with a clinically superior, non-invasive (i.e., no more invasive than a peripheral intravenous injection or I.V.) and cost-effective method for
diagnosing cardiovascular disease. We also believe 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 conventional X-ray angiography, which is currently considered the definitive diagnostic exam
for assessing cardiovascular disease. Potential additional imaging applications for MS-325, include breast cancer, female sexual arousal dysfunction, myocardial perfusion and arthritis
imaging. We are currently conducting a Phase III clinical trial program to test the safety and efficacy of MS-325-enhanced MR angiography, or MRA, for the evaluation of
peripheral vascular disease.

As
a major component of our corporate strategy, we have sought to enter into alliances with leaders in the pharmaceutical, diagnostic imaging and MRI equipment industries to facilitate
the development, manufacture, marketing, sale and distribution of our products. To date, we have entered into strategic alliances with Schering Aktiengesellschaft, or Schering AG, Tyco/Mallinckrodt
and Daiichi Radioisotope Laboratories, Ltd., or Daiichi for the development, manufacture and commercialization of MS-325 and other vascular contrast agents. We have also formed
collaborations with the three major MRI scanner manufacturers, General Electric Medical Systems, Philips Medical Systems and Siemens Medical
Systems, to develop advanced imaging techniques designed to facilitate the use of MS-325-enhanced MRA. We entered into these strategic alliances and collaborations, which are
described in "Strategic Alliances," and we will seek to enter into future strategic alliances and collaborations with industry leaders, in order to obtain access to resources and infrastructure to
leverage our strengths.

The
use of MRI has grown steadily over the past 10 years due to reduced cost and improved imaging capabilities and now provides an effective diagnostic technique, or modality, for
a broad range of applications. MRI manufacturers have improved the hardware and software of their systems, reducing the time per procedure dramatically while significantly enhancing image resolution.
While MRI is currently used extensively to image many organs and tissues in the body, its use in imaging the arteries and veins has been limited. Prior attempts to develop contrast agents to
facilitate the clinical utility of MRI, particularly for coronary arteries, have had limited success. Unlike most currently available MRI contrast agents, which are non-specific,
MS-325 is an injectable intravascular contrast agent intended to enhance the quality of MR images and provide physicians with a superior method for diagnosing diseases affecting the
vasculature. MS-325 is a small molecule that produces an MRI signal because of the presence of gadolinium, a highly magnetically active element favored by clinicians for enhancing MR
images. This molecule is designed with our proprietary technology to bind to albumin, the most common blood protein. In MS-325 images using standard MRI techniques, the blood gives off a
strong magnetic signal and appears bright against the dark background of surrounding tissue. Because of its affinity for albumin, MS-325 remains at high concentrations in the bloodstream
throughout the MRI exam and therefore provides the image acquisition time and signal strength needed to obtain a high contrast, high resolution image of the cardiovascular system. Like most currently
available

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non-specific contrast agents, MS-325 is designed to be excreted safely through the kidneys over time. We believe that MS-325 will simplify the diagnostic pathway
for a number of diseases and in many cases replace highly invasive and expensive conventional X-ray angiography.

In
September 2001, we settled a longstanding patent dispute with Bracco Imaging, S.p.A., or Bracco, which is described in "Management's Discussion and Analysis and Results of
Operations." Also, in January 2002, we completed an equity offering raising an additional $30.2 million.

We
incorporated in Delaware in 1988 and commenced operations in 1992. Our principal executive offices are located at 71 Rogers Street, Cambridge, Massachusetts 02142-1118 and our
telephone number is (617) 250-6000. Our Web site is located at http://www.epixmed.com. We do not intend for the information contained in our Web site to be considered a part of this Form 10-K.

Cardiovascular Disease



The human cardiovascular system consists of the heart and a vast series of arteries and veins that carry blood throughout the body. Cardiovascular disease, a
broad class of diseases affecting the heart and vasculature, is the number one cause of death in the United States, with approximately 950,000 fatalities each year. One out of every 2.5 deaths in the
United States is attributed to cardiovascular disease and it is estimated that over 60 million Americans suffer from some form of this disease.

Atherosclerosis
is one of the most common forms of cardiovascular disease. This condition refers to the accumulation of fatty plaques in the inner lining of blood vessels, resulting in a
thickening or hardening of affected vessels. As the disease progresses, the arteries can become weakened or increasingly narrowed, thereby reducing blood flow to vital organs, including the heart and
brain. This condition is often characterized by the vascular region in which it is diagnosed. Coronary artery disease, for example, refers to disease in the arteries in the heart, while peripheral
vascular disease refers to disease in the major vessels outside the heart: vessels of the head and neck, the aorta, the renal arteries, and the large vessels of the pelvis, legs and arms. Recent
research in cardiovascular disease has begun to highlight the pervasive, or multi-focal nature, of this condition. Because the major risk factors tend to affect all vascular regions, many patients
have multiple clinical symptoms of cardiovascular disease. Therefore, patients diagnosed with cardiovascular disease in one vascular region are at high risk of having similar disease in another
vascular region. Clinicians have also begun to realize the importance of characterizing atherosclerotic plaques once they have been identified. We believe that the ability to characterize plaques may
allow physicians to identify those regions of cardiovascular disease that present the most immediate threat to patients' health and that MS-325 will aid in the evaluation of the disease.

The
consequences of cardiovascular disease can be extremely severe and often include one or more of the following:



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Cardiovascular disease is currently diagnosed using a number of different modalities, including conventional X-ray angiography, computed tomography,
ultrasound, intravascular ultrasound, nuclear medicine and MRI. These modalities are often classified as either "screening" or "definitive" according to their role in the diagnostic pathway. Screening
procedures are typically used early in the diagnostic evaluation to rule out certain conditions and assist physicians in determining subsequent diagnostic testing. These procedures tend to be
relatively inexpensive and non-invasive. Physicians rely on definitive diagnostic procedures, on the other hand, to provide them with the information required to make final diagnosis and
plan treatment. Because of the importance of this definitive information, physicians are willing to use costlier, more invasive modalities.



A patient with peripheral vascular disease may exhibit a wide range of symptoms including: leg pain; gangrene; hypertension; stroke and transient ischemic
attack, a brief episode of cerebral ischemia usually characterized by blurred vision, slurred speech, numbness or paralysis. The appropriate screening tests vary according to the particular disease
indication. In the work-up of peripheral vascular disease of the lower limb, for example, ultrasound is often performed to confirm the location of disease once it has been detected by
non-imaging techniques. In general, traditional screening modalities for peripheral vascular diseasemost commonly ultrasound and renal nuclear examstend to have
poor image quality, leading to exams which are frequently inconclusive.

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Typically, a patient enters the diagnostic pathway for coronary artery disease after experiencing chest pain or shortness of breath. If the patient cannot be
ruled out for this condition after the initial work-up that includes a physical exam, patient history, electrocardiogram and exercise stress test, then a cardiologist will often perform a
stress echocardiogram and/or a nuclear stress perfusion study.





Conventional X-ray angiography is currently considered to be the definitive diagnostic exam for imaging arterial anatomy in patients with suspected
peripheral vascular disease or coronary artery disease. Invented in the 1920's, an X-ray angiogram involves the insertion of a catheter through a puncture of the femoral artery in the
patient's groin. Once the catheter is placed in the artery, nephrotoxic X-ray contrast dye is injected into the bloodstream and an image is acquired of the relevant vascular region.
Conventional X-ray angiography does not always provide sufficient information for clinical decision-making, particularly in the coronary arteries: while X-ray angiography
identifies the location of arterial blockages, in many cases it cannot conclusively determine the impact of these blockages on blood flow. Therefore, for many blockages, additional studies must be
performed to enable the physician to make a definitive diagnosis. Based on available procedure data, we estimate that over 4.3 million X-ray angiograms were performed in the United
States in 2000, of which approximately 2.1 million were coronary angiograms. X-ray angiography has a number of undesirable characteristics for a diagnostic tool including:



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Another
modality currently being investigated as a potential diagnostic tool for imaging blood vessels is computed tomography, or CT, which is primarily used to image solid organs.
Although it does not require an arterial puncture, CT requires the use of large quantities of toxic X-ray contrast dye and exposes patients to radiation, which limits the number of
vascular regions it can image in an exam. CT has shown limited success in imaging the coronary arteries due to cardiac motion. A specialized form of CT, electron beam CT, is approved in the United
States for angiographic imaging but has had limited impact on clinical practice due to the low number of electron beam CT scanners installed and its use of toxic X-ray contrast dye and
radiation. CT is also being investigated for use in detecting calcium deposits in the coronary arteries, which has been advocated as predictive of atherosclerotic disease in that region. While
extremely sensitive, this technique is limited by its high level of false positives.



MRI has been established as the imaging modality of choice for a broad range of applications, including brain tumors, knee injuries and disorders of the head,
neck and spine. MRI is performed 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 electromagnetic field within the MRI scanner, and these responses can be captured and converted into high-resolution 3-dimensional images. A contrast
agent is often injected into a vein in the patient's arm prior to an MRI exam to amplify the signal from the desired anatomical structure. It is estimated that contrast agents are used in
25-30% of all MRI exams. MR scanners are characterized by the strength of the magnetic field they generate. Typical MRI scannersthose most commonly found in
hospitalsgenerate a relatively strong magnetic field and therefore require significant infrastructure for installation. Low-field scanners, whose magnetic fields are less than
one-third the strength of traditional scanners, are often found in out-patient settings due to their relatively low cost and infrastructure requirements. The
trade-off for low-field MR scanners is that a decrease in the strength of the magnetic field results in a decrease in the MR signal detected, which typically results in reduced
resolution. While the use of MRI is expanding among experts, MRI has not made a significant impact on the diagnosis of cardiovascular disease to date with the exception of cerebrovascular and carotid
artery studies. Non-contrast MRI exams of the vascular system, which image blood flow rather than anatomy, are often ineffective when used in patients with cardiovascular disease, because
of the minimal or turbulent blood flow associated with this condition. Even for the imaging of carotid arteries, where flow-based MRI has had some clinical impact, the lack of direct
anatomic data limits the ability of MRI to provide a quantitative measurement of stenosis required for accurate diagnosis. MRI exams using existing non-specific contrast agents are limited
by the rapid diffusion of the agents out of the vascular system, which reduces the time during which an image can be acquired. Consequently, many experts believe MRI contrast agents which remain in
the bloodstream for extended periods of time will be necessary to obtain sufficient contrast for widespread use of MRI to image the vascular system.



Recent research suggests that plaques associated with regions of vessel wall inflammation may be at increased risk of rupture and are consequently more likely to
present immediate risk to patients. The one modality currently used to characterize the content and/or shape of arterial plaques is known as intravascular ultrasound, or IVUS. An IVUS exam requires
the insertion of a relatively large catheter (i.e., larger than an X-ray angiographic catheter) equipped with an ultrasound transducer through an

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arterial puncture in the femoral artery. These procedures, which are more invasive than conventional X-ray angiograms, are not commonly used in the United States due to the elevated risk
of complications.



In summary, the current process for diagnosing cardiovascular disease is a complicated pathway that typically involves subjecting patients to risky and invasive
procedures before a definitive diagnosis can be rendered. We therefore believe that there is significant clinical need for a highly accurate, non-invasive exam which provides more
comprehensive diagnostic information about the cardiovascular system.

Our Approach To Cardiovascular MRI

Our lead product under development, MS-325, is an injectable intravascular contrast agent intended to enhance the quality of MR images and provide
physicians with a superior method for diagnosing cardiovascular disease. Unlike most currently available MRI contrast agents, which are non-specific and therefore leak out of the
vasculature, MS-325 binds to albumin, the most common protein in the blood. Because of its affinity for albumin, MS-325 remains at high concentrations in the bloodstream
throughout the MRI exam and, therefore, provides the image acquisition time and signal strength needed to obtain a high contrast, high resolution image of the cardiovascular system. These images are
intended to provide sufficient anatomical detail for definitive diagnosis and surgical planning.

We
believe that MS-325-enhanced MRA may facilitate several clinically valuable diagnostic procedures.



We believe that MS-325-enhanced MRA will be used to diagnose cardiovascular disease and has the potential to replace a significant portion
of the estimated 4.3 million conventional X-ray angiograms performed each year in the United States. In particular, we believe MS-325-enhanced MRA has the
following advantages over conventional X-ray angiography:



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We believe that the extended blood residence time of MS-325 will prove particularly beneficial in facilitating the use of low-field MRI
scanners for diagnosing cardiovascular disease. These scanners, which account for approximately 37% of the installed base of MRI scanners, pose several potential advantages over traditional scanners:
they are relatively inexpensive, they use open configurations for improved patient comfort, they can be portable, they are compatible with nearby electronic equipment, and they can enable MRI for
patients with pacemakers. However, low-field scanners do not currently provide the resolution required for clinically useful vascular studies. Because of its high signal at low magnetic
field strengths, MS-325 may enable low-field MRI scanners to perform high-resolution imaging of the vasculature. This would potentially allow relatively inexpensive
MRI exams to be performed in outpatient settings, such as physician offices and freestanding imaging centers.



We believe that MS-325, coupled with anticipated advances in software and hardware for MRI equipment, will enable physicians to use MRI to perform a
non-invasive, integrated cardiac exam for the diagnosis of coronary artery disease. Such a procedure would be designed to provide information on coronary artery anatomy, including location
of arterial blockages, as well as cardiac perfusion and cardiac function data, in one sitting early in the diagnostic work-up. Because the procedure is intended to provide physicians with
more comprehensive diagnostic information at an earlier stage of the
diagnostic work-up, physicians would be able to make a more informed diagnosis, and therefore arrange for appropriate patient treatment, sooner than would otherwise be possible, thereby
potentially achieving better patient outcomes at a lower cost. Of the estimated 6.75 million patients in the United States who enter the diagnostic pathway for coronary artery disease each
year, we believe that over half would be candidates for such an integrated cardiac exam.

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We are currently investigating the potential utility of MS-325-enhanced MRI for a number of additional applications related to
cardiovascular disease, including myocardial perfusion imaging.

Beyond Cardiovascular



We believe MS-325-enhanced MRA will find significant clinical utility beyond the diagnosis of cardiovascular disease. Because of its
potential for high-resolution imaging of the vasculature, for example, MS-325 is being investigated for possible use in diagnosing several conditions involving damaged or
abnormal microvessels. In addition, as a marker of albumin, MS-325-enhanced MRA may play a role in diagnosing conditions which result in regions of atypical albumin
concentration. We are pursuing applications for MS-325 beyond cardiovascular disease in order to fully leverage the broad diagnostic potential of this technology.

Technology Platform



Our product candidates are small molecule chelates, which are soluble metal-organic complexes, containing a magnetically active metal element, gadolinium, which
elicits a strong MRI signal. The design of these molecules is derived from the unique and highly complex intersection of chemistry, pharmacology, and biophysics. Our compounds must be safe, easily
eliminated from the body, and display a useful distribution pattern in the body. At the same time, these agents must elicit the strongest possible effect on the local magnetic properties of tissue.
Our scientists specialize in discovering and patenting useful ways to combine these two disparate areas of investigation. Specifically, we believe our ability to design targeted MRI contrast agents is
a result of our expertise in three areas:



We develop metal complexes that are engineered to 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 the targeted receptor molecules. The challenge in designing such agents is two-fold: one must both choose
the best targetthe protein or cell type that most precisely characterizes the relevant disease stateand identify a targeting region that binds to that target without binding
to other molecules in the body. The targeting region of MS-325, for example, is designed to bind selectively to albumin, the most common blood protein, which keeps the agent localized
within the bloodstream. For our thrombus MR agent, we have used combinatorial chemistry technology to select a family of highly specific peptides which bind to fibrin, the dominant protein inside
clots, without binding to fibrinogen, a similar, but far less clot specific protein in blood. We have considerable expertise in peptide synthesis and in labeling the peptides with strongly enhancing
clusters of gadolinium.



A key part of our biophysical technology platform is receptor-induced magnetic enhancement, or RIME. Developed by Dr. Randall Lauffer, our founder and
Chief Scientific Officer, while at Massachusetts General Hospital, or MGH, RIME is now exclusively licensed by us under patents held by MGH. The binding of a RIME agent to its receptor reduces the
rate at which the agent rotates, in solution. This reduction in rotation rate leads to a complex magnetic effect whereby the agent's signal-enhancing characteristics are substantially increased,
resulting in a stronger signal during MR scans. For MS-325, RIME effects result in an up to 10-fold increase in signal relative to non-specific gadolinium agents.
We also have technology for the synthesis of discrete, compact clusters of gadolinium chelates

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to increase the signal from a single targeting molecule. This involves challenges in both chemistry and biophysics to maintain the RIME effect.



We have also developed significant expertise in the translation of raw MRI data into clinically useful 3-dimensional images. MRI is the most flexible
of the major medical imaging modalities. The hardware and software of most MRI scanners allow an enormous range of data acquisition methods, and, increasingly, methods for displaying and interpreting
the resulting medical images. Through our research and development, extensive academic collaborations and industrial partnerships, we have built a deep understanding of the relationships between the
contrast agent biophysics, scanner engineering, and medical practice. Our expertise allows us not only to create the best images for the agents we have already designed, but is critical for optimizing
the clinical usefulness of future MRI agents.

Our Product and Development Programs

MS-325



Our lead product candidate, MS-325, is a targeted intravascular contrast agent intended for use with MRI. MS-325 is a small molecule
chelate which produces an MRI signal because it contains gadolinium, a highly magnetically active element favored by clinicians for enhancing MR images. This molecule is designed with our proprietary
technology to bind to albumin, the most common blood protein. In MS-325 images using standard MRI techniques, the blood gives off a strong magnetic signal and appears bright against the
dark background of surrounding tissue. Because of its affinity for albumin, MS-325 remains at high concentrations in the bloodstream throughout the MRI exam and therefore provides the
image acquisition time and signal strength needed to obtain a high contrast, high resolution image of the cardiovascular system. Like most currently available non-specific contrast agents,
MS-325 is designed to be excreted safely through the kidneys over time.



