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                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-K
 
(Mark One)
   [X]          Annual Report Pursuant to Section 13 or 15(d) of
                      the Securities Exchange Act of 1934
 
                    FOR THE FISCAL YEAR ENDED MARCH 31, 1998
 
   [ ]         Transaction Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
 
                         Commission file number 0-12648
 
                           MOLECULAR BIOSYSTEMS, INC.
 
             (Exact name of registrant as specified in its charter)
 
               DELAWARE                                 36-3078632
   (State or other jurisdiction of                   (I.R.S. Employer
    incorporation or organization)                 Identification No.)
 
             10070 Barnes Canyon Road, San Diego, California 92121
              (Address of principal executive offices) (Zip Code)
 
       Registrant's telephone number, including area code: (619) 452-0681
 
          Securities registered pursuant to Section 12(b) of the Act:
 
         Title of each class                  Name of each exchange on which
     Common Stock, $.01 par value                       registered
                                                 New York Stock Exchange
 
          Securities registered pursuant to Section 12(g) of the Act:
                                      None
 
    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 [X] No [  ]
 
    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.  [X]
 
    The aggregate market value of voting stock held by non-affiliates of the
registrant was $136,975,838 as of June 16, 1998 (computed by reference to the
last sale price of a share of the registrant's Common Stock on that date as
reported on the New York Stock Exchange).
 
    There were 18,572,995 shares outstanding of the registrant's Common Stock as
of June 16, 1998.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
    Information required by Items 10, 11, 12 and 13 of this Report is
incorporated by reference to the registrant's definitive proxy statement for the
1998 Annual Meeting of Stockholders to be held August 13, 1998.
 
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<PAGE>

                                       PART I

ITEM 1.        BUSINESS

  THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS ITEM AND IN
ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."

GENERAL

  Molecular Biosystems, Inc. ("MBI" or the "Company") is a leader in the
development, manufacture and sale of ultrasound contrast imaging agents. These
contrast agents are used primarily to improve the real-time images ("moving
pictures") of organs and body structures, especially the heart, obtained through
ultrasound examinations. MBI's products are designed to increase the diagnostic
usefulness of ultrasound examinations through enhanced visualization of
structures and vasculature, and to reduce the need for diagnostic procedures
that may be more expensive, time-consuming, or invasive.  MBI is the first and
only company to obtain marketing approval from the United States Food and Drug
Administration ("FDA") for ultrasound contrast agents, having gained approvals
for ALBUNEX-Registered Trademark-_in 1994 and for OPTISON-TM- (the Company's
second-generation agent) in 1997.  OPTISON, a significant improvement over
ALBUNEX in terms of efficacy, is used to detect heart disease by assessing blood
flow within the heart chambers and by identifying the location of the chamber
borders and the movement of the chamber walls ("cardiac function").
 
  To increase the potential applications of OPTISON, MBI has conducted Phase 2
clinical trials to evaluate the product's efficacy in determining whether the
heart muscle is receiving an adequate blood supply ("myocardial perfusion"). 
The multiple Phase 2 trials include use of OPTISON in the emergency room for
patients presenting with chest pain, and in various forms of stress
echocardiography.  Results using OPTISON in each of these applications suggest a
close agreement with nuclear SPECT imaging for the detection of ischemia by wall
motion and perfusion.  Furthermore, the results indicate that use of OPTISON
could help to "rescue" a large proportion of uninterpretable non-contrast
studies, thereby reducing the need for additional, more expensive and time
consuming testing.  The Company believes the information regarding perfusion
will enable cardiologists to diagnose heart attacks and coronary artery disease
more accurately and safely than is currently feasible.  MBI is also conducting
Phase 2 clinical studies using OPTISON to detect abnormalities in other organs,
such as the liver.

  Ultrasound imaging is a widely-used and cost-effective technique to examine 
soft tissues, internal body organs and blood flow.  Ultrasound systems use 
low-power, high-frequency sound waves that are reflected by tissues and 
fluids to produce real-time images.  It is estimated that over 54 million 
ultrasound imaging procedures were performed in the United States in 1997, of 
which approximately 15 million procedures were used to examine the heart 
("echocardiograms"). Unlike other imaging modalities, such as magnetic 
resonance imaging, computed tomography and nuclear imaging, ultrasound 
imaging procedures could not be performed with contrast agents to enhance 
images until the approval of ALBUNEX and the subsequent approval of OPTISON.  
Non-contrast ultrasound, while very good in delineating anatomy, often 
results in poor image quality and is unable to demonstrate actual blood flow 
within organ tissue.

  MBI's ultrasound contrast agents are designed to enhance existing 
ultrasound procedures by improving their ability to image blood flow and by 
providing clearer images of body structures and organs.  OPTISON and ALBUNEX 
consist of human albumin microspheres made using MBI's patented process.  The 
microspheres are injected intravenously into the bloodstream and transported 
to the heart and other organs.  Because the microspheres are highly 
reflective to the ultrasound xbeam, organs and structures containing blood 
will appear more brightly and clearly than they would in the absence of the 
contrast agent.  Albumin is a protein naturally found in human blood and has 
been used for many years as a blood expander. Both ALBUNEX, which was first 
marketed in Japan in October 1993, and OPTISON, marketed since January 1998, 
have been given to over 30,000 patients with no clinically significant side 
effects.