We are currently conducting a Phase III clinical trial program to test the safety and efficacy of MS-325-enhanced MRA for the evaluation
of peripheral vascular disease. In June 1999, we initiated the first trial of a two-arm Phase III study designed to determine the efficacy of MS-325-enhanced
MRA for the detection of aortoiliac occlusive disease, a common peripheral vascular disease. We completed enrollment in this trial in 2001 and reported preliminary results on March 18, 2002 at
the American College of Cardiology conference. We achieved the primary clinical endpoint of this trial, which was improvement in accuracy of MS-325-enhanced MRA versus that of
non-contrast MRA. The trial compared with conventional X-ray angiography demonstrated that MS-325-enhanced MRA compared favorably to conventional X-ray angiography,
the current reference standard, achieving 88% accuracy in identifying clinically significant stenoses caused by atherosclerotic disease. The results indicated that MS-325 was safe and
well-tolerated by patients in this study. In September 2001, we expanded our Phase III clinical trial program for MS-325 in order to broaden our lead indication
to peripheral vascular disease from aortoiliac occlusive disease. This expansion resulted from discussions with the FDA during which we agreed to add other vascular beds broadly representative of
atherosclerotic disease in the peripheral vascular system to our then current Phase III clinical trial program. In late 2001, we filed two additional protocols with the FDA, one to determine the
efficacy of MS-325-enhanced MRA for the detection of peripheral vascular disease in the renal arteries, and another to determine the efficacy of
MS-325-enhanced MRA for the detection of peripheral vascular disease in the feet. We expect that a broad peripheral vascular disease indication will include the entire
vasculature excluding the heart and brain, thereby providing us with the potential to significantly expand the market directly addressed by MS-325.

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In
addition to the expansion of our Phase III clinical trial program, we have reduced the number of patients in the second Phase III aortoiliac trial based on the statistical
results of a Phase II clinical trial that was completed in June 2001. This Phase II trial compared the diagnostic accuracy of five different doses of MS-325-enhanced MRA
with that of X-ray angiography in the aortoiliac vascular bed. The results of this trial strongly supported the 0.03 mmol/kg dose selected for use in the Phase III aortoiliac occlusive
disease studies and favorably compared MS-325-enhanced MRA to conventional X-ray angiography achieving 87% accuracy versus conventional X-ray
angiography in identifying clinically significant stenoses caused by atherosclerotic disease. The results indicated that MS-325 was safe and well-tolerated by patients in this
study.

In
June 1998, we completed a Phase II clinical trial to test the safety and preliminary efficacy of MS-325 for the evaluation of peripheral vascular disease in the
carotid, iliac and femoral arteries. In this Phase II study, MS-325-enhanced MRA compared favorably to conventional X-ray angiography, achieving 82% accuracy versus
conventional X-ray angiography in identifying clinically significant stenoses caused by atherosclerotic disease and was safe and well-tolerated by patients. In addition, we
have completed two Phase I clinical trials to date; the first in February 1997, and the second in February 1998.



We are currently conducting a Phase II feasibility trial to test the safety and preliminary efficacy of MS-325-enhanced MRA for the
evaluation of coronary artery disease. This trial is being conducted at multiple sites. As with the completed first arm of the Phase III aortoiliac trial and the Phase II peripheral vascular disease
trial, our trial compares MS-325-enhanced MRA to X-ray angiography, the current reference standard, to determine the location and degree of plaque blockages.
Clinical use of MRA for imaging the coronary arteries is particularly difficult at present due to the problem of cardiac motion which results from both the beating of the heart and respiration. We
have joined with several leading MRI manufacturers, academic centers and other research organizations to develop hardware and software solutions to the problem of cardiac motion. We received promising
early images from this study which indicate that MS-325 may be useful in assessing coronary artery blockages.

Potential Additional Applications

We are currently evaluating results from clinical and preclinical studies performed in the following areas to determine the potential utility of
MS-325 for additional applications:



In March 2000, we completed enrollment for a 45-patient multi-center Phase II feasibility trial designed to test the safety and preliminary
efficacy of MS-325-enhanced MRA for detecting malignant breast lesions in women with breast abnormalities. In this trial, we evaluated MS-325-enhanced
MRA on twenty patients using low field MRI scanners and twenty-five patients using high field MRI systems. Data from the sub-population of the twenty patients using low field
MRI scanners showed marked and persistent contrast enhancement in both benign and malignant lesions, demonstrating that MS-325 provides a strong signal enhancement of breast lesions and
enables high quality imaging at field strengths associated with open MR and lower field magnetic resonance systems that we believe will be appropriate for breast clinics. We believe that
MS-325 has potential utility as part of a non-invasive imaging procedure that would assist physicians in identifying breast cancer in patients who have had mammograms that do
not yield conclusive information or who are at high risk of developing breast cancer. Commencement of additional clinical trial studies for the breast cancer application is contingent upon the future
outlook and development of the breast imaging market.

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In March 2001, we completed enrollment in a Phase II feasibility trial, which we conducted in collaboration with Pfizer, Inc. to explore the
efficacy of MS-325-enhanced MRA in the diagnosis of female sexual arousal dysfunction. Preliminary results from this trial indicate that MS-325-enhanced
MRA is able to measure changes in pelvic blood volume and organ volume during sexual arousal. We believe that this technique may prove useful in assessing how different diseases affect sexual response
in women as well as examining the effects of potential treatments in restoring impaired sexual response.



We are currently evaluating results from preclinical studies to assess the utility of MS-325-enhanced MRA to detect myocardial perfusion.



We are currently evaluating results from a preclinical study in a rabbit model that has shown promise in both demonstrating high-contrast images
delineating synovium and joint effusion separately in inflammatory arthritis, as well as monitoring disease progression in longitudinal study of rheumatoid arthritis.

Prototype Clot Imaging Agent



Thromboembolic disease refers to a class of relatively common disorders involving the formation of blood clots or, thrombi, in the veins and arteries. The most
common form of this disease, deep vein thrombosis, or DVT, is characterized by the presence of thrombi in the deep veins of the leg and calf. This disease afflicts approximately two million Americans
each year. The most severe consequences of DVT tend to occur when a thrombus dislodges from the vessel wall to form an embolus, which can then pass to and obstruct arteries in the lung. This
condition, known as pulmonary embolism, or PE,
affects an estimated 600,000 patients each year in the United States. In addition, blood clots in the carotid artery can lead to stroke, while clots in the coronary arteries can result in heart
attack. We estimate that blood clots are responsible for over 400,000 deaths each year in the United States. The current method for diagnosing DVT involves a series of venous ultrasound exams
typically followed by X-ray venography. The ultrasound procedure, while non-invasive, is effective primarily for diagnosing DVT in the thighs. It is ineffective for a
significant portion of the patient population who may be asymptomatic and those who have clots forming below the knee, in the pelvis and in the vena cava. It is estimated that over 2.7 million
ultrasound procedures are performed each year in the United States to detect DVT, which represents the current gold standard for diagnosis, requires the injection of X-ray contrast dye
into the foot and carries a significant risk of complications, including the formation of new clots. The diagnosis of PE presents an even greater challenge for clinicians. In fact, research suggests
that this diagnosis is missed more than 50% of the time. The primary diagnostic technique for PE, a nuclear scan, is indeterminate in a large number of patients. Nearly one million such exams were
performed in the United States in 2000. In the event of an indeterminate exam, the clinician must either infer the diagnosis from the presence/absence of DVT or must perform a pulmonary angiogram.
Pulmonary angiography is a highly invasive catheter-based procedure which subjects the patient to significant risk of morbidity and mortality. Clots in the carotid and coronary arteries are diagnosed
in much the same way as atherosclerotic blockages, with X-ray angiography providing definitive diagnosis in most patients.



We are seeking to develop a targeted contrast agent that would enable MRI to illuminate blood clots. Such a product could potentially change the diagnostic
work-up for many of the conditions associated with thromboembolic disease, including PE and DVT. We believe that the use of this new

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approach could lead to better medical outcomes due to earlier and more definitive diagnosis. Early diagnosis is especially important for clots in the thigh, pelvis and vena cava. Because of their
increased likelihood of migrating to the lungs once inside the pulmonary vasculature, these clots can be fatal. We believe that such a contrast agent could eliminate the need for the CT, ultrasound
and nuclear medicine studies currently used to identify thrombotic disease, and could potentially provide a non-invasive but clinically equivalent alternative to pulmonary angiography.
Further, we believe that our proprietary technology platform could enable MRI to differentiate old and new clot formation, potentially identifying those clots that pose the most risk to patients. Our
prototype clot-imaging agent is based on a family of highly specific peptides that bind to fibrin, the dominant protein inside clots. The selected peptide is linked to a proprietary
gadolinium group, which for the first time, will provide a sufficiently strong signal to allow imaging of clots during MRI exams. In November 1999, we announced that a prototype agent,
EP-862, had been shown in preclinical testing, to detect sub-millimeter blood clots in an animal model. We are continuing to advance this program, having identified several
improved prototype agents. We expect to continue to devote significant resources to this program in the future and hope to file an Initial New Drug, or IND, application with the FDA which, if
approved, will allow us to begin human safety trials.

Our Business Strategy

Our objective is to become a worldwide leader in MRI contrast agents by pursuing a strategy based on commercializing MS-325 and developing new
applications for our proprietary technology platform. Our key business objectives are to:



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Strategic Alliances and Collaborations

Our business strategy includes entering into alliances with leaders in the pharmaceutical, diagnostic imaging and MRI equipment industries to facilitate the
development, manufacture, marketing, sale and distribution of our products. To date, we have formed strategic alliances and collaborations with Schering AG, Tyco/Mallinckrodt, General Electric Medical
Systems, Philips Medical Systems, Siemens Medical Systems, and Pfizer.



In June 2000, we entered into a strategic collaboration agreement pursuant to which we granted Schering AG an exclusive license to co-develop
and market MS-325 worldwide, exclusive of Japan. In December 2000, we amended this strategic collaboration agreement to grant to Schering AG the exclusive rights to develop and
market MS-325 in Japan. Generally, each party to the agreement will share equally in MS-325 costs and profits. Under the agreement, we will assume responsibility for completing
clinical trials and filing for FDA approval in the United States. Schering AG will lead clinical activities for the product outside the United States. In addition, we granted Schering AG an exclusive
option to develop and market an unspecified cardiovascular MRI blood pool agent from our product pipeline. In connection with this strategic collaboration and the amendment to our strategic
collaboration agreement withTyco/Mallinckrodt, as further described below, Schering AG paid us an up-front fee of $10.0 million, which we then paid to Tyco/Mallinckrodt. Under the
agreement, Schering AG also paid us $20.0 million in exchange for shares of our common stock through its affiliate, Schering Berlin Venture Corporation, or Schering BV. We may receive up to an
additional $20.0 million in milestone payments under the strategic collaboration agreement, of which $2.5 million will be earned upon NDA filing and up to $2.5 million will be
earned upon product approval. Under the terms of the December 2000 amendment, Schering AG paid us an up-front fee of $3.0 million and may be required to pay us an additional
$7.0 million upon our achievement of certain milestones.

Also,
under the strategic collaboration agreement, we have options to acquire certain participation rights with respect to two of Schering AG's products currently in clinical trials, SHU
555C and Gadomer-17. We are entitled to exercise these options on a region-by-region basis upon the payment of certain fees. We are entitled to exercise the SHU
555C option for a period of twelve months after the date the option becomes exercisable. Once we exercise the SHU 555C option, we will enter into a definitive agreement with Schering AG with respect
to SHU 555C, pursuant to which Schering AG will be responsible for the conduct of all development, marketing and sales activities in connection with
SHU 555C. We are entitled to exercise the Gadomer-17 option for a period of 120 days following Schering AG's performance of certain milestones. Once we exercise the
Gadomer-17 option, we will enter into a definitive agreement with Schering AG with respect to Gadomer-17, pursuant to which we will share development costs incurred from the
date of the option exercise, as well as profits, equally with Schering AG. Under the terms of the strategic collaboration agreement, either party may terminate the agreement upon thirty days notice if
there is a material breach of the contract or if either party fails to meet certain milestones. In addition, Schering AG may terminate the agreement at any time on a
region-by-region basis or in its entirety, upon six months written notice to us; and we may terminate the agreement with respect to development of MS-325 in the
European Union, or EU, at any time after June 9, 2001 upon ninety days written notice to Schering AG, if Schering AG has failed to meet its obligations in connection with the regulatory
approval of MS-325 in the EU.

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On May 8, 2000, we granted to Schering AG a worldwide, royalty-bearing license to patents covering Schering AG's development project, Eovist injection, an MRI contrast agent for
imaging the liver, currently in Phase III clinical trials. Also on May 8, 2000, Schering AG granted us a non-exclusive, royalty-bearing license to certain of its Japanese patents.
We agreed to withdraw our invalidation claim of Schering AG's Japanese patent 1,932,626 in the Japanese Patent Office pursuant to this license agreement. See "Patents and Proprietary Rights." Schering
AG had been an opposing party in our European patent case prior to the licensing agreement. On May 9, 2000, the Opposition Division of the European Patent Office maintained our European patent
in a slightly amended form. The patent is owned by the Massachusetts General Hospital and is exclusively licensed to us. The remaining opposing parties initially elected to appeal the May 9,
2000 decision. However, in September 2001, we settled this patent dispute with such opposing parties by entering into a non-exclusive royalty bearing license agreement with Bracco.
See "Patents and Proprietary Rights" for further discussion of this settlement.



In June 2000, in connection with the exclusive license that we granted to Schering AG, we amended our strategic collaboration with Tyco/Mallinckrodt to
grant Tyco/Mallinckrodt a non-exclusive, worldwide license to manufacture MS-325 for clinical development and commercial use in accordance with a manufacturing agreement
entered into in June 2000 between Tyco/Mallinckrodt and Schering AG, and to enable us to enter into the strategic collaboration agreement with Schering AG described above. In connection with
this amendment, we paid Tyco/Mallinckrodt an up-front fee of $10.0 million and may pay up to an additional $5.0 million in milestone payments, of which $2.5 million
will be paid upon NDA filing and $2.5 million will be paid upon product approval. We will also pay Tyco/Mallinckrodt a share of our MS-325 operating profit margins in the US and a
royalty on MS-325 gross profits outside the US, except in Japan where no payments are due Tyco/Mallinckrodt.

In
October 1999, we entered into a Non-Negotiable Promissory Note and Security Agreement, or the Loan, with Tyco/Mallinckrodt, our strategic partner, under which we
were eligible to borrow our share of MS-325 development costs, on a quarterly basis, up to a total of $9.5 million. In June 2000, pursuant to the amended collaboration
agreement with Tyco/Mallinckrodt and the new strategic collaboration with Schering AG, Schering AG assumed the development cost sharing obligation for MS-325 from Tyco/Mallinckrodt as of
January 1, 2000. As a result, we amended the terms of the Loan to allow funding for our portion of development costs through December 31, 1999. The balance due under the Loan as of
December 31, 2000 and 2001 was $3,004,607 and represents our share of the third and fourth quarter MS-325 development costs in 1999. No additional funding is available to us under
the Loan. The Loan bears interest, adjustable on a quarterly basis, at the Prime Rate published in the Wall
Street Journal and is repayable in full on October 1, 2002. The loan is secured by a first priority security interest in all of our intellectual property.



In March 1996, we entered into a development and license agreement with Daiichi pursuant to which we granted Daiichi an exclusive license to develop and
commercialize MS-325 in Japan. Under this arrangement, Daiichi assumed primary responsibility for clinical development, regulatory approval, marketing and distribution of
MS-325 in Japan. We retained the right and obligation to manufacture MS-325 for development activities and commercial sale under the agreement. In December 2000, we
reacquired the rights to develop and commercialize MS-325 in Japan from Daiichi. Under the terms of this reacquisition agreement with Daiichi, we agreed to pay Daiichi a total amount of
$5.2 million. In January 2001, we paid Daiichi $2.8 million in up-front fees and we will pay an additional $2.4 million upon the earlier of regulatory approval of MS-325 in
either the U.S. or Japan or December 31, 2003. Daiichi will also receive a royalty from us based on net sales of MS-325 in Japan. Simultaneously with

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our reacquisition from Daiichi of the MS-325 development and marketing rights in Japan, we assigned these rights to Schering AG as described above.



To date, we have formed collaborations with the three major MRI scanner manufacturers, General Electric Medical Systems, Philips Medical Systems and Siemens
Medical Systems, to develop advanced imaging techniques designed to facilitate the use of MS-325-enhanced MRA. We believe it is extremely important to collaborate with
equipment manufacturers to develop MRI techniques capable of taking full advantage of the unique properties of MS-325 to diagnose cardiovascular disease.



In January 1998, we announced the formation of a collaboration with General Electric Medical Systems to accelerate the development of cardiovascular MRI.
In particular, the collaboration focuses on reducing the effects of cardiac motion on MR images, providing user-friendly computer tools as a means of visualizing arteries and veins in
3-dimensional space and optimizing MRI sequences for intravascular MRI contrast agents, including MS-325. Under the terms of this non-exclusive agreement, research
is performed at several centers in addition to our facilities, including General Electric's corporate research facility in Schenectady, NY; General Electric Medical Research in Milwaukee, WI, and
several academic centers.



We agreed in November 1998, to collaborate with Philips Medical Systems in advancing the development of contrast-based cardiovascular MRI technologies.
Under the terms of this non-exclusive collaboration agreement, we and Philips Medical Systems will combine our resources to optimize imaging technology and improve
3-dimensional visualization of arteries and veins in patients undergoing MR angiography. Research and development is being carried out at several international Philips research centers, as
well as at our facilities.



In September 1999, we announced a non-exclusive collaboration with Siemens Medical Systems to optimize MR imaging technology and improve
visualization of arteries and veins in patients undergoing MR angiography. The collaboration will also focus on expanding the use of MRI in diagnosing cardiovascular disease and providing
user-friendly tools for easy visualization of the cardiovascular system in three-dimensional space. Research and development is being carried out at our facilities and at Siemens' Iselin,
NJ facilities.

Potential New Applications



In September 1998, we entered into an exclusive agreement with Pfizer to explore the potential utility of MS-325-enhanced MRA in
the diagnosis of female sexual arousal dysfunction. As part of this collaboration, we and Pfizer undertook a Phase II feasibility trial to explore the efficacy of
MS-325-enhanced MRA in the detection and monitoring of female sexual arousal dysfunction. We completed enrollment in the trial in March 2001. Under the terms of this
collaboration, Pfizer has full responsibility for funding the trial. Pfizer currently markets Viagra® for erectile dysfunction in men.

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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 ours. There are currently no FDA-approved targeted vascular contrast agents for use with MRI. However, there are a number of non-specific MRI agents
approved for marketing in the United States and in certain foreign markets that are likely to compete with MS-325 if approved for MR angiography. Such products include
Magnevist® by Schering-AG, Dotarem® by Guerbet, S.A., Omniscan® by Nycomed Imaging ASA or Nycomed, ProHance and MultiHance® by Bracco and
OptiMARK by Tyco/Mallinckrodt. We are aware of six agents under clinical development, Nycomed's NC100150, Schering AG's Gadomer-17, SHU555C, Guerbet's P792, or Vistarem, Bracco's
B-22956/1 and Advanced Magnetics' Code 7228 that have been or are being evaluated for use in MRA. We are aware of no MRI contrast agent other than our prototype being developed for use in
imaging blood clots. We can not assure you that our competitors will not succeed in the future in developing products that are more effective than any that we are developing. We believe that our
ability to compete within the MRI contrast agent market is dependent on a number of factors including the success and timeliness with which we complete FDA trials, the breadth of applications, if any,
for which our products receive approval, and the effectiveness, cost, safety and ease of use of our products in comparison to the products of our competitors. Our success will also be dependent on
physician acceptance of MRI as a primary imaging modality for certain cardiovascular and other applications.

We
have many competitors, including pharmaceutical, biotechnology and chemical companies. A number of competitors, including two of our strategic partners, are actively developing and
marketing product candidates that, if commercialized, would compete with our product candidates. Many of these competitors have substantially greater capital and other resources than we do and may
represent significant competition for us. Such companies may succeed in developing technologies and products that are more effective or less costly than any of those that we may develop. Such
companies may be more successful than us 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 angiography, CT, nuclear medicine and ultrasound. Other companies are actively developing the capabilities of the competing
modalities to enhance their effectiveness in cardiovascular system imaging. For example, we are aware of at least one radiopharmaceutical agent, Schering AG's AcuTect®, which has been
approved for imaging acute venous thrombosis. Several other nuclear medicine agents, including Draxis Health's FibrImage® and Schering AG's P748, are in clinical testing for DVT and PE,
respectively. We believe another radiopharmaceutical under clinical development by Schering AG, P-773, is being investigated for use in imaging atherosclerotic plaque. In addition, while
no ultrasound contrast agent has yet been approved for myocardial perfusion imaging, several of these agents are undergoing clinical testing for this indication, including, DuPont's Definity, Alliance
Pharmaceutical's Imagent, and Nycomed's Sonazoid and Optison. Finally, we are aware of one ultrasound agent, ImaRx's MRX-408, under preclinical development for imaging DVT. We cannot
guarantee that we will be able to compete successfully in the future or that developments by others will not render MS-325, or our future product candidates obsolete or
non-competitive or that our collaborators or customers will not choose to use competing technologies or products.

Patents and Proprietary Rights

We consider the protection of our proprietary technologies to be material to our business prospects. We pursue a comprehensive patent program in the United States
and in other countries where we believe that significant market opportunities exist.

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We
own or have exclusively licensed patents and patent applications on the critical aspects of our core technology as well as many specific applications of this technology. Our patents
and applications covering RIME technology consist of the following:

Two
U.S. patents exclusively licensed from MGH as well as their cognate patents and applications in foreign countries. Five additional patents that had been exclusively
licensed to Epix from MGH have been transferred back to MGH.

Two
U.S. patents owned by us as well as their cognate patents and applications in foreign countries.

Eight
utility applications in prosecution and four provisional utility applications on twelve different subject matters as well as their cognate patents and applications in
foreign countries.

Our
two licensed U.S. patents which broadly cover RIME technology, albumin binding with metal chelates, and liver targeting metal chelates, have been issued a patent in Europe similar to
those United States patents, and have received notice of allowance for a similar patent application in Japan. These two United States patents were involved in an interference proceeding with an
application owned by Tyco/Mallinckrodt, but the interference was terminated in our favor. Our Japanese patent application had been opposed. The sole issue in these proceedings is whether the Japanese
Patent Office should have granted and/or allowed patents to us.

The
legal proceedings between Bracco, Schering AG and others against us and MGH involving national patents derived from European Patent 222,886 (the European patent referred to above)
have been terminated. A Settlement and Release Agreement as to litigation between the parties and a License Agreement from us to Bracco for European Patent 222,886 and its worldwide counterparts was
executed on September 25, 2001. We received various payments, including royalties on a quarterly basis pursuant to the license with Bracco, which is described in "Management's Discussion and
Analysis and Results of Operations." Previously, on May 7, 2000, we granted to Schering AG a worldwide royalty-bearing license to our patents covering Schering AG's development project,
Eovist®, an MRI contrast agent for imaging the liver, currently in Phase III clinical trials. Also on May 7, 2000, Schering AG
granted us a non-exclusive royalty-bearing license to its Japanese patents, 1,932,626, 1,968,413 and its Japanese Application, WO99/16474. We have agreed to withdraw our invalidation claim of Schering
AG's Japanese patent, 1,932,626 in the Japanese Patent Office pursuant to this license agreement. As a result of the Settlement and License Agreements with Bracco and Schering AG, there are
currently no legal actions involving this patent family.

We
have received an additional United States patent covering novel metal chelates. We have also received a patent in the United States covering the process by which MS-325 is
manufactured (U.S. Patent Number 5,919,967; granted July 6, 1999; expires April 11, 2017). Finally, we have patent applications pending in the United States, Japan and Europe covering
various aspects of our RIME technology. Our patent protection for MS-325 currently extends to 2006 in the United States and Europe. If the currently pending patent applications issue, this protection
will be extended until 2015. Protection for the manufacturing process in the United States is already extended until 2017, and will be extended until 2017 in Europe and Japan if the currently pending
patent applications issue. In addition, during 1999 and early 2000 we filed four new patent applications for additional products and processes involving compounds, compositions, and methods for
imaging. In 2001, we filed one patent application and four provisional patent applications.

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

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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 our issued patents, or any patents that may
be issued in the future, will effectively protect our technology or provide a competitive advantage. There can be no assurance that any of our patents or patent applications will not be challenged,
invalidated or circumvented in the future.

Our
commercial success will also depend on our 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, we 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 our products or 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 us or that we would be successful in any attempt to redesign our products or processes to avoid infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products,
which would have a material adverse effect on our business, financial condition and results of operations.

There
may be pending or issued patents, held by parties not affiliated with us, relating to technologies used by us in the development or use of certain of our product candidates. There
can be no assurance that our current or future activities will not be challenged, that additional patents will not be issued containing claims materially constraining our proposed activities, that we
will not be required to obtain licenses from third parties, or that we will not become involved in costly, time-consuming litigation regarding patents in the field of contrast agents,
including actions brought to challenge or invalidate our own patent rights.

Many
of our competitors are continuing to actively pursue patent protection for activities and discoveries similar to ours. There can be no assurance that these competitors, many of
which have substantially greater resources than us and have made substantial investments in competing technologies, will not in the future seek to assert that our products or chemical processes
infringe their existing patents and/or will not seek new patents that claim to cover aspects of our technology. Furthermore, patent applications in the United States, and 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 we are aware of all competitive patents,
either pending or issued, that relate to products or processes used or proposed to be used by us.

We
and MGH have entered into a license agreement pursuant to which MGH has granted us an exclusive worldwide license to the patents and patent applications, which relate to our 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 us to pay royalties on our net sales of MS-325. We must also pay MGH a percentage of all royalties received from our sublicensees. Accordingly, we will be
required to make payments to MGH on profits generated under the Schering collaboration, if any. Our failure 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 our business, financial condition and results of
operations.

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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 us and/or determine the scope and validity of others' proprietary rights. We 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 result in extensive costs to us as well as be a
significant distraction for management. Such costs could have a material adverse effect on our business, financial condition and results of operations.

We
also rely upon trade secrets, technical know-how, and continuing technological innovation to develop and maintain our competitive position. We typically require our
employees, consultants, and advisors to execute confidentiality and assignment of invention agreements in connection with their employment, consulting or advisory relationships with us. These
agreements require disclosure and assignment to us 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 we 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 our proprietary technology, or that we can meaningfully protect our rights in unpatented proprietary technology. We intend to
vigorously protect and defend our intellectual property. Costly and time-consuming litigation brought by us may be necessary to enforce our issued patents, to protect our trade secrets or
know-how owned by us, or to determine the enforceability, scope, and validity of the proprietary rights of others.

Manufacturing

We do not have, nor do we currently have plans to develop, full-scale manufacturing capability for MS-325. We intend to rely on
Tyco/Mallinckrodt as the primary manufacturer of MS-325 for Phase III clinical trials, as well as for any future human clinical trials and commercial use. In the event that
Tyco/Mallinckrodt fails to fulfill its manufacturing responsibilities satisfactorily, Schering AG has the right to purchase MS-325 from a third party or to manufacture the compound itself.
However, either course of action could materially delay the manufacture and development of MS-325, and the cost to produce MS-325 could increase significantly. Schering AG may
not be able to find an alternative manufacturer, or, Schering AG may not be able to manufacture MS-325 in a timely manner. If we experience a delay in manufacturing, it could result in a
delay in the approval or commercialization of MS-325 and have a material adverse effect on our business, financial condition and results of operations.

Government Regulation

The manufacture and commercial distribution of our 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, or 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 our 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, or

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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 application for an IND, 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 use; (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. In November 1997, the Food and Drug Administration Modernization Act of 1997, or the Act, was passed and signed into law. The Act, most of which became effective in
February 1998, promises, among other things, to streamline the approval process for drugs and enable patients with serious diseases to more easily access experimental products. The effect, if
any, of the Act on us, MS-325 and our other product candidates is not known at this time.

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 and the protocol for the proposed clinical trial 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 the trials will be performed are submitted to the FDA as
part of the IND.

An
independent institutional review board, or 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 and the adequacy of the informed consent.

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
process of completing clinical testing and obtaining FDA approval for a new product is likely to take a number of years. When the study for a particular indication 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, further studies and a
supplement to the initially approved

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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.

After
an NDA is approved, we 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 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. Our failure to receive approval of an NDA supplement could have a material adverse effect on our 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. We are 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. We also will be subject to existing present and possible future local, state, federal and foreign
regulation. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition 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 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 we may be subject to governmentally mandated prices for our products.

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

Our
research, development and manufacturing processes require the use of hazardous substances and testing on certain laboratory animals. As a result, we are 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. We cannot predict what impact, if any, such changes might have on our business, financial condition or
results of operations.

Reimbursement

We expect that sales volumes and prices of our 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 our products. We expect that our 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, or 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 prospectively determined
amount for an in-patient stay based on a Medicare

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beneficiary's discharge diagnosis related group, or DRG. This payment includes payment for any procedure, including MRI that is performed while a beneficiary is in the hospital. No additional payment
has been made for contrast agents used during the procedure. In 2001, the Centers for Medicare and Medicaid Services (formerly HCFA) created additional payment categories for contrast-
enhanced diagnostic procedures performed in outpatient settings, thus improving the reimbursement situation for such agents. Certain new contrast agents may be eligible for additional
pass-through payments. 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.

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, including Medicare beneficiaries, covered by MCOs is
expected to grow in the United States over the next decade. We believe 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 our products, as we believe that the use of our products will
significantly lower the overall costs and improve the effectiveness of managing patient populations. We cannot assure you, however, that our 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. We may need to seek international reimbursement approvals, although we can not assure you 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 our product candidates in the international markets in which such approvals are sought.

We
believe 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. We believe 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 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 our product candidates or our ability to sell our product candidates on a profitable basis, particularly if MRI exams enhanced with our 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 our business,
financial condition and results of operations.

Employees

As of December 31, 2001 we employed 88 persons on a full-time basis, of which 65 were involved in research and development and 23 in
administration and general management. Twenty seven of our employees hold Ph.D. or M.D. degrees. We believe that our relations are good with all of our employees. None of our employees are a party to
a collective bargaining agreement.

22

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Research and Development

During the years ended December 31, 2001, 2000, and 1999, we incurred research and development expenses of $22,903,780, $25,833,243 and $14,667,370
respectively.

Risk Factors

The risks and uncertainties described below are those that we currently believe may materially affect our company. Additional risks and
uncertainties that we are unaware of or that we currently deem immaterial also may be important factors that affect our Company.

All of our product candidates are in research or development and we have not generated revenues from commercial sales of our products.

We currently have no products for sale, and we can not guarantee that we will ever have marketable products. All of our product candidates are in research or
development. To date, we have financed our operations through public stock offerings, private sales of equity securities, equipment lease financings and license payments from our strategic partners.
To achieve profitable operations, we, alone or with others, must successfully develop, obtain regulatory approval for, introduce, market and sell products. We do not expect to receive revenue from the
sale of any of our product candidates for the next several years. We can not ensure that we will successfully complete our product development efforts, that we will obtain required regulatory
approvals in a timely manner, if at all, that we will be able to manufacture our product candidates at an acceptable cost and with acceptable quality or that we can successfully market any approved
products.

We anticipate future losses and may never become profitable.

Our future financial results are uncertain. We have experienced significant losses since we commenced operations in 1992. Our accumulated net losses as of
December 31, 2001 were approximately $92.0 million. These losses have resulted primarily from expenses associated with our research and
development activities, including pre-clinical and clinical trials, and general and administrative expenses. We anticipate that our research and development expenses will increase
significantly in the future, and we expect to incur substantial losses over at least the next several years. We may never generate revenues from the sale of our products. Moreover, even if we generate
product revenues, we may not be able to achieve or sustain profitability.

Our financial results fluctuate quarterly, which could negatively affect our stock price.

Our results of operations have varied and will continue to vary significantly from quarter to quarter and depend on, among other factors:

the
timing of fees and milestone payments that we receive from strategic partners;

whether
we form new strategic alliances;

the
timing of expenditures in connection with research and development activities, including clinical trials;

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.

Fluctuations
in our results of operations may cause us to fail to meet investor expectations, resulting in a decline in the trading price of our stock price. As a result, you may lose
all or part of your investment.

23

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For the forseeable future, we will depend on our only product candidate, MS-325, for revenues.

MS-325 is currently our only product candidate in human clinical trials and we can not guarantee that any of our other development projects will yield
a product candidate suitable for entry into clinical trials. As a result, our initial revenues and profits, if any, will be derived from sales of MS-325. If MS-325 fails to
achieve regulatory approval and market acceptance, our business, financial condition and results of operations will be materially adversely effected.

Because development of our targeted contrast agents will involve a lengthy and complex process, we are not certain that we will be able to commercialize any of our product
candidates currently in development.

Our product candidates are currently in research and development and will require additional research and development, extensive clinical testing and regulatory
approval prior to any commercial sales. We cannot predict if or when we will be able to commercialize any of our product candidates under development. We must complete clinical trials in the United
States and demonstrate the safety and efficacy of MS-325, currently in Phase III clinical trials, prior to obtaining Food and Drug Administration approval. Our clinical trials may not be
successful and we may not complete them in a timely manner. We could report serious side effects as the clinical trial proceeds. Our results from early clinical trials may not predict results that we
will obtain in large scale clinical trials, as a number of companies have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. We may not conduct
additional Phase II or Phase III clinical trials for MS-325 and such trials, if begun, may not demonstrate any efficacy or will be completed successfully in a timely manner, if at all. The
rate of completion of our clinical trials depends upon, among other things, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient
population, the nature of the clinical protocol under which MS-325 will be studied, the proximity of the patient to a clinical site and the eligibility criteria for the study. Delays in
planned patient enrollment may result in increased costs, regulatory filing delays, or both. Furthermore, we, the FDA or other regulatory authorities may alter, suspend or terminate clinical trials at
any time. If we do not successfully complete clinical trials, we will not have a product to market.

If MRI manufacturers are not able to enhance their hardware and software, we will not be able to market our contrast agents for cardiac indications.

Existing MRI scanners do not have the capability to perform coronary angiography without improvements in current MRI hardware and software. The success of cardiac
applications of MS-325 therefore depends on advancements in MRI hardware and software. Although several leading MRI manufacturers, academic centers and others are developing advanced
hardware and software, we do not know when, or if, these techniques will enable MS-325 to provide clinically relevant images in the cardiac indications that we are pursuing. If MRI
manufacturers are not able to enhance their scanners to perform coronary angiography, we will not be able to market MS-325 for that application and the potential market for our products
will be substantially reduced.

If MRI technology becomes obsolete, we will not have a market for our product candidates.

Several well-established medical imaging modalities compete with MRI, including X-ray angiography, computer assisted tomography, nuclear
medicine and ultrasound. Other companies are actively developing the capabilities of these competing modalities to enhance their effectiveness in cardiovascular system imaging. If developments by
others render MS-325 or our future product candidates obsolete or non-competitive, we will not have a market for our product candidates.

24

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If the market does not accept our technology and products, we may not generate sufficient revenues to achieve or maintain profitability.

The commercial success of MS-325 and our other products, when and if approved for marketing by the United States Food and Drug Administration, the
FDA, and corresponding foreign agencies, depends on their acceptance by the medical community and third-party payors as clinically useful, cost-effective and safe. While contrast agents
are currently used in an estimated 25% to 30% of all MRI exams, there are no FDA-approved targeted vascular agents in use. Furthermore, clinical use of MRI for vascular imaging has been
limited and use of MRI for cardiac imaging has occurred mainly in research. Market acceptance, and thus sales of our product candidates, will depend on several factors, including:

safety;

price;

ease
of administration;

effectiveness;
and

the
rate of adoption of up-to-date MRI technology.

Market
acceptance will also depend on our ability and that of our strategic partners to educate the medical community and third-party payors about the benefits of diagnostic imaging with
MRI enhanced
with our product candidates compared to imaging with other modalities. Our MRI contrast agents represent a new approach to imaging the cardiovascular system and market acceptance both of MRI as an
appropriate imaging technique for the cardiovascular system and of our product candidates is critical to our success. If our products do not achieve market acceptance, we may not generate sufficient
revenues to achieve or maintain profitability.

Our competitors may have greater financial resources, superior products or product candidates, manufacturing capabilities and/or marketing expertise, and we may not be able to
compete with them successfully.

Medical technology is subject to intense competition and rapid technological change. We have many competitors, including pharmaceutical, biotechnology and
chemical companies, a number of which, including our strategic partners, are actively developing and marketing products that could compete with our product candidates. Many of these competitors have
substantially greater capital and other resources than we have and may represent significant competition for us. These companies may succeed in developing technologies and products that are more
effective or less costly than any of those that we may develop. In addition, these companies may be more successful than we are in developing, manufacturing and marketing products. Our strategic
partners or customers may choose to use competing technologies or products. As a result, we may not be able to compete successfully in the future.

We depend on exclusively licensed technology from the Massachusetts General Hospital and if we lose this license, it is unlikely we could obtain this technology elsewhere.

Under the terms of a license agreement that we have with MGH, we are the exclusive licensee to certain technology, including patents and patent applications,
which relate to our product candidates, including MS-325. The license agreement imposes various commercialization, sub-licensing, royalty and other obligations on us. If we
fail to comply with these and other requirements our license could convert from exclusive to non-exclusive or terminate entirely. It is unlikely that we would be able to obtain this
technology elsewhere. Any such event would have a material adverse effect on our business, financial condition and results of operations.

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We depend on our strategic collaborators for support in product development and the regulatory approval process, and these efforts may suffer if we experience problems with our
collaborators.

We depend on strategic collaborators for support in product development and the regulatory approval process as well as a variety of other activities including
manufacturing, marketing and distribution of our products in the United States and abroad, when and if the FDA and corresponding foreign
agencies approve our product candidates for marketing. To date, we have entered into several strategic alliances, including a collaboration agreement with Schering AG, to develop and commercialize
MS-325 and other MRI vascular agents worldwide and an agreement with Tyco/Mallinckrodt, granting Tyco/Mallinckrodt rights to enter into an agreement with Schering AG to manufacture
MS-325 for clinical development and commercial use. We may not receive milestone payments from these alliances should MS-325 fail to meet certain performance targets in
clinical trials. Further, our receipt of revenues from strategic alliances is affected by the level of efforts of our collaborators. Our collaborators may not devote the resources necessary to
complete development, and commence marketing, of MS-325 in their respective territories, or they may not successfully market MS-325. Schering AG and Mallinckrodt currently
manufacture imaging agents for other modalities that will compete against MS-325. Schering AG will be responsible for setting the price of the product worldwide. However, Schering AG may
not set prices in a manner that maximizes revenues for us. Our failure to receive milestone payments, a reduction or discontinuance of efforts by our partners, or the termination of these alliances
would have a material adverse effect on our business, financial condition and results of operations.

We
may not successfully enter into additional strategic alliances for the development and commercialization of future product candidates. In addition, any future alliances may not be on
terms favorable to us or may not be successful. If we are unable to enter into future strategic alliances with capable partners on commercially reasonable terms, we may delay the development and
commercialization of future product candidates and could possibly postpone them indefinitely.

We depend on patents and other proprietary rights, and if they fail to protect our business, we may not be able to compete effectively.

The protection of our proprietary technologies is material to our business prospects. We pursue a comprehensive patent program for our product candidates in the
United States and in other countries where we believe that significant market opportunities exist. We own or have an exclusive license to patents and patent applications on the critical aspects of our
core technology as well as many specific applications of this technology. However, the patent positions of pharmaceutical and biopharmaceutical firms, including us, generally include complex legal and
factual questions. The issued patents that we own or license, or any patents that we obtain in the future, may not effectively protect our technology or provide a competitive advantage. In addition,
any of our patents, patent applications or licensed patents may be challenged, invalidated or circumvented in the future.

Many
of our competitors actively pursue patent protection for activities and discoveries similar to our activities and discoveries. These competitors, many of which have made substantial
investments in competing technologies, could seek to assert that our products or chemical processes infringe on their existing patents and/or will seek new patents that claim to cover aspects of our
technology. Furthermore, patent applications in the United States are maintained in secrecy until patents are issued, 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 pharmaceuticals are numerous. Therefore, we may not be aware of all competitive patents, either pending or issued, that relate to our product
candidates or processes used
or those products or processes that we propose to use. If our patents fail to protect our business, we may not be able to compete effectively.

26

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We may incur substantial costs as a result of litigation or other proceedings relating to our patent and other intellectual property rights.

The pharmaceutical and biotechnology industries are characterized by extensive litigation regarding patents and other intellectual property rights. We intend to
protect and defend our intellectual property vigorously. We may need to bring costly and time-consuming litigation to enforce our issued patents, to protect our trade secrets and
know-how, or to determine the enforceability, scope and validity of the proprietary rights of others. We may have to participate in interference proceedings declared by the U.S. Patent and
Trademark Office or by foreign agencies to determine the priority of inventions. Any litigation surrounding these issues could result in extensive costs to us as well as be a significant distraction
for management. Such costs could have a material adverse effect on our business, financial condition and results of operations.

We
also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We typically require our
employees, consultants and advisors to execute confidentiality and assignment of invention agreements in connection with their employment, consulting or advisory relationships with us. These
agreements could be breached or we may not have adequate remedies for any breach. Furthermore, our competitors could independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our proprietary technology, and we might not be able to meaningfully protect our rights in unpatented proprietary technology. Several of our management and
scientific personnel were formerly associated with other pharmaceutical and biotechnology companies and academic institutions. In some cases, these individuals are conducting research in similar areas
with which they were involved prior to joining us. As a result, we, as well as these individuals, could be subject to claims of violation of trade secrets and similar claims.

Our
commercial success will also depend on our ability to operate without infringing upon the patents of others in the United States and abroad. There are pending or issued patents, held
by parties not affiliated with us, relating to technologies we use in the development or use of certain of our contrast agents. If any judicial or administrative proceeding upholds any third-party
patents as valid and enforceable, we could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the owners of each such patent, or to
redesign our products or processes to avoid infringement.

Extensive government regulation may delay or prevent us from marketing MS-325 or other products under development.

We are subject to extensive U.S. and foreign governmental regulatory requirements and lengthy approval processes for our product candidates. The development and
commercial use of our product candidates will be regulated by numerous federal, state, local and foreign governmental authorities in the U.S., including the FDA and foreign regulatory agencies abroad.
The nature of our research and development and manufacturing processes requires the use of hazardous substances and testing on certain laboratory animals. Accordingly, we are subject to extensive
federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and
wastes, as well as the use of and care for laboratory animals. Although we believe we are in compliance with all such laws and maintain policies and procedures to ensure that we remain in compliance,
it is possible that accidents will happen that would expose us to legal risk and/or financial loss. Furthermore, current laws could change and new laws could be passed that may force us to change our
policies and procedures, an event which could impose significant costs on us.

The
regulatory approval process for new MRI contrast agents, including required pre-clinical studies and clinical trials, is lengthy and expensive. Although some of our
employees have experience in

27

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obtaining regulatory approvals, we have only limited experience in filing or pursuing applications necessary to gain regulatory approvals. Pre-clinical testing of our product development
candidates is subject to Good Laboratory Practices as prescribed by the FDA and the manufacture of any products developed by us will be subject to Good Manufacturing Practices as prescribed by the
FDA. We may not obtain the necessary FDA clearances and subsequent approvals in a timely manner, if at all. We can not be sure as to the length of the clinical trial period or the number of patients
that will be required to be tested in the clinical trials in order to establish the safety and efficacy of MS-325 or any of our future product candidates. We may encounter unanticipated
delays or significant costs in our efforts to secure necessary approvals. We may not obtain regulatory approval, even after the performance of clinical trials and the passage of time and the
expenditure of such resources, for MS-325 or any other product candidates that we develop. Our analysis of data obtained from pre-clinical and clinical activities is subject to
confirmation and interpretation by regulatory authorities, which could delay, limit or prevent FDA regulatory approval. Future United States legislative or administrative actions also could prevent or
delay regulatory approval of our product candidates. Even if we obtain regulatory approvals, they may include significant limitations on the indicated uses for which we may market a product. A
marketed product also is subject to continual FDA and other regulatory agency review and regulation. Later discovery of previously unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, as well as possible civil or criminal sanctions. Further, many academic institutions
and companies conducting research and clinical trials in the MRI contrast agent field are using a variety of approaches and technologies. If researchers obtain any adverse results in
pre-clinical studies or clinical trials, it could adversely affect the regulatory environment for MRI contrast agents generally. In addition, if we obtain marketing approval, the FDA may
require post-marketing testing and surveillance programs to monitor the product's efficacy and side effects. Results of these post-marketing programs may prevent or limit the
further marketing of the monitored product.

We
and our strategic partners are also subject to numerous and varying foreign regulatory requirements governing the design and conduct of clinical trials and the manufacturing and
marketing of our products. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval set forth above, and we may not obtain foreign regulatory
approvals on a timely basis, if at all.

If we do not raise additional funds necessary to fund our operations, we may not be able to implement our business plan.

Since inception, we have funded our operations primarily through our public offerings of common stock, private sales of equity securities, equipment lease
financings and license payments from our strategic partners. We believe that we will need to raise substantial additional funds for research, development and other expenses, through equity or debt
financings, strategic alliances or otherwise, prior to commercialization of any of our product candidates. Our future liquidity and capital requirements will depend upon numerous factors, including
the following:

the
progress and scope of clinical trials;

the
timing and costs of filing future regulatory submissions;

the
timing and costs required to receive both United States and foreign governmental approvals;

the
cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

the
extent to which our products gain market acceptance;

28

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the
timing and costs of product introductions; the extent of our ongoing research and development programs;

the
costs of training physicians to become proficient with the use of our products; and

the
costs of developing marketing and distribution capabilities.

Additional
financing may not be available on terms acceptable to us, or at all. If we cannot fund our capital requirements, it would have a material adverse effect on our business,
financial condition and results of operations. If adequate funds are not available, we may have to curtail operations significantly or obtain funds by entering into arrangements with strategic
partners or others that may require us to relinquish rights to certain of our technologies, product candidates, products or potential markets. To the extent that we raise additional capital through
the sale of equity or securities convertible into equity, the issuance of such securities could result in dilution to our existing stockholders.

We have a limited manufacturing capability and we intend to rely on outsourced manufacturing to produce MS-325.

We do not have, nor do we currently have plans to develop, full-scale manufacturing capability for MS-325. While we do manufacture small
amounts of MS-325 for research and development efforts, we intend to rely on Tyco/Mallinckrodt as the primary manufacturer of MS-325 for Phase III clinical trials, as well as
for any future human clinical trials and commercial use. In the event that Tyco/Mallinckrodt fails to fulfill its manufacturing responsibilities satisfactorily, Schering AG has the right to purchase
MS-325 from a third party or to manufacture the compound itself. However, either course of action could materially delay the manufacture and development of MS-325. Schering AG
may not be able to find an alternative manufacturer. In addition, Schering AG may not be able to manufacture MS-325 in a timely manner. If we experience a delay in manufacturing, it could
result in a delay in the approval or commercialization of MS-325 and have a material adverse effect on our business, financial condition and results of operations.

Product liability claims could increase our costs and adversely effect our results of operations.

The clinical testing, manufacturing and marketing of our product candidates may expose us to product liability claims, and we may experience material product
liability losses in the future. We currently have limited product liability insurance for the use of our product candidates in clinical research, but our coverage may not continue to be available on
terms acceptable to us or adequate for liabilities we actually incur. We do not have product liability insurance coverage for the commercial sale of our products but intend to obtain such coverage if
and when we commercialize our product candidates. However, we may not be able to obtain adequate additional product liability insurance coverage on acceptable terms, if at all. A successful claim
brought against us in excess of available insurance coverage, or any claim or product recall that results in significant adverse publicity against us, may have a material adverse effect on our
business and results of operations.

If we fail to get adequate levels of reimbursement from third party payors for our product candidates after they are approved in the U.S. and abroad, we will not be able to
commercialize our product candidates.

We could be adversely affected by changes in reimbursement policies of governmental or private healthcare payors, particularly to the extent any such changes
affect reimbursement for procedures in which our product candidates would be used. Failure by physicians, hospitals and other users of our products to obtain sufficient reimbursement from third-party
payors for the procedures in which our products would be used or adverse changes in governmental and private third-party payors' policies toward reimbursement for such procedures would have a material
adverse effect on our business,

29

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financial condition and results of operations. If we obtain the necessary foreign regulatory approvals, market acceptance of our product candidates in international markets would be dependent, in
part, upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country, and
include both government sponsored health care and private insurance. We intend to seek international reimbursement approvals, although we can not assure you that any such approvals will be obtained in
a timely manner, if at all, and failure to receive international reimbursement approvals could have an adverse effect on market acceptance of our products in the international markets in which such
approvals are sought.

We depend on our key personnel, the loss of whom would hurt our ability to compete.

Our future business and operating results depend in significant part upon the continued contributions of our key technical and senior management personnel, many
of whom would be difficult to replace and some of whom perform important functions for us beyond those functions suggested by their respective job title or description. Our future business and
operating results also depend in significant part upon our ability to attract and retain qualified management, operational and technical personnel. Competition for this personnel is intense, and we
may not be successful in attracting or retaining such personnel. Although we maintain key life insurance on the lives of some key officers, the loss of any key employee, the failure of any key
employee to perform in his or her current position, or our inability to attract and retain skilled employees, as needed, could have a material adverse effect on our business, financial condition and
results of operations.

Future issuances and sales of shares of our common stock upon the exercise of options may result in dilution of our common stock.

Dilution is likely to occur upon exercise of outstanding stock options.

We do not intend to pay cash dividends on our common stock.

We have not paid cash dividends since our inception and do not intend to pay cash dividends in the foreseeable future. Therefore, you will have to rely on
appreciation in our stock price in order to achieve a gain on your investment.

Certain anti-takeover clauses in our charter and by-law provisions and in Delaware law may make an acquisition of us more difficult.

Our Restated Certificate of Incorporation authorizes the Board of Directors to issue, without stockholder approval, up to 1,000,000 shares of preferred stock with
voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of common stock. The issuance of Preferred Stock or of rights to
purchase Preferred Stock could be used to discourage an unsolicited acquisition proposal. In addition, the possible issuance of Preferred Stock could discourage a proxy contest, make more difficult
the acquisition of a substantial block of our common stock or limit the price that investors might be willing to pay for shares of our common stock. The Restated Certificate provides for staggered
terms for the members of the Board of Directors. A staggered Board of Directors and certain provisions of our By-laws and of Delaware law applicable to us could delay or make more
difficult a merger, tender offer or proxy contest involving us. For example, we are subject to Section 203 of the General Corporation Law of the State of Delaware which, subject to certain
exceptions, restricts certain transactions and business combinations between a corporation and a stockholder owning 15% or more of the corporation's outstanding voting stock for a period of three
years from the date the stockholder becomes an interested stockholder. These provisions may have the effect of delaying or preventing a change of control of us without action by the stockholders and,
therefore, could adversely affect the price of our stock.

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ITEM 2. PROPERTIES

We lease a total of 22,950 square feet of space at 71 Rogers Street and adjacent locations, and 13,310 square feet at 161 First Street, all in Cambridge,
Massachusetts. The current leases at 71 Rogers Street and adjacent locations, and our lease at 161 First Street run until December 31, 2002. We have an option to extend the lease at 71 Rogers
Street and adjacent locations for an additional three or five years. Our current facilities are adequate to meet our needs until the expiration of the leases in December 31, 2002. We are
currently involved in negotiating extensions for our current facilities.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings that would materially adversely affect our business, results of operations or financial condition.

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

No matters were submitted to a vote of our security holders during the quarter ended December 31, 2001.

PART II

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

Our Common Stock commenced trading on the Nasdaq Stock Market on January 30, 1997 under the symbol "EPIX", and is listed on Nasdaq's National Market. The
following table sets forth, for the periods indicated, the range of the high and low bids for our Common Stock:

High

Low2000First Quarter

$
26.75

$
8.88Second Quarter


22.63


12.75Third Quarter


18.94


13.19Fourth Quarter


14.06


4.882001First Quarter

$
13.63

$
8.03Second Quarter


12.35


7.10Third Quarter


12.26


7.02Fourth Quarter


14.60


6.24


The
above quotations reflect inter-dealer prices without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

On
March 21, 2002, the last reported bid for the Common Stock was $14.15 per share. As of March 21, 2002, there were approximately 91 holders of record of our Common Stock.
To date, we have neither declared nor paid any cash dividends on shares of our Common Stock and do not anticipate doing so for the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data are derived from our audited financial statements and 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 elsewhere herein.

|                                                                               |         | Year Ended December 31, |        
|------------------------------------------------------------------------------ | ------- | ----------------------- | -------
|
|
|Statement of Operations Data:                                                  |         |                         |        
|Revenues                                                                       |         | $                       | 9,569  
|Operating loss                                                                 |         |                         | (18,841
|Loss before provision for income taxes                                         |         |                         | (18,156
|Provision for income taxes                                                     |         |                         | 1,092  
|                                                                               |         |                         |        
|Loss before cumulative effect of change in accounting principle                |         |                         | (19,248
|Cumulative effect of change in accounting principle (1)                        |         |                         |       
|                                                                               |         |                         |        
|Net loss                                                                       |         | $                       | (19,248
|                                                                               |         |                         |        
|Weighted average common shares outstanding:                                    |         |                         |        
|                                                                               | Basic   |                         |        
|                                                                               | Diluted |                         |        
|Loss per share:                                                                |         |                         |        
|Loss before cumulative effect of change in accounting principle                |         | $                       | (1.38  
|Cumulative effect of change in accounting principle                            |         |                         |       
|                                                                               |         |                         |        
|Net loss, basic and diluted                                                    |         | $                       | (1.38  
|                                                                               |         |                         |        
|Pro forma amounts assuming the accounting change is applied retroactively (1): |         |                         |        
|Net loss                                                                       |         |                         |       
|Net loss per share basic and diluted                                           |         |                         |       

|                                                 |  | December 31,
|------------------------------------------------ |  | ------------
|
|Balance Sheet Data:                              |  |             
|Cash, cash equivalents and marketable securities |  | $           
|Working capital                                  |  |             
|Total assets                                     |  |             
|Long-term liabilities                            |  |             
|Total stockholders' equity (deficit)             |  |             

---

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

Overview

Since commencing operations in 1992, we have been principally engaged in the research and development of our product candidates, as well as seeking various
regulatory clearances and patent protection. We have had no revenues from product sales and have incurred cumulative losses since inception through December 31, 2001 aggregating approximately
$92.1 million.

We
have received revenues, as more fully described under "Strategic Alliances and Collaborations," in connection with licensing and strategic alliances with Bracco, Schering AG,
Tyco/Mallinckrodt and Daiichi. In September 2001, pursuant to a Settlement and Release Agreement and Worldwide License Agreement known as the License Agreement, we granted Bracco a worldwide,
non-exclusive royalty bearing sub-license to our patents. The patents sub-licensed to Bracco are owned by MGH and are licensed exclusively to us. We received
$10.0 million ($9.0 million net of Italian income taxes) in up-front payments pursuant to the License Agreement, which consisted of a $2.0 million license fee,
$1.0 million of royalties on past sales of MultiHance®, $4.0 million of prepaid royalties and a $3.0 million contingent license fee based upon marketing approval in
the US. In addition, Bracco is obligated to pay us a quarterly royalty on its sales of MultiHance® beginning in January 2001 and ending on the patent expiration date in each country
that MultiHance® is sold. During 2001, we recorded a total of $2.1 million of revenue related to this agreement, consisting of $2.0 million of royalties and $100,000 of
license fee revenue. Of the $2.0 million in revenues, $1.0 million related to sales of MultiHance® prior to January 1, 2001 and the remaining $1.0 million
related to sales on MultiHance® for the year ended December 31, 2001. Upon termination of the License Agreement, any remaining balance of the prepaid future royalties,
$3.6 million at December 31, 2001, must be repaid to Bracco.

We
expect continued operating losses for the next several years as we incur expenses to support research, development and efforts to obtain regulatory approvals.

Our
initial product candidate, MS-325, is currently our only product candidate undergoing human clinical trials. We filed an IND application for MS-325 in
July 1996. We initiated a Phase I clinical trial in 1996 and a Phase I dose escalation study in 1997, both of which have been completed. We completed a Phase II clinical trial in
June 1998 to test the safety and preliminary efficacy of MS-325-enhanced MRA for the evaluation of PVD, and also completed a Phase II trial in June 2001 that was
designed to compare the diagnostic accuracy of five different doses of MS-325-enhanced MRA with that of X-ray angiography in the aortoiliac vascular bed. In 2001,
we completed enrollment in the first study of a two-arm Phase III clinical trial, which was initiated in June 1999, and was designed to determine the efficacy of
MS-325-enhanced MRA for the detection of aortoiliac occlusive disease. In September 2001, we expanded our initial target indication for MS-325 to a broad
peripheral vascular disease indication from only aortoiliac occlusive disease, after discussions with the FDA. As a result of this expansion, we added two new Phase III trials to our Phase III
clinical trial program, one in the renal arteries and one in the feet. We expect to complete enrollment in the Phase III trials by approximately the end of the third quarter of 2002. We are also
currently conducting a Phase II feasibility trial to test the safety and feasibility of MS-325-enhanced MRA for the evaluation of coronary artery disease. In addition, in
March 2000, we completed enrollment in a Phase II clinical trial to test the safety and feasibility of MS-325 for detecting breast cancer, and in March 2001, we completed
enrollment in a Phase II feasibility trial which we conducted in collaboration with Pfizer, Inc. to explore the efficacy of MS-325-enhanced MRA in the diagnosis of
female sexual arousal disfunction.

We
anticipate fluctuation in our quarterly results of operations due to several factors, including: the timing of fees and milestone payments received from strategic partners; the
formation of new

33

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strategic alliances by us; 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.



In December 2001, the Securities and Exchange Commission, or the SEC, requested that all registrants discuss their most "critical accounting policies" in
Managements Discussion and Analysis of Financial Condition and Results of Operations. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the
company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that
are inherently uncertain. We believe that the following accounting policies fit this definition:



In the fourth quarter of 2000, we adopted SEC Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial Statements" retroactively to
January 1, 2000, changing our method of recognizing revenue. Under SAB 101, we recognize revenues from non-refundable license fees and milestone payments not specifically tied to a
separate earning process ratably over the period during which we have a substantial continuing obligations to perform services under the contract. When the period of deferral cannot be specifically
identified from the contract, we estimate the period of deferral based upon our obligations under the contract. We continually review these estimates, which could result in a change in the deferral
period. Payments received from Schering AG for development cost sharing obligations are recorded as revenue when the underlying costs are incurred. Non-refundable payments received for
which revenue has not been earned are recorded as deferred revenue. Contract advances represent refundable amounts received in advance of services rendered.



In order to conduct the clinical trials required for our initial product, MS-325, we enter into contracts with vendors who render services over an
extended period of time. Upon signing a contract, we determine the expected timing of when services are to be provided and record expense ratably over time based upon the initial forecasted timetable.
Periodically, we review both the timetable of services to be rendered and the timing of services actually received. Based upon this review, revisions may be made to the forecasted timetable or to the
extent of services performed, or both, in order to reflect our most current estimate of the contract.

The
above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles, with no need for our judgment in their application. There are also areas in which our judgment in selecting any available alternative would not
produce a materially different result. See our audited financial statements and notes thereto, which begin on page F-1 of this Annual Report on Form 10-K and which
contain our accounting policies and other disclosures required by generally accepted accounting principles.

34

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Results of Operations



Revenues for the years ended December 31, 2001 and 2000 were $9.6 million and $6.9 million, respectively. Revenues for 2001 consisted of
$5.8 million of product development revenue from Schering AG, $2.1 million of royalty and license fee revenue related to the Bracco agreement signed in September 2001 and
$1.7 million of license fee revenue related to the Schering AG and Tyco/Mallinckrodt strategic collaboration agreements for the development and marketing of MS-325. The increase in
revenues is a result of $2.1 million related to the Bracco agreement and $600,000 in license fee revenue associated with the granting of Schering AG's rights to market MS-325 in
Japan.



Research and development expenses for the year ended December 31, 2001 were $22.9 million as compared to $25.8 million for 2000. In the year
2000, a one-time charge of $4.9 million was included in research and development expenses, which related to the reacquisition of the Japanese rights to develop and commercialize
MS-325 from Daiichi, causing an overall decrease in research and development expenses from 2000 to 2001. Excluding this one-time charge in 2000, research and development
expenses increased $2.0 million from 2000 to 2001 primarily due to increased costs for personnel and other resources to support research and development of the Company's thrombus imaging
program and higher costs associated with advancing MS-325 through clinical trials.



General and administrative expenses for the year ended December 31, 2001 were $5.5 million as compared to $4.8 million for 2000. General and
administrative expenses increased $670,000 during 2001 as compared to 2000 primarily as a result of ongoing corporate activities, royalty expense associated with the Bracco agreement and increased
personnel and related expenses.



Interest income for the year ended December 31, 2001 was $1.0 million as compared to $1.3 million for 2000. The $300,000 decrease was
primarily due to lower interest rates during 2001 compared to 2000 offset by a higher average cash, cash equivalent and marketable securities balance in 2001 as compared to 2000. Interest expense for
the year ended December 31, 2001 was $339,000 as compared to $468,000 in 2000. The $129,000 decrease was attributable to lower interest rates in the year ended December 31, 2001 along
with lower interest expense associated with our decreasing capital lease obligation and the repayment of our note payable. This decrease was offset by increased interest expense associated with the
Bracco agreement.



The provision for income taxes of $1.1 million represents Italian income taxes related to the Bracco agreement signed in September 2001 for which we
are unable to offset against net operating losses. Any future payments received from Bracco are subject to Italian income tax withholding.



In the fourth quarter of 2000, we adopted SAB 101, "Revenue Recognition in Financial Statements" retroactively to January 1, 2000, changing our
method of recognizing revenue. We recorded a cumulative effect of change in accounting principle in accordance with the adoption of SAB 101 in the amount of $4.4 million, which related to
up-front and guaranteed milestone fees paid in

35

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1996 and 1997 by Tyco/Mallinckrodt, our previous marketing partner for MS-325. Prior to the adoption of SAB 101, we recognized revenues from non-refundable license fees upon
execution of the underlying license agreement. Revenues from milestone payments under collaborative agreements were recorded as revenue based upon the provisions of each agreement. Under the new
accounting method, after the adoption of SAB 101, we now recognize revenues from non-refundable license fees, and milestone payments not specifically tied to a separate earnings process
ratably over the period during which we have a substantial continuing obligation to perform services under the contract. Included in 2000 revenues is $1.1 million of revenue that was recognized
in prior years relating to the adoption of SAB 101. The remaining $3.3 million of revenue to be recognized in future years that is included in the cumulative effect of change in accounting
principle will be recognized ratably over the future period during which we have a substantial continuing obligation to perform services under the contract.

The
following discussions relating to revenue for the year ended December 31, 2000 and revenue for the year ended December 31, 1999 reflect pro forma results as if we had
followed SAB 101 from our inception.



Revenues for the year ended December 31, 2000 and 1999 totaled $6.9 million and $2.2 million, respectively. Excluding $1.1 million of
SAB 101 revenues in both periods, revenues were derived from work performed in connection with product development contracts with Schering AG in the year ended December 31, 2000 and
Tyco/Mallinckrodt in the year ended December 31, 1999. The increase in revenues was due to the impact of the development funding terms under the strategic collaboration agreement entered into
with Schering AG in June 2000.



Research and development expenses for the year ended December 31, 2000 were $25.8 million as compared to $14.7 million for 1999. The
$11.1 million increase resulted primarily from higher costs associated with advancing MS-325 through clinical trials and the related effect of new development funding terms under
the strategic collaboration agreement with Schering AG, increased costs for personnel and other resources associated with advancing our thrombus imaging program and $4.9 million of expenses
incurred in December 2000 associated with the reacquisition of the Japanese rights to develop and commercialize MS-325 from Daiichi. These increased costs were partially offset by
lower manufacturing costs of material produced in connection with our strategic alliance with Daiichi.



General and administrative expenses for the year ended December 31, 2000 were $4.8 million as compared to $4.4 million for 1999. The $400,000
increase was due to increased costs related to corporate communications and marketing activities. These increased costs were partially offset by lower legal costs related to ongoing patent activities.



Interest income for the year ended December 31, 2000 was $1.3 million as compared to $1.2 million for 1999. The $100,000 increase was
primarily due to slightly higher average levels of cash, cash equivalents and marketable securities during 2000. Interest expense for the year ended December 31, 2000 was $468,000 as compared
to $222,000 in 1999. The increase in interest expense was attributable to a higher average balance in our loan payable to Tyco/Mallinckrodt in the year ended December 31, 2000.

36

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Research and DevelopmentGeneral

We are currently performing research and development activities for two products, MS-325, which is in Phase III clinical trials and Thrombus, which is
in the research stage.



MS-325 is an injectable intravascular contrast agent intended to enhance the quality of MR images and provide physicians with a superior method for
diagnosing diseases affecting the vasculature.

We
are currently conducting a Phase III clinical trial program to test the safety and efficacy of MS-325-enhanced MRA for the evaluation of peripheral vascular
disease. We expect to complete enrollment in the three remaining studies in our Phase III clinical trial program by approximately the end of the third quarter of 2002 and we expect to file our NDA
with the FDA in 2003. The FDA review process of an NDA filing can vary widely. If granted expedited review, we could receive product approval within six months from the date of the NDA filing date.
However, historically the FDA has required approximately twelve months to review a product NDA prior to approval. Once approved by the FDA, our partner, Schering AG will be responsible for the
launch and marketing of MS-325.

Both
the time-frame and costs involved in completing the development of MS-325, gaining FDA approval and commercializing the product may vary greatly for several reasons:



Our
current timetable for completing the development of MS-325 and achieving commercialization reflects our best estimate of the time involved in completing the remaining
steps in the development program based on factors currently known to us. The third parties described above have the ability to greatly impact this timetable, and we may not have control over or be
able to respond within the existing timetable to changes caused by them. Any such delays could result in a significant increase in costs to complete development of MS-325 as well as a
delay in product launch, which could enable competition to intensify.

37

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We are seeking to develop a targeted contrast agent that would enable MRI to illuminate blood clots. Such a product could potentially change the diagnostic
work-up for many of the conditions associated with thromboembolic disease, including PE and DVT. We believe that the use of this new approach could lead to better medical outcomes due to
earlier and more definitive diagnosis. We further believe that our proprietary technology platform could enable MRI to differentiate old and new clot formation, potentially identifying those clots
that pose the most risk to patients and those that are the most treatable.

We
have not yet entered into a strategic collaboration with a third party for the development and marketing of our Thrombus program. Therefore, we have generated no revenues from this
program and have fully funded its costs to date.

The
amounts of the expenditures that will be necessary to execute our thrombus business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital
resources. Completion of product candidates may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a
product candidate.

The
duration and cost of bringing a product to market may vary significantly over the life of a project as a result of differences arising during the clinical trials protocol, including,
among others, the following:



We
test our potential product candidates in numerous pre-clinical studies to identify disease indications for which they may be product candidates. We may conduct multiple
clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for
certain indications in order to focus on more promising product candidates or indications.

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash, cash equivalents and available-for-sale marketable securities, of $25.0 million
at December 31, 2001. On January 18, 2002 we raised $30.2 million pursuant to our previously filed shelf registration, bringing our cash, cash equivalents and marketable
securities to $53.8 million as of that date. In September 2000, we entered into an agreement with Acqua Wellington North American Equities Fund Ltd., or Acqua Wellington, for an
equity financing facility. During 2001, we received $8,666,346 and in 2000, we received $885,397 in net proceeds using this facility. This equity financing facility was terminated in
January 2002, in accordance with the terms of the equity financing facility agreement, as a result of our sale of all of the remaining shares available on our effective S-3 shelf
offering. Our January 2002 offering raised $30.2 million in net proceeds, and we issued an additional 2.575 million shares. Acqua Wellington did not purchase any shares in the
January offering.

We
currently receive quarterly cash payments from Schering AG for their share of development costs of MS-325, quarterly royalty payments from Bracco on their sales of
MultiHance® and interest income earned on our cash, cash equivalents and available-for-sale marketable securities. In the future, we may also receive proceeds from
a shelf registration statement filed with the SEC on March 20, 2002 whereby we requested to register 5 million shares of common stock. Such filing has not yet been declared effective by
the SEC. Certain additional future cash flows depend on the successful filing of an NDA, FDA approval and product launch of MS-325, and include up to $27.0 million in milestone

38

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payments from Schering AG and our share of the profits earned on sales of MS-325 worldwide. We may also receive royalties on sales of Schering AG's Eovist product once it is approved for
sale.

Known
outflows, in addition to our ongoing research and development and general and administrative expenses, include the $3.0 million Loan due Tyco/Mallinckrodt in
October 2002, semi-annual royalties we owe MGH on sales by Bracco of MultiHance®, and $2.4 million we owe Daiichi in December 2003 under the terms of the
Reacquisition Agreement. Other potential future outflows depend on the successful filing of an NDA, FDA approval and product launch of MS-325, which include $5.0 million of
milestone payments due Tyco/Mallinekrodt, a share of profits due Mallinekrodt on sales of MS-325 worldwide except Japan, a royalty to Daiichi on sales of MS-325 in Japan and a
royalty due MGH on our share of the profits of MS-325 worldwide.

We
estimate that cash, cash equivalents and marketable securities on hand as of December 31, 2001, as well as the $30.2 million raised in January 2002, will be
sufficient to fund our operations through November 2003. We believe that we will need to raise additional funds for research, development and other expenses through equity or debt financing,
strategic alliances or otherwise, in order to achieve commercial introduction of any of our product candidates. Our future liquidity and capital requirements will depend on numerous factors, including
the following: the progress and scope of clinical trials; the timing and costs of filing future regulatory submissions; the timing and costs required to receive both United States and foreign
governmental approvals; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the extent to which our products gain market acceptance; the
timing and costs of product introductions; the extent of our ongoing research and development programs; the costs of training physicians to become proficient with the use of our products; and, if
necessary, once regulatory approvals are received, the costs of developing marketing and distribution capabilities.

Because
of anticipated spending to support development of MS-325, thrombus and new research programs, we do not expect positive cash flow from operating activities for any
future quarterly or annual period prior to commercialization of MS-325, which is currently forecast to be in 2004. We anticipate continued investments in fixed assets, including equipment
and facilities expansion to support new and continuing research and development programs. We have in place a lease agreement that will enable us to utilize our current principal scientific facilities
through December 31, 2002, and we have an option to extend the lease for an additional three or five years at a rental rate equal to approximately 95% of fair market value. We also have a lease
for nearby office space, which expires in December 2002. We are currently involved in negotiating extensions for our current facilities.

Our
major outstanding contractual obligations relate to our capital leases from equipment financings, our facilities leases and our obligations to strategic partners.

Below
is a table that represents our contractual obligations and commercial commitments as of December 31, 2001:

Payments due by periodTotal

2002

2003

2004Capital leases

$
81,037

$
81,037

$


$
Operating leases

$
1,794,589


1,355,044


400,781


38,764Loan payable to strategic partner

$
3,004,607

$
3,004,607





Accrued reacquisition costs

$
2,400,000




$
2,400,000


$
7,280,233

$
4,440,688

$
2,800,781

$
38,764


We
have incurred tax losses to date and therefore have not paid significant federal or state income taxes since inception. As of December 31, 2001, we had loss carryforwards of
approximately $71.0 million available to offset future taxable income. These amounts expire at various times through

39

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2020. As a result of ownership changes resulting from sales of equity securities, our ability to use the loss carryforwards is subject to limitations as defined in Sections 382 and 383 of the
Internal Revenue Code of 1986, or the Code, as amended. We currently estimate that the annual limitation on our use of net operating losses through May 31, 1996 will be approximately $900,000.
Pursuant to Sections 382 and
383 of the Code, the change in ownership resulting from public equity offerings in 1997 and any other future ownership changes may further limit utilization of losses and credits in any one year. We
also are eligible for research and development tax credits that 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.

We
do not believe that inflation has had a material impact on our operations.

Strategic Agreements

In September 2001, pursuant to a Settlement and Release Agreement and Worldwide License Agreement, known as the License Agreement, we granted Bracco a
worldwide, non-exclusive royalty bearing sub-license to our patents. We received $10.0 million ($9.0 million after payment of Italian withholding taxes) in
up-front payments pursuant to the License Agreement. In addition, Bracco is obligated to pay us a quarterly royalty on its sales of MultiHance® beginning in January 2001
and ending on the patent expiration date in each country that MultiHance® is sold. During 2001, we recorded a total of $2.1 million of revenue related to this agreement, consisting
of $2.0 million of royalties and $100,000 of license fee revenue of the $2.0 million in revenues, $1.0 million related to sales of MultiHance® prior to
January 1, 2001 and the remaining $1.0 million related to sales on MultiHance® for the year ended December 31, 2001. If upon termination of the License Agreement, any
balance remains of the prepaid future royalties, originally $4.0 million, this balance, $3.6 million at December 31, 2001 must be repaid to Bracco.

In
connection with the 2000 Schering strategic collaboration agreement, as amended, Schering AG paid us an up-front fee of $10.0 million, which we then paid to
Tyco/Mallinckrodt. Schering AG also made a $20.0 million dollar equity investment in us at $17.98 per share of common stock, through its affiliate, Schering Berlin Venture Corporation
("Schering BV"). In return for their investment, we issued 1,112,075 shares of our common stock to Schering BV. We may receive up to an additional $20.0 million in milestone payments under the
strategic collaboration agreement, of which $2.5 million will be earned upon NDA filing and up to $2.5 million will be earned upon product approval. Under the terms of the
December 2000 amendment, Schering AG paid us an up-front fee of $3.0 million and may be required to pay us an additional $7.0 million upon our achievement of certain
milestones.

In
connection with the amendment to the Tyco/Mallinckrodt agreement, we paid in June 2000 Tyco/Mallinckrodt an up-front fee of $10.0 million and may be required
to pay up to an additional $5.0 million in milestones, $2.5 million will be paid upon NDA filing and $2.5 million will be paid upon product approval. The first milestone is the
submission of an NDA to the FDA, which is planned for 2003. We will also pay Tyco/Mallinckrodt a share of operating margins in the US and a royalty on gross profits outside the US on sales of
MS-325.

In
October 1999, we entered into a Loan with Tyco/Mallinckrodt. The Loan balance at December 31, 2001 and 2000 of $3,004,607 represents our share of third and fourth
quarter 1999 MS-325 development
costs. No additional funding is available to us under the Loan. The Loan bears interest, adjustable on a quarterly basis, payable twice a year, at the Prime Rate published in the Wall Street Journal
and is repayable in full on October 1, 2002. The Loan is secured by a first priority security interest in all of the Company's intellectual property.

40

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In March 1996, we entered into a development and license agreement with Daiichi pursuant to which we granted Daiichi an exclusive license to develop and commercialize
MS-325 in Japan. In December 2000 we reacquired the rights to develop and commercialize MS-325 in from Daiichi. Under the terms of this Reacquisition Agreement, we
agreed to pay Daiichi a total of $5.2 million. In January 2001, we paid Daiichi $2.8 million in fees and we will pay an additional $2.4 million upon the earlier of
regulatory approval of MS-325 in either U.S. or Japan or December 31, 2003. Daiichi will also receive a royalty from us on net sales of MS-325 in Japan.

Certain Factors That May Affect Future Results of Operations

This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based
on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking
statements. We caution investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the following: the uncertainties associated with pre-clinical studies and clinical trials; the early stage of our
initial product development and lack of product revenues; our history of operating losses and accumulated deficit; our lack of commercial manufacturing experience and commercial sales, distribution
and marketing capabilities; reliance on suppliers of key materials necessary for production of our products and technologies; the potential development by competitors of competing products and
technologies; our dependence on existing and potential collaborative partners, and the lack of assurance that we will receive any funding under such relationshiops to develop and maintain strategic
alliances; the lack of assurance regarding patent and other protection for our proprietary technology; governmental regulation of our activities, facilities, products and personnel; the dependence on
key personnel; uncertainties as to the extent of reimbursement for the costs of our potential products and related treatments by government and private health insurers and other organizations; the
potential adverse impact of government-directed health care reform; the risk of product liability claims; and economic conditions, both generally and those specifically related to the biotechnology
industry. As a result, our future development efforts involve a high degree of risk. For further information, refer to the more specific risks and uncertainties discussed throughout this Annual Report
on Form 10-K.

Accounting Pronouncements



In July 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard, or SFAS, No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 applies to all business combinations completed after June 30, 2001 which, among other things,
requires the use of the purchase method of accounting. SFAS No. 141 also establishes new criteria for determining whether intangible assets should be recognized separately from goodwill. SFAS
No. 142 provides that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be reviewed for impairment at least annually. SFAS No. 142 is effective
for fiscal years beginning after December 31, 2001 and accordingly, the Company will apply SFAS No. 142 beginning in the first quarter of 2002. Management does not expect that the
application of SFAS No. 141 or No. 142 will have a significant impact on the results of operations or financial position of the Company.

In
August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which superseded SFAS No. 121, Accounting
for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt SFAS No. 144 in the first quarter of fiscal 2003. The adoption of
SFAS No. 144 is not expected to have a material effect on the Company's financial position or results of operations.

41

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The objective of our investment activities is to preserve principal, while at the same time maximizing yields without significantly increasing risk. To achieve
this objective, in accordance with our investment policy, we invest our cash in a variety of financial instruments, principally restricted to United States government issues, high-grade
bank obligations, high grade corporate bonds and certain money market funds. These investments are denominated in U.S. dollars.

Investments
in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may
fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates.
A hypothetical 10% increase or decrease in interest rates would result in a decrease in the fair market value of our total portfolio of approximately $40,000, and an increase of approximately $39,000,
respectively, at December 31, 2001.

The
interest rate on our loan payable to Tyco/Mallinckrodt is adjustable on a quarterly basis and therefore subjects the Company to interest rate risk. However, based on the outstanding
loan balance of $3,004,607 and prime rate of 4.75% at December 31, 2001, a 10% increase in the prime rate would increase the Company's annual interest expense by approximately $15,000.

The
interest rate of our agreement with Bracco S.p.A. is adjustable on a quarterly basis and therefore subjects the Company to interest rate risk. However, based on the outstanding
balance of $4,000,000, a portion of total deferred revenue, and an interest rate of 4.75% (prime plus 1%) at December 31, 2001, a 10% increase in the prime rate would increase the Company's
annual interest expense by approximately $23,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements and supplementary data appear at pages F-1 through F-19 of this Annual Report on Form 10-K.

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

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



ITEM 11. EXECUTIVE COMPENSATION

The information required under this item is incorporated herein by reference to the section entitled "Executive Compensation" in the 2002 Proxy Statement.

42

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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 "Security Ownership of Certain Beneficial Owners And
Management" in the 2002 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 2002 Proxy Statement.

PART IV

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

a. Documents filed as part of this Report:



|Index to Financial Statements: |                                | F-1                                      
|------------------------------ | ------------------------------ | -----------------------------------------
|                               | Report of Independent Auditors |                                          
|                               | Financial Statements:          |                                          
|                               |                                | Balance Sheets                           
|                               |                                | Statements of Operations                 
|                               |                                | Statements Stockholders' (Deficit) Equity
|                               |                                | Statements of Cash Flows                 
|                               |                                | Notes to Financial Statements            



b. No reports on Form 8-K were filed in the fourth quarter of 2001.

c. Exhibits

|3.1  |  | Restated Certificate of Incorporation of the Company. Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (File No. 333-30531) and incorporated herein by reference.                                                      
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2  |  | Certificate of Amendment of Restated Certificate of Incorporation of the Company. Filed herewith.                                                                                                                                              
|3.3  |  | Form of Amended and Restated By-Laws of the Company. Filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8 (File No. 333-30531) 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 |  | 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.             
|10.2 |  | 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.         
|10.3 |  | 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.

43

---

|10.4+  |  | 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.                                                                                                                                                                    
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5   |  | Third Amendment Lease From Trustees of the Cambridge East Trust to the Comp any 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.                                                                                                                                                                                      
|10.6   |  | 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.                                                                                                                                    
|10.7   |  | 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.                                                                                                                                                                                        
|10.8   |  | 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.                                                                                                                                                                                    
|10.9#  |  | Amended and Restated 1992 Equity Incentive Plan. Filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-30531) and incorporated herein by reference.                                                                                                                                                                                                                                         
|10.10# |  | 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.                                                                                                                                                                                                                                             
|10.11  |  | 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.                                                                                                                                                                                                                                          
|10.12# |  | Amended and Restated 1996 Employee Stock Purchase Plan. Filed as Appendix B to the Company's 2002 Definitive Proxy Statement on Schedule 14A (File No. 000-21863) and incorporated herein by
reference.                                                                                                                                                                                                                       
|10.13# |  | Amended and Restated 1996 Director Stock Option Plan. Filed as Appendix C to the Company's 2002 Definitive Proxy Statement on Schedule 14A (File No. 000-21863) and incorporated herein by
reference.                                                                                                                                                                                                                         
|10.14  |  | Short Form Lease from Trustees of the Cambridge Trust to the Company with a commencement date of January 1, 1998. Filed as Exhibit 10.39 to the Company's Registration Statement on Form S-1 (File No. 333-38399) and
incorporated herein by reference.                                                                                                                                                                       
|10.15  |  | Sublease dated as of October 31, 1997 between the Company and SatCon Technology Corporation. Filed as Exhibit 10.40 to the Company's Annual Report on Form 10-K for the period ended December 31, 1998 (File No. 000-21863)
and incorporated herein by reference.                                                                                                                                                             
|10.16  |  | First Amendment to Sublease dated as of July 15, 1998 between the Company and SatCon Technology Corporation. Filed as Exhibit 10.41 to the Company's Annual Report on Form 10-K for the period ended December 31, 1998
(File No. 000-21863) and incorporated herein by reference.                                                                                                                                             
|10.17  |  | First Amendment dated February 8, 1999 to the Short Form Lease dated as of July 7, 1998 with a commencement date as of January 1, 1998 between the Company and the Trustees of The Cambridge East Trust. Filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1999 (File No. 000-21863) and incorporated herein by reference.                                                  
|10.18  |  | Sublease extension election for an additional three years, beginning January 1, 2000 and ending December 31, 2002 pursuant to Article 5 of the First Amendment to Sublease dated as of July 15, 1998 between the Company and
SatCon Technology Corporation. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999 (File No. 000-21863) and incorporated herein by reference.

44

---

|10.19   |  | Non-Negotiable Promissory Note dated October 8, 1999 between the Company and Tyco/Mallinckrodt Inc. Filed as Exhibit 10.47 to the Company's Annual Report on Form 10-K for the period ended December 31, 1999 (File No.
000-21863) and incorporated herein by reference.                                                                            
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20   |  | Security Agreement dated October 8, 1999 between the Company and Tyco/Mallinckrodt Inc. Filed as Exhibit 10.48 to the Company's Annual Report on Form 10-K for the period ended December 31, 1999 (File No. 000-21863)
and incorporated herein by reference.                                                                                        
|10.21   |  | Second Amendment dated June 30, 2000 to the Short Form Lease dated as of July 7, 1998 with a commencement date as of January 1, 1998 between the Company and the Trustees of The Cambridge East Trust. Filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000 and incorporated herein by reference.
|10.22++ |  | Amended and Restated Strategic Collaboration Agreement dated June 9, 2000, among the Company, Tyco/Mallinckrodt Inc. (a Delaware corporation) and Tyco/Mallinckrodt Inc. (a New York corporation). Filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K dated June 29, 2000 (File No. 000-21863) and incorporated herein by reference. 
|10.23++ |  | Strategic Collaboration Agreement dated as of June 9, 2000, between the Company and Schering Aktiengesellschaft. Filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated June 29, 2000 (File No. 000-21863)
and incorporated herein by reference.                                                                                   
|10.24   |  | Stock Purchase Agreement, dated as of June 9, 2000, between the Company and Schering Berlin Venture Corporation. Filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated June 29, 2000 (File No. 000-21863)
and incorporated herein by reference.                                                                                   
|10.25   |  | Standstill Agreement, dated as of June 9, 2000, between the Company and Schering Berlin Venture Corporation. Filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated June 29, 2000 (File No. 000-21863) and
incorporated herein by reference.                                                                                       
|10.26   |  | Common Stock Purchase Agreement dated as of September 18, 2000 by and between the Company and Acqua Wellington North American Equities Fund, Ltd. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated
September 18, 2000 (File No. 000-21863) and incorporated herein by reference.                                             
|10.27++ |  | Reacquisition Agreement dated December 22, 2000 between the Company and Daiichi Radioisotope Laboratories, Ltd. Filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the period ended December 31, 2001
(File No. 000-21863) and incorporated herein by reference.                                                                
|10.28   |  | Amendment No. 1 dated as of December 22, 2000 to the Strategic Collaboration agreement, dated as of June 9, 2000, between the Company and Schering Aktiengesellschaft. Filed as Exhibit 10.33 to the Company's Annual Report
on Form 10-K for the period ended December 31, 2001 (File No. 000-21863) and incorporated herein by reference.         
|10.29++ |  | Worldwide License Agreement, dated as of September 25, 2001, by and between the Company and Bracco Imaging S.p.A. filed as Exhibit 10.1 to the Company's current report on Form 8-K dated September 25, 2001 (File No.
000-21863) and incorporated herein by reference.                                                                             
|10.30   |  | Settlement and Release Agreement dated as of September 25, 2001,by and between the Company and Bracco Imaging S.p.A. filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated September 25, 2001 (File No.
000-21863) and incorporated herein by reference.                                                                          
|23.1    |  | Consent of Ernst & Young LLP. Filed herewith.                                                                                                                                                                                                                                                                                                       

---

45

---



SIGNATURES

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

|               |  | EPIX MEDICAL, INC.
|-------------- |  | ------------------
|March 28, 2002 |  | By:               

We
the undersigned officers and directors of EPIX Medical, Inc., hereby severally constitute Michael D. Webb, Pamela E. Carey, 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, 2001, 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.

|Signature                                                     |  | Title                                                              |  | Date          
|------------------------------------------------------------- |  | ------------------------------------------------------------------ |  | --------------
|                                                              |  |                                                                    |  |               
|/s/MICHAEL D. WEBBMichael D. Webb                             |  | Chief Executive Officer and Director (Principal Executive Officer) |  | March 28, 2002
|/s/PAMELA E. CAREYPamela E. Carey                             |  | Chief Financial Officer                                            |  | March 28, 2002
|/s/CHRISTOPHER F. O. GABRIELIChristopher F. O. Gabrieli       |  | Chairman of the Board and Director                                 |  | March 28, 2002
|/s/STANLEY T. CROOKE, M.D., PH.DStanley T. Crooke, M.D., Ph.D |  | Director                                                           |  | March 28, 2002
|/s/PETER WIRTHPeter Wirth                                     |  | Director                                                           |  | March 28, 2002
|/s/RANDALL B. LAUFFER, PH.D.Randall B. Lauffer, Ph.D.         |  | Director                                                           |  | March 28, 2002

46

---



EPIX MEDICAL, INC.        INDEX TO FINANCIAL STATEMENTS

|Report of Independent Auditors |                                              | F-2
|------------------------------ | -------------------------------------------- | ---
|Financial Statements           |                                              |    
|                               | Balance Sheets                               |    
|                               | Statements of Operations                     |    
|                               | Statements of Stockholders' (Deficit) Equity |    
|                               | Statements of Cash Flows                     |    
|Notes to Financial Statements  |                                              | F-7

F-1

---



REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders EPIX Medical, Inc.

We have audited the accompanying balance sheets of EPIX Medical, Inc. as of December 31, 2001 and 2000, and the related statements of operations,
stockholders' (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and
2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the
United States.



Boston,
Massachusetts
February 12, 2002

F-2

---



EPIX MEDICAL, INC.        BALANCE SHEETS

|                                               |                                                   | December 31,                                                                                                                                                                                  |                                                     
|---------------------------------------------- | ------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------
|
|ASSETS                                         |                                                  
|Current assets:                                |                                                   |                                                                                                                                                                                               |                                                     
|                                               | Cash and cash equivalents                         |                                                                                                                                                                                               | $                                                   
|                                               | Marketable securities                             |                                                                                                                                                                                               |                                                     
|                                               | Due from strategic partner                        |                                                                                                                                                                                               |                                                     
|                                               | Royalties receivable                              |                                                                                                                                                                                               |                                                     
|                                               | Prepaid expenses and other assets                 |                                                                                                                                                                                               |                                                     
|                                               |                                                   |                                                                                                                                                                                               |                                                     
|                                               |                                                   |                                                                                                                                                                                               | Total current assets                                
|Property and equipment, net                    |                                                   |                                                                                                                                                                                               | 1,243,842                                           
|Other assets                                   |                                                   |                                                                                                                                                                                               | 112,533                                             
|                                               |                                                   |                                                                                                                                                                                               |                                                     
|                                               |                                                   |                                                                                                                                                                                               | Total assets                                        
|                                               |                                                   |                                                                                                                                                                                               |                                                     
|LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY |                                                  
|Current liabilities:                           |                                                   |                                                                                                                                                                                               |                                                     
|                                               | Accounts payable                                  |                                                                                                                                                                                               | $                                                   
|                                               | Accrued expenses                                  |                                                                                                                                                                                               |                                                     
|                                               | Contract advances                                 |                                                                                                                                                                                               |                                                     
|                                               | Accrued reacquisition costs                       |                                                                                                                                                                                               |                                                     
|                                               | Current portion of capital lease obligations      |                                                                                                                                                                                               |                                                     
|                                               | Current portion of note payable                   |                                                                                                                                                                                               |                                                     
|                                               | Loan payable to strategic partner                 |                                                                                                                                                                                               |                                                     
|                                               | Deferred revenue                                  |                                                                                                                                                                                               |                                                     
|                                               |                                                   |                                                                                                                                                                                               |                                                     
|                                               | Total current liabilities                         |                                                                                                                                                                                               |                                                     
|                                               | Capital lease obligations, less current portion   |                                                                                                                                                                                               |                                                     
|                                               | Accrued reacquisition costs, less current portion |                                                                                                                                                                                               |                                                     
|                                               | Loan payable to strategic partner                 |                                                                                                                                                                                               |                                                     
|                                               | Deferred revenue                                  |                                                                                                                                                                                               |                                                     
|                                               | Commitments and contingencies                     |                                                                                                                                                                                               |                                                     
|                                               | Stockholders' (deficit) equity:                   |                                                                                                                                                                                               |                                                     
|                                               |                                                   | Preferred Stock, $0.01 par value, 1,000,000 shares authorized at December 31, 2001 and 2000, no shares issued and outstanding at December 31, 2001 and 2000 respectively                      |                                                     
|                                               |                                                   | Common stock, $.01 par value, 40,000,000 shares authorized at December 31, 2001 and 2000, 14,238,087 and 13,203,991 shares issued and outstanding at December 31, 2001 and 2000, respectively |                                                     
|                                               |                                                   | Additional paid-in capital                                                                                                                                                                    |                                                     
|                                               |                                                   | Accumulated deficit                                                                                                                                                                           |                                                     
|                                               |                                                   | Accumulated other comprehensive income (loss)                                                                                                                                                 |                                                     
|                                               |                                                   |                                                                                                                                                                                               |                                                     
|                                               |                                                   |                                                                                                                                                                                               | Total stockholders' (deficit) equity                
|                                               |                                                   |                                                                                                                                                                                               |                                                     
|                                               |                                                   |                                                                                                                                                                                               | Total liabilities and stockholders' (deficit) equity
|                                               |                                                   |                                                                                                                                                                                               |                                                     

See
accompanying notes.

F-3

---



EPIX MEDICAL, INC.        STATEMENTS OF OPERATIONS

|                                                                           |                                                                 | Year ended December 31,               |            
|-------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------- | -----------
|
|Revenues:                                                                  |                                                                 |                                       |            
|                                                                           | Product development revenue                                     |                                       | $          
|                                                                           | Royalty revenue                                                 |                                       |            
|                                                                           | License fee revenue                                             |                                       |            
|                                                                           |                                                                 |                                       |            
|Total revenues                                                             |                                                                 |                                       | 9,568,715  
|Operating expenses:                                                        |                                                                 |                                       |            
|                                                                           | Research and development                                        |                                       |            
|                                                                           | General and administrative                                      |                                       |            
|                                                                           |                                                                 |                                       |            
|Total operating expenses                                                   |                                                                 |                                       | 28,409,587 
|                                                                           |                                                                 |                                       |            
|Operating loss                                                             |                                                                 |                                       | (18,840,872
|Interest income                                                            |                                                                 |                                       | 1,023,659  
|Interest expense                                                           |                                                                 |                                       | (339,204   
|                                                                           |                                                                 |                                       |            
|Loss before provision for income taxes                                     |                                                                 |                                       | (18,156,417
|Provision for income taxes                                                 |                                                                 |                                       | 1,091,606  
|                                                                           |                                                                 |                                       |            
|Loss before cumulative effect of change in accounting principle            |                                                                 | $                                     | (19,248,023
|Cumulative effect of change in accounting principle                        |                                                                 |                                       |           
|                                                                           |                                                                 |                                       |            
|                                                                           |                                                                 | Net loss                              |            
|                                                                           |                                                                 |                                       |            
|Weighted average shares:                                                   |                                                                 |                                       |            
|                                                                           | Basic and diluted                                               |                                       |            
|                                                                           |                                                                 |                                       |            
|Net loss per share, basic and diluted:                                     |                                                                 |                                       |            
|                                                                           | Loss before cumulative effect of change in accounting principle |                                       | $          
|                                                                           | Cumulative effect of change in accounting principle             |                                       |            
|                                                                           |                                                                 |                                       |            
|                                                                           |                                                                 | Net loss                              |            
|                                                                           |                                                                 |                                       |            
|Pro forma amounts assuming the accounting change is applied retroactively: |                                                                 |                                       |            
|                                                                           |                                                                 | Net loss                              |            
|                                                                           |                                                                 |                                       |            
|                                                                           |                                                                 | Net loss per share, basic and diluted |            
|                                                                           |                                                                 |                                       |            

See
accompanying notes.

F-4

---



EPIX MEDICAL, INC.        STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                            |  | Common Stock |            |  |   |         |  |   |            | Accumulated
Other
Comprehensive
Income/(loss) |   |          |  
|----------------------------------------------------------- |  | ------------ | ---------- |  | - | ------- |  | - | ---------- | --------------------------------------------- | - | -------- | -
|
|
|Balance at December 31, 1998                                |  | $            | 11,458,401 |  | $ | 114,584 |  | $ | 55,839,411 |                                               | $ | (123,119 | )
|Issuance of common stock upon exercise of options           |  |              | 142,037    |  |   | 1,420   |  |   | 119,388    |                                               |   |          |  
|Issuance of common stock under employee stock purchase plan |  |              | 24,323     |  |   | 243     |  |   | 116,659    |                                               |   |          |  
|Issuance of compensatory stock option plan                  |  |              | 55,554     |  |   | 556     |  |   | 249,438    |                                               |   |          |  
|Issuance of compensatory stock option loan                  |  |              |            |  |   |         |  |   |            |                                               |   | (249,994 | )
|Compensatory stock option expense                           |  |              |            |  |   |         |  |   | 98,956     |                                               |   |          |  
|Disqualifying disposition of compensatory stock option      |  |              |            |  |   |         |  |   | 96,828     |                                               |   |          |  
|Interest income on compensatory stock options loans         |  |              |            |  |   |         |  |   |            |                                               |   | (14,317  | )
|Net loss                                                    |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|Available-for-sale marketable securities unrealized loss    |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|                                                            |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|Comprehensive loss                                          |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|                                                            |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|Balance at December 31, 1999                                |  |              | 11,680,315 |  |   | 116,803 |  |   | 56,520,680 |                                               |   | (387,430 | )
|Issuance of common stock upon exercise of options           |  |              | 332,803    |  |   | 3,328   |  |   | 1,615,179  |                                               |   |          |  
|Issuance of common stock under employee stock purchase plan |  |              | 14,708     |  |   | 147     |  |   | 120,018    |                                               |   |          |  
|Issuance of common stock                                    |  |              | 1,176,165  |  |   | 11,762  |  |   | 20,873,635 |                                               |   |          |  
|Compensatory stock option loan expense                      |  |              |            |  |   |         |  |   | 15,400     |                                               |   |          |  
|Repayment of stock option loans                             |  |              |            |  |   |         |  |   |            |                                               |   | 387,430  |  
|Net loss                                                    |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|Available-for-sale marketable securities unrealized gain    |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|                                                            |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|Comprehensive loss                                          |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|                                                            |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|Balance at December 31, 2000                                |  |              | 13,203,991 |  |   | 132,040 |  |   | 79,144,912 |                                               |   |         |  
|Issuance of common stock upon exercise of options           |  |              | 98,266     |  |   | 983     |  |   | 363,366    |                                               |   |          |  
|Issuance of common stock under employee stock purchase plan |  |              | 18,822     |  |   | 188     |  |   | 152,870    |                                               |   |          |  
|Issuance of common stock                                    |  |              | 917,008    |  |   | 9,170   |  |   | 8,657,176  |                                               |   |          |  
|Compensatory stock option expense                           |  |              |            |  |   |         |  |   | 301,770    |                                               |   |          |  
|Net loss                                                    |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|Available-for-sale marketable securities unrealized loss    |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|                                                            |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|Comprehensive loss                                          |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|                                                            |  |              |            |  |   |         |  |   |            |                                               |   |          |  
|Balance at December 31, 2001                                |  |              | 14,238,087 |  | $ | 142,381 |  | $ | 88,620,094 |                                               | $ |         |  
|                                                            |  |              |            |  |   |         |  |   |            |                                               |   |          |  

See accompanying notes.

F-5

---



EPIX MEDICAL, INC.        STATEMENTS OF CASH FLOWS

|                                                                                  |                                                                   | Year Ended December 31, |                                                    
|--------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------- | ---------------------------------------------------
|
|Operating activities:                                                             |                                                                   |                         |                                                    
|                                                                                  | Net loss                                                          |                         | $                                                  
|Adjustments to reconcile net loss to net cash used in operating activities:       |                                                                   |                         |                                                    
|                                                                                  | Cumulative effect of change in accounting principle               |                         |                                                    
|                                                                                  | Depreciation and amortization                                     |                         |                                                    
|                                                                                  | Stock compensation expense                                        |                         |                                                    
|                                                                                  | Loss on sale of fixed assets                                      |                         |                                                    
|Changes in operating assets and liabilities:                                      |                                                                   |                         |                                                    
|                                                                                  | Due from strategic partner                                        |                         |                                                    
|                                                                                  | Royalties receivable                                              |                         |                                                    
|                                                                                  | Prepaid expenses and other current assets                         |                         |                                                    
|                                                                                  | Notes receivable from officer                                     |                         |                                                    
|                                                                                  | Other long term assets                                            |                         |                                                    
|                                                                                  | Accounts payable                                                  |                         |                                                    
|                                                                                  | Accrued expenses                                                  |                         |                                                    
|                                                                                  | Accrued reacquisition costs                                       |                         |                                                    
|                                                                                  | Contract advances                                                 |                         |                                                    
|                                                                                  | Deferred revenue                                                  |                         |                                                    
|                                                                                  | Receipt of cash from Schering AG for marketing rights             |                         |                                                    
|                                                                                  | Disbursement of cash to Tyco/Mallinckrodt for marketing rights    |                         |                                                    
|                                                                                  |                                                                   |                         |                                                    
|                                                                                  |                                                                   |                         | Net cash used in operating activities              
|Investing activities:                                                             |                                                                   |                         |                                                    
|                                                                                  | Purchases of fixed assets                                         |                         |                                                    
|                                                                                  | Proceeds from sale of fixed assets                                |                         |                                                    
|                                                                                  | Purchases of marketable securities                                |                         |                                                    
|                                                                                  | Sale or redemption of marketable securities                       |                         |                                                    
|                                                                                  |                                                                   |                         |                                                    
|                                                                                  |                                                                   |                         | Net cash provided by (used in) investing activities
|Financing activities:                                                             |                                                                   |                         |                                                    
|                                                                                  | Repayment of capital lease obligations                            |                         |                                                    
|                                                                                  | Proceeds from loan payable from strategic partner                 |                         |                                                    
|                                                                                  | Repayment of note payable                                         |                         |                                                    
|                                                                                  | Proceeds from repayment of stock option loan and related interest |                         |                                                    
|                                                                                  | Proceeds from Employee Stock Purchase Plan                        |                         |                                                    
|                                                                                  | Proceeds from stock options and warrants                          |                         |                                                    
|                                                                                  | Proceeds from sale of Common Stock                                |                         |                                                    
|                                                                                  |                                                                   |                         |                                                    
|                                                                                  |                                                                   |                         | Net cash provided by financing activities          
|                                                                                  |                                                                   |                         |                                                    
|                                                                                  | Net increase (decrease) in cash and cash equivalents              |                         |                                                    
|                                                                                  |                                                                   |                         | Cash and cash equivalents at beginning of period   
|                                                                                  |                                                                   |                         |                                                    
|                                                                                  |                                                                   |                         | Cash and cash equivalents at end of period         
|                                                                                  |                                                                   |                         |                                                    
|Supplemental disclosure of noncash investing and financing activities:            |                                                                   |                         |                                                    
|Capital lease obligations incurred in connection with acquisition of fixed assets |                                                                   | $                       |                                                   
|                                                                                  |                                                                   |                         |                                                    
|Issuance of stock option loan for exercise of stock options and related interest  |                                                                   | $                       |                                                   
|                                                                                  |                                                                   |                         |                                                    
|Supplemental cash flow information:                                               |                                                                   |                         |                                                    
|Cash paid for interest                                                            |                                                                   | $                       | 344,452                                            
|                                                                                  |                                                                   |                         |                                                    

See accompanying notes.

F-6

---



EPIX MEDICAL, INC.        NOTES TO FINANCIAL STATEMENTS        December 31, 2001

1. Business

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 human disease. The Company's principal product
under development, MS-325, is an injectable vascular contrast agent designed for multiple vascular imaging indications, including peripheral vascular disease ("PVD") and coronary artery
disease ("CAD").

2. Significant Accounting Policies



The Company considers investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of money
market accounts.



The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115). SFAS 115 establishes the accounting and reporting requirements for all debt securities and for
investments in equity securities that have readily determinable fair values. All marketable securities must be classified as one of the following: held-to-maturity,
available-for-sale, or trading. The Company classifies its marketable securities as available-for-sale and, as such, carries the investments at fair
value, with unrealized holding gains and losses included in accumulated other comprehensive income/(loss).



At December 31, 2001 and 2000, the Company's financial instruments consisted of cash and cash equivalents, available-for-sale
marketable securities, a portion of deferred revenue, a loan payable to Tyco/Mallinckrodt and accrued reacquisition costs.

The
carrying value of cash equivalents approximate fair value due to their short-term maturities. The carrying value of the available-for-sale
marketable securities, the loan payable to Tyco/Mallinckrodt, a portion of deferred revenue and accrued reacquisition costs are discussed in Notes 3, 6, 8 and 12, respectively.



Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash equivalents and
available-for-sale marketable securities. In accordance with the Company's investment policy, marketable securities are principally restricted to United States government
issues, high-grade bank obligations, high-grade corporate bonds and certain money market funds. The Company had $24,965,668 of cash, cash equivalents and
available-for-sale marketable securities invested with two financial institutions as of December 31, 2001.

F-7

---



Property and equipment are recorded at historical cost. Depreciation on laboratory equipment, furniture and 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.



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.



The Company provides for income taxes under Statement of Financial Accounting Standards ("SFAS") 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 are 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.



In the fourth quarter of 2000, the Company adopted SEC Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in
Financial Statements" retroactively to January 1, 2000, changing its method of recognizing revenue. The Company recorded a cumulative effect of change in accounting
principle, in accordance with the adoption of SAB 101, in the amount of $4.4 million, which related to up-front and milestone fees paid in 1996 and 1997 by Tyco/Mallinckrodt, the
Company's previous marketing partner for MS-325. Under the new accounting method, after the adoption of SAB 101, the Company recognizes revenues from non-refundable license
fees and milestone payments not specifically tied to a separate earning process ratably over the period during which the Company has a substantial continuing obligation to perform services under the
contract. Included in 2001 and 2000 revenues is $1.1 million of revenue that was recognized in prior years relating to the adoption of SAB 101. As of December 31, 2001 the remaining
$2.2 million of revenue to be recognized in future years that is
included in the cumulative effect of change in accounting principle will be recognized ratably over the future period during which the Company has a substantial continuing obligation to perform
services under the contract. In September 2001, pursuant to a Settlement and Release Agreement, the Company entered into a License Agreement with Bracco Imaging S.p.A. ("Bracco"). Under the
License Agreement, the Company sub-licensed certain patents relating to Bracco products, including Bracco's proprietary product MultiHance®. The patents
sub-licensed to Bracco are owned by the MGH and are licensed exclusively to the Company for which we pay a royalty.

The
Company received from Bracco $10,000,000 ($9,000,000 net of Italian income taxes) in up-front payments consisting of a license fee, royalties on past sales of
MultiHance®, prepayment of

F-8

---

future royalties and a contingent licensing fee based upon marketing approval of MultiHance® in the United States. The license fee of $2,000,000, will be recognized ratably over the term
of the License Agreement because of ongoing obligations of the Company over such term. $1,000,000 of royalties on past sales of MultiHance® made by Bracco prior to January 1, 2001
was recognized as revenue in the third quarter of 2001. Prepaid future royalties total $4,000,000; $3,000,000 of which is required, pursuant to the License Agreement, to be applied against a portion
of royalties earned commencing January 1, 2001; the remaining $1,000,000 will be applied against royalties earned commencing on January 1, 2005. The remaining $3,000,000 represents a
contingent licensing fee for MultiHance® FDA approval, which will be recognized as revenue ratably in the period beginning with FDA approval through the remaining term of the License
Agreement, because of ongoing obligations of the Company over such term. The $3,000,000 contingent license fee for MultiHance® FDA approval and the $1,000,000 of prepaid royalties
commencing on January 1, 2005 bear interest at prime plus 1%. Interest that accrues on these balances is charged to interest expense. The carrying value of this amount approximates fair value
due to the variable interest rate.

Upon
termination of the License Agreement, any remaining balance of the prepaid future royalties, $3.6 million at December 31, 2001, must be repaid to Bracco.

Of
the $10,000,000 received from Bracco, any amount not recognized as revenue in the year ended December 31, 2001 has been recorded on the balance sheet as deferred revenue,
classified as short term and long term according to when the amount is expected to be recognized as revenue.

For
the years ended December 31, 2001, 2000 and 1999, one source represented 66%, 84% and 100% of revenues, another source represented 11%, 16% and 0% and a third source
represented 23%, 0% and 0%, respectively. The 1999 revenue percentages do not reflect the effect of SAB 101.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.



Research and development costs, including those associated with technology, licenses and patents, are expensed as incurred. Research and development costs include
employee salaries and related costs, third party service costs and consulting expenses.



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 SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The Company has provided the required disclosures pursuant to SFAS 123.

F-9

---



The Company computes net loss per share in accordance with the provisions of SFAS No. 128, "Earnings per
Share." Basic net loss per share is based upon the weighted-average number of common shares outstanding. Diluted net loss per share includes the effect of dilutive common
equivalent shares from stock options and warrants using the treasury stock method. Basic and diluted loss per share are the same for all periods presented, due to the Company's operating losses.



The Company reports and presents comprehensive income and its components in accordance with the provisions of SFAS No. 130,
"Reporting Comprehensive Income." Comprehensive income/(loss) is reflected in the statements of stockholders' equity and relates to unrealized gains and
losses in marketable securities.



The Company adopted Financial Accounting Standards Board Statement (FASB) SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. Adoption of this
standard had no material effect on the Company's financial position or results of operations.

In
July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 applies to all business combinations completed after June 30, 2001, which, among
other things, requires the use of the purchase method of accounting. SFAS No. 141 also establishes new criteria for determining whether intangible assets should be recognized separately from
goodwill. SFAS No. 142 provides that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be reviewed for impairment at least annually. SFAS
No. 142 is effective for fiscal years beginning after December 31, 2001. The Company will apply SFAS No. 142 beginning in the first quarter of fiscal 2002. Management does not
expect that the application of SFAS No. 141 or No. 142 will have a significant impact on the results of operations or financial position of the Company.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which superseded SFAS No. 121, "Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
Company is required to adopt SFAS No. 144 in the first quarter of fiscal 2003. The adoption of SFAS No. 144 is not expected to have a material effect on the Company's financial position
or results of operations.

F-10

---



3. Marketable Securities

The estimated fair value of marketable securities is determined based on broker quotes or quoted market prices or rates for the same or similar instruments. The
carrying value of available-for-sale marketable securities approximates their fair value. The estimated fair value and cost of marketable securities are as follows:

|                           |  | Fair Value |            | Cost
|-------------------------- |  | ---------- | ---------- | ----
|
|
|Federal agency obligations |  | $          | 11,355,785 |     
|U.S. Treasury obligations  |  |            |           |     
|Bank obligations           |  |            |           |     
|Corporate obligations      |  |            |           |     
|                           |  |            |            |     
|                           |  | $          | 11,355,785 |     
|                           |  |            |            |     

Maturities
of marketable securities classified as available-for-sale by contractual maturity are shown below:

December 31,2001

2000Due within one year




$
24,310,253Due after one year through two years

$
11,355,785


$
11,355,785

$
24,310,253


Gross
unrealized gains on marketable securities, amounted to $137,165 and $113,594 in 2001 and 2000 respectively. Gross unrealized losses on marketable securities, amounted to $9,520 and
$106,323 in 2001 and 2000, respectively.

4. Property and Equipment

Property and equipment consist of the following:

December 31,2001

2000Leasehold improvements

$
2,221,947

$
2,120,601Laboratory equipment


1,030,371


734,254Furniture, fixtures and other equipment


880,339


580,225Assets under capital lease


1,375,691


1,375,6925,508,348


4,810,772Less accumulated depreciation and amortization


(4,264,506
)

(3,349,329
)$
1,243,842

$
1,461,443


Depreciation
and amortization expense, which includes amortization of assets recorded under capital leases, was $915,177, $938,839 and $996,461 in 2001, 2000 and 1999, respectively.

F-11

---

5. Accrued Expenses

Accrued expenses consist of the following:

December 31,2001

2000Accrued product development expenses

$
3,261,548

$
2,152,101Accrued legal expense


74,598


110,000Accrued compensation


885,757


815,514Other accrued expenses


759,352


600,218$
4,981,255

$
3,677,833


6. Loan Payable to Strategic Partner

In October 1999, the Company entered into a Non-Negotiable Promissory Note and Security Agreement (the "Loan") with Tyco/Mallinckrodt, under
which the Company was eligible to borrow its share of development costs, on a quarterly basis, up to a total of $9.5 million. In June 2000, pursuant to the amended collaboration
agreement with Tyco/Mallinckrodt and a new strategic collaboration with Schering AG, Schering AG assumed the development cost sharing obligation for MS-325 from Tyco/Mallinckrodt as of
January 1, 2000. As a result the Company amended the terms of the Loan to allow funding for the Company's portion of development costs through December 31, 1999. The Loan balance as of
December 31, 2001 and 2000 was $3,004,607 and represents the Company's share of third and fourth quarter 1999 MS-325 development costs. No additional funding is available to the
Company under the Loan. The Loan bears interest, adjustable on a quarterly basis, at the Prime Rate published in the Wall Street Journal and is repayable in full on October 1, 2002. The Loan is
secured by a first priority security interest in all of the Company's intellectual property. The carrying value of the loan approximates fair value due to its variable interest rate.

7. Leases

Assets under capital leases, the majority of which are for laboratory equipment, totaled $1,375,691 as of December 31, 2001 and 2000. During the years
ended December 31, 2001, 2000 and 1999, the Company incurred amortization expense relating to assets under capital leases of $237,933, $371,300 and $427,740, respectively. Accumulated
amortization relating to assets under capital leases was $1,319,253 and $1,081,320 at December 31, 2001 and 2000, respectively.

In
addition, the Company leases office space and certain office equipment under operating lease arrangements. The leases for the two principal facilities expire in December 2002.
The Company has an option to extend the lease at one of its principal facilities and adjacent locations for an additional three or five-year period.

F-12

---



7. Leases (Continued)

Future minimum commitments under leases with non-cancelable terms of one or more years are as follows at December 31, 2001:

Capital Leases

Operating Leases2002

$
81,037

$
1,355,0442003





400,7812004





38,764Total minimum lease payments


81,037

$
1,794,589Less amounts representing interest


2,277Present value minimum lease payments


78,760Less amounts due within one year


(78,760
)$



Rent
expense amounted to $694,395, $614,268 and $598,694 for 2001, 2000 and 1999, respectively.

8. Stockholders' (Deficit) Equity

In September 2000, we entered into an agreement with Acqua Wellington North American Equities Fund Ltd. ("Acqua Wellington") for an equity financing
facility covering the sale of up to $45 million of our common stock over a 28 month period. During 2001, we received $8,666,346 and in 2000, we received $885,397 in net proceeds under
this facility. These shares were sold at our discretion at a small discount to the market price of our shares at the time of the sale. The total amount of the investment was dependent, in part, on our
stock price, with us controlling the amount and timing of the stock sold. This equity financing facility was terminated in January 2002, in accordance with the terms of the equity financing facility
agreement, as a result of our sale of all of the remaining shares available on our effective S-3 shelf offering. The January 2002 offering raised $30.2 million in net
proceeds, and we issued 2.575 million shares. Acqua Wellington did not purchase any shares in the January offering.

Warrants

In connection with the issuance of certain notes payable and the sale of Series D preferred stock in 1996, the Company issued warrants to purchase 40,000
shares of Series D preferred stock. Effective with the Company's initial public offering and the conversion of Series D preferred stock into the Company's common stock, the holders of
the warrants became entitled to exercise the warrants for an aggregate of 26,665 shares of common stock at a cost equal to $4.50 per common share. These warrants, which expire in February 2002,
remain outstanding as of December 31, 2001, but were exercised in February 2002.

Equity Plans

Equity Incentive Plan

The Company has in place an Amended and Restated 1992 Equity Incentive Plan (the "Equity Plan"), which provides stock awards to purchase shares of Common Stock to
be granted to employees

F-13

---

and consultants. In May 2001, the Company amended the Equity Plan to, among other things, increase the number of shares reserved for issuance pursuant to future grants by 500,000. 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 5,099,901 shares
of Common Stock, subject to adjustment for stock-splits and similar capital changes. Awards under the Equity Plan may be granted to officers, employees and other individuals as determined by the
Compensation Committee. The Compensation Committee also 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. As of December 31, 2001, 3,977,480 shares of Common
Stock are reserved for issuance under the Equity Plan.

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

|                  |  |           |   |   |             |  |   |       |  | Options Exercisable
|----------------- |  | --------- | - | - | ----------- |  | - | ----- |  | -------------------
|
|December 31, 1998 |  | 1,737,592 |   | $ | 0.42$13.88 |  | $ | 5.64  |  | 118,548            
|Granted           |  | 881,322   |   | $ | 4.50$11.13 |  | $ | 5.84  |  |                    
|Exercised         |  | (197,591  | ) | $ | 0.42$9.94  |  | $ | 1.88  |  |                    
|Canceled          |  | (41,361   | ) | $ | 4.50$13.88 |  | $ | 8.81  |  |                    
|                  |  |           |   |   |             |  |   |       |  |                    
|December 31, 1999 |  | 2,379,962 |   | $ | 0.42$13.88 |  | $ | 5.97  |  | 78,587             
|Granted           |  | 615,915   |   | $ | 6.75$22.50 |  | $ | 12.75 |  |                    
|Exercised         |  | (332,803  | ) | $ | 0.42$13.88 |  | $ | 4.86  |  |                    
|Canceled          |  | (278,411  | ) | $ | 0.83$22.25 |  | $ | 7.55  |  |                    
|                  |  |           |   |   |             |  |   |       |  |                    
|December 31, 2000 |  | 2,384,663 |   | $ | 0.42$22.50 |  | $ | 7.69  |  | 1,191,083          
|Granted           |  | 1,061,532 |   | $ | 6.91$12.13 |  | $ | 8.44  |  |                    
|Exercised         |  | (98,266   | ) | $ | 0.42$11.50 |  | $ | 3.67  |  |                    
|Canceled          |  | (99,453   | ) | $ | 5.13$22.50 |  | $ | 10.65 |  |                    
|                  |  |           |   |   |             |  |   |       |  |                    
|December 31, 2001 |  | 3,248,476 |   | $ | 0.42$21.63 |  | $ | 8.00  |  | 729,004            
|                  |  |           |   |   |             |  |   |       |  |                    

1996 Directors Stock Option Plan

The Company has in place an Amended and Restated 1996 Director Stock Option Plan (the "Director Plan"). All of the directors who are not employees of the Company
are currently eligible to participate in the Director Plan. As of December 31, 2001, there are 200,000 shares of Common Stock reserved for issuance under the Director Plan. Effective
January 1, 2001, the numbers of shares underlying the option granted to each eligible director upon election or re-election was increased from 15,000 to 25,000 shares. Each option becomes
exercisable with respect to 8,333 shares on each anniversary date of grant for a period of three years, provided that the option holder is still a director of the Company
at the opening of business on such date. The options have a term of ten years and a vesting schedule of three 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.

F-14

---

Stock
option information relating to the Director Plan is as follows:

|                  |  |         |   |   |             |  |   |       |  | Options Exercisable
|----------------- |  | ------- | - | - | ----------- |  | - | ----- |  | -------------------
|
|December 31, 1998 |  | 45,000  |   | $ | 8.50$13.25 |  | $ | 11.80 |  | 55,000             
|Granted           |  | 15,000  |   | $ | 7.00        |  | $ | 7.00  |  |                    
|                  |  |         |   |   |             |  |   |       |  |                    
|December 31, 1999 |  | 60,000  |   | $ | 7.00$13.25 |  | $ | 10.60 |  | 40,000             
|Granted           |  | 15,000  |   | $ | 17.75       |  | $ | 17.75 |  |                    
|                  |  |         |   |   |             |  |   |       |  |                    
|December 31, 2000 |  | 75,000  |   | $ | 7.00$17.75 |  | $ | 12.03 |  | 25,000             
|Granted           |  | 50,000  |   | $ | 7.98$10.00 |  | $ | 8.99  |  |                    
|Cancelled         |  | (11,334 | ) | $ | 8.50$17.75 |  | $ | 16.66 |  |                    
|                  |  |         |   |   |             |  |   |       |  |                    
|December 31, 2001 |  | 113,666 |   | $ | 7.00$17.75 |  | $ | 10.23 |  | 86,334             
|                  |  |         |   |   |             |  |   |       |  |                    

Combined Option Information

The following table summarizes information about options outstanding at December 31, 2001:

|  |              | Outstanding |           | Exercisable
|- | ------------ | ----------- | --------- | -----------
|
|$ | 0.42$5.38   |             | 927,167   |            
|$ | 5.50$8.69   |             | 988,313   |            
|$ | 8.75$11.00  |             | 821,305   |            
|$ | 11.13$21.63 |             | 625,357   |            
|  |              |             |           |            
|  |              |             | 3,362,142 |            
|  |              |             |           |            

1996 Employee Stock Purchase Plan

The Company sponsors the Amended and Restated 1996 Employee Stock Purchase Plan (the "Purchase Plan") under which employees may purchase shares of Common Stock at
a discount from fair market value at specified dates. In May 2001, the Company amended the Purchase Plan to increase the number of shares of common stock that may be purchased under the
Purchase Plan by 50,000 shares to an aggregate of 116,666. Employees purchased 18,822 shares in 2001 at an average price of $8.13 per share and 14,708 shares in 2000 at an average price of $8.17 per
share. At December 31, 2001, 40,470 common shares remained available for issuance 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 Internal Revenue Code of 1986, as amended (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 duration of individual offerings under the Purchase Plan and the dates

F-15

---

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 are paid through payroll deductions. The Purchase Plan terminates in December 2006.

FAS 123 Pro Forma Information

The pro forma information required by FAS 123 is presented below and has been determined as if the Company accounted for its stock-based awards under the
fair value method per FAS 123. The fair value of the Company's stock-based awards to employees was estimated using the Black-Scholes option-pricing model and assuming no expected dividends and
the following weighted-average assumptions:

|                                          |  | Options |   | ESPP |  
|----------------------------------------- |  | ------- | - | ---- | -
|
|
|Weighted-average life (years)             |  | 5.0     |   | 4.90 |  
|Weighted-average contractual life (years) |  | 7.45    |   | 7.62 |  
|Expected stock price volatility           |  | 0.86    |   | 1.14 |  
|Risk-free interest rate                   |  | 4.72    | % | 6.20 | %

The
following is a summary of weighted-average grant date fair values generated by the application of the Black-Scholes model:

Date Fair Value
Year Ended December 31,2001

2000

1999Stock option plans

$
5.61

$
10.18

$
3.70ESPP

$
3.71

$
5.64

$
2.80


As
required under FAS 123, the following pro forma net loss and loss per share presentation reflects the amortization of the option grant fair value. For purposes
of this disclosure, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows:

|                                           |  | Year Ended December 31, |            
|------------------------------------------ |  | ----------------------- | -----------
|
|Pro forma net loss                         |  | $                       | (22,532,215
|Pro forma basic and diluted loss per share |  | $                       | (1.61      

The
effects on 2001, 2000 and 1999 pro forma net loss and net loss per share of expensing the estimated fair value of stock options and common stock issued pursuant to
the stock option plans are not necessarily representative of the effects on reported results of operations for future years as the periods presented include only two, three and four years,
respectively, of option grants and share purchases under the Company's plans.

F-16

---



9. Income Taxes

The Company has reported losses since inception and, due to the degree of uncertainty related to the ultimate use of the loss carry forwards, fully reserved this
tax benefit. The Company has the following deferred tax assets as of December 31, 2001 and 2000:

December 31,2001

2000Deferred tax assets:Net operating loss carry forwards

$
29,010,000

$
23,760,000Research and development tax credits


3,359,000


2,953,000Book over tax depreciation and amortization


1,225,000


1,299,000Deferred revenue


4,350,000


2,073,000Other


1,090,000


1,045,000Total deferred tax assets


39,034,000


31,130,000Valuation allowances


(39,034,000
)

(31,130,000
)Deferred income taxes, net

$


$



As
of December 31, 2001, the Company has net operating loss carry forwards for income tax purposes of approximately $71.0 and $64.4 million, which expire through the year
2020 and 2005, for Federal and State purposes, respectively. The valuation allowance increased by $7,904,000 during the twelve months ended December 31, 2001. The tax net operating loss carry
forwards 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 ownership changes resulting from sales of equity securities, the Company's ability to use the loss carry forwards is subject to limitations as defined in Sections 382 and
383 of 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 Sections 382 and
383 of the Code, the change in ownership resulting from public equity offerings in 1997 and any other future ownership changes may further limit utilization of losses and credits in any one year. The
Company is also eligible for research and development tax credits, 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 carry forwards before utilization.

F-17

---

The
reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense is as follows:

|                                    |  | Years ended December 31, |            | Years ended December 31, |  
|----------------------------------- |  | ------------------------ | ---------- | ------------------------ | -
|
|Tax at U.S. statutory rate          |  | $                        | (6,173,000 | )                        | $
|State taxes, net of federal benefit |  |                          | (1,089,000 | )                        |  
|Non-deductible items                |  |                          | 200,606    |                          |  
|Foreign taxes, net of benefit       |  |                          | 655,000    |                          |  
|Tax credits                         |  |                          | (406,000   | )                        |  
|Change in valuation allowance       |  |                          | 7,904,000  |                          |  
|                                    |  |                          |            |                          |  
|Income tax expense                  |  | $                        | 1,091,606  |                          | $
|                                    |  |                          |            |                          |  

10. Defined Contribution Plan

The Company offers 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. Beginning in 1999, the Company began matching up to 3% of employees' contributions. During 2001, 2000, and 1999 the Company's match amounted to $173,412, $154,061, and
$134,355, respectively.

11. Subsequent Events

Sale of Common Stock

On January 18, 2002, the Company raised approximately $30.2 million in net proceeds from the sale of 2,575,000 shares of common stock. The shares of
common stock were sold pursuant to the Company's effective shelf registration statement, representing all of the available shares thereunder.

Exercise of Warrants

In February 2002, the holders of the warrants described in Note 8 exercised their warrants, and the Company issued 17,848 shares of common stock.
The Company received no cash proceeds pursuant to these exercises as the warrant holders elected to exercise their warrants on a net stock issue basis. As a result of these warrant exercises, there
are no remaining warrants outstanding.

F-18

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12. Quarterly Financial Information (unaudited)

|                                           |                          | First Quarter
Ended
March 31, 2001 |            | Second Quarter
Ended
June 30, 2001 |   | Third Quarter
Ended
September 30, 2001 |           | Fourth Quarter
Ended
December 31, 2001 |           
|------------------------------------------ | ------------------------ | ---------------------------------- | ---------- | ---------------------------------- | - | -------------------------------------- | --------- | -------------------------------------- | ----------
|Revenues                                   |                          | $                                  | 1,731,673  |                                    | $ | 2,197,422                              |           | $                                      | 3,615,864 
|Operating expenses:                        |                          |                                    |            |                                    |   |                                        |           |                                        |           
|                                           | Research Development     |                                    |            | 5,322,031                          |   |                                        | 6,352,953 |                                        |           
|                                           | General & administrative |                                    |            | 1,586,835                          |   |                                        | 1,264,498 |                                        |           
|                                           |                          |                                    |            |                                    |   |                                        |           |                                        |           
|Total operating expenses                   |                          |                                    | 6,908,866  |                                    |   | 7,617,451                              |           |                                        | 6,696,108 
|Other income, net                          |                          |                                    | 206,807    |                                    |   | 293,148                                |           |                                        | 137,761   
|Income taxes                               |                          |                                    |           |                                    |   |                                       |           |                                        | 1,082,000 
|                                           |                          |                                    |            |                                    |   |                                        |           |                                        |           
|Net loss                                   |                          | $                                  | (4,970,386 | )                                  | $ | (5,126,881                             | )         | $                                      | (4,024,483
|                                           |                          |                                    |            |                                    |   |                                        |           |                                        |           
|Weighted average shares, basic and diluted |                          |                                    | 13,638,913 |                                    |   | 14,022,893                             |           |                                        | 14,160,239
|                                           |                          |                                    |            |                                    |   |                                        |           |                                        |           
|Net loss per share:                        |                          |                                    |            |                                    |   |                                        |           |                                        |           
|Basic and diluted                          |                          | $                                  | (0.36      | )                                  | $ | (0.37                                  | )         | $                                      | (0.28     
|                                           |                          |                                    |            |                                    |   |                                        |           |                                        |           

|                                                                |  | First Quarter Ended
March 31, 2000 |            | Second Quarter Ended
June 30, 2000 |   | Third Quarter Ended
September 30, 2000 |   | Fourth Quarter Ended
December 31, 2000 |           
|--------------------------------------------------------------- |  | ---------------------------------- | ---------- | ---------------------------------- | - | -------------------------------------- | - | -------------------------------------- | ----------
|
|Revenues                                                        |  | $                                  | 859,400    |                                    | $ | 1,132,127                              |   | $                                      | 2,286,729 
|Operating expense:                                              |  |                                    |            |                                    |   |                                        |   |                                        |           
|Research & development                                          |  |                                    | 5,050,906  |                                    |   | 5,050,906                              |   |                                        | 5,456,370 
|General & administrative                                        |  |                                    | 1,042,083  |                                    |   | 1,042,083                              |   |                                        | 1,439,641 
|                                                                |  |                                    |            |                                    |   |                                        |   |                                        |           
|Total operating expenses                                        |  |                                    | 6,092,989  |                                    |   | 6,092,989                              |   |                                        | 6,896,011 
|Other Income, net                                               |  |                                    | 73,004     |                                    |   | 73,004                                 |   |                                        | 38,864    
|Loss before cumulative effect of change in accounting principle |  |                                    | (5,160,585 | )                                  |   | (4,887,858                             | ) |                                        | (4,570,418
|Cumulative effect of change in accounting principle             |  |                                    |           |                                    |   | (4,363,636                             | ) |                                        |          
|                                                                |  |                                    |            |                                    |   |                                        |   |                                        |           
|Net loss                                                        |  | $                                  | (5,160,585 | )                                  | $ | (9,251,494                             | ) | $                                      | (4,570,418
|                                                                |  |                                    |            |                                    |   |                                        |   |                                        |           
|Weighted average shares, basic and diluted                      |  |                                    | 11,720,515 |                                    |   | 11,720,515                             |   |                                        | 11,869,515
|                                                                |  |                                    |            |                                    |   |                                        |   |                                        |           
|Net loss per share, basic and diluted:                          |  |                                    |            |                                    |   |                                        |   |                                        |           
|Loss before cumulative effect of change in accounting principle |  | $                                  | (0.44      | )                                  | $ | (0.42                                  | ) | $                                      | (0.39     
|Cumulative effect of change in accounting principle             |  |                                    |           |                                    |   | (0.37                                  | ) |                                        |          
|                                                                |  |                                    |            |                                    |   |                                        |   |                                        |           
|Net loss                                                        |  | $                                  | (0.44      | )                                  | $ | (0.79                                  | ) | $                                      | (0.39     
|                                                                |  |                                    |            |                                    |   |                                        |   |                                        |           

F-19

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