                                       2

<PAGE>

  OPTISON permits cardiologists to see blood flow in the chambers of the 
heart and the motion of the heart muscle using ultrasound.  Cardiologists are 
particularly interested in the chamber of the heart called the left ventricle 
which pumps oxygenated blood arriving from the lungs to all other parts of 
the body.  In approximately 15-20% of patients undergoing an echocardiogram, 
the wall of the left ventricle (the "endocardial border") cannot be detected 
or its location appears ambiguous on the ultrasound image based on the 
physical and disease condition of the patient.  When OPTISON enters the left 
ventricle, however, the endocardial border can be visualized because of the 
reflectivity of the OPTISON microspheres in the blood.  When the endocardial 
border is visible, cardiologists can observe its motion and thus are able to 
interpret cardiac function, which is critical in diagnosing cardiac disease, 
including damage from a heart attack.

  In addition to other indications, OPTISON is designed to permit 
cardiologists to evaluate myocardial perfusion. Unlike ALBUNEX, which is 
air-filled, OPTISON microspheres contain an insoluble gas, fluoropropane. 
Because of their composition, OPTISON microspheres remain in the bloodstream 
for more than 5 minutes, as opposed to 35-40 seconds in the case of ALBUNEX. 
As a result, OPTISON is able to perfuse into tissues, including the heart 
muscle, highlighting areas of normal and abnormal blood flow. The Company 
believes that if its clinical trials for myocardial perfusion are successful, 
OPTISON will provide important diagnostic benefits, including detecting areas 
of the heart muscle compromised due to coronary artery stenosis as well as 
detecting the lack of blood flow in the heart muscle resulting from a 
complete occlusion of a coronary artery (heart attack). The Company believes 
that OPTISON may have much greater market potential than ALBUNEX because of 
the greater diagnostic importance of the indications for which it may be 
suitable (such as myocardial perfusion) when used in conjunction with new 
ultrasound imaging modalities.

  In June 1998, the Company announced that results from Phase 2 myocardial
perfusion clinical trials for OPTISON indicate that it may be a useful contrast
agent for the evaluation of myocardial perfusion.  The Company believes that the
use of OPTISON in routine diagnostic as well as emergency room procedures may
significantly reduce the overall cost of patient care by substituting ultrasound
for more expensive diagnostic methods such as nuclear imaging and by enabling
more accurate screening of patients to determine whether follow-up diagnostic or
surgical procedures are required.  In March 1996, the Company announced that
preliminary analysis of Phase 2 myocardial perfusion results indicated a 92%
concordance between diagnoses of patients with known or suspected heart disease
made using dipyridamole-stress nuclear imaging, the current perfusion "gold
standard" and dipyridamole-stress harmonic ultrasound imaging using OPTISON.

  The Company has additionally completed Phase 2 clinical trials for an oral
ultrasound contrast agent, known as ORALEX, which may be used to enhance the
ultrasound image of the abdominal area and improve the ability to detect stomach
lesions and pancreatic tumors.  Preliminary evaluation of data from this study
suggests that ORALEX may provide significant diagnostic utility as compared both
with non-contrast images and with water, which is sometimes used as a contrast
agent but which has a short gastric emptying time and is of limited efficacy. 
MBI has entered into a strategic alliance with Chugai Pharmaceutical Co, Ltd.
("Chugai") to develop and commercialize ORALEX in Japan, Taiwan and South Korea.
In the United States, the Company is seeking a partner for continued development
of ORALEX.  Because of the Company's primary commitment to OPTISON and related
products, it has determined that it will begin Phase 3 clinical trials for
ORALEX only when it has found a collaborative partner to fund a significant
portion of the necessary clinical and regulatory activities in the United
States.
 
  In the area of computed tomography imaging ("CT"), MBI is developing a 
novel contrast agent, MB-840, which employs iodinated triglycerides ("ITG") 
to target hepatocytes (liver cells), thereby providing a site-specific 
contrast agent for CT.  Current CT imaging is not effective in identifying 
the very early stages of liver cancer even with the use of traditional 
iodinated x-ray contrast agents. The Company believes that MB-840 may make 
possible consistent early identification of liver cancer by CT.  At present, 
the Company is preparing to initiate pre-clinical trials for MB-840.

  MBI is collaborating with Mallinckrodt, Inc. ("Mallinckrodt") to develop and
commercialize OPTISON in all territories of the world with the exception of
Japan, Taiwan and South Korea.  Mallinckrodt is one of the world leaders in the
marketing of contrast imaging agents, with 1997 imaging agent sales of
approximately $801 million.


                                       3

<PAGE>

MBI's relationship with Mallinckrodt began in 1988 with the execution of a 
distribution agreement for North and South America and a related investment 
agreement pursuant to which Mallinckrodt paid the Company approximately $30 
million.
 
  The Company and Mallinckrodt expanded their original agreement in September 
1995 when the parties entered into an Amended and Restated Distribution 
Agreement ("ARDA").  ARDA expanded the geographic scope and extended the 
duration of Mallinckrodt's exclusive marketing rights. Mallinckrodt at that 
time also made a $13 million equity investment in MBI and committed $20 
million to the clinical development of OPTISON and related projects. MBI may 
receive up to an additional $9.5 million upon meeting certain territorial and 
product development milestones, of which $3 million has been received to 
date.  There can be no assurances, however, that future milestones will be 
met.
 
  In December 1996, the Company and Mallinckrodt amended ARDA to further expand
the geographical scope of Mallinckrodt's exclusive marketing and distribution
rights for OPTISON, ALBUNEX and related products.  The amendment extended
Mallinckrodt's exclusive territory to include the territory that the Company had
formerly licensed to Nycomed Imaging AS, consisting of Europe, Africa, India and
parts of Asia.
 
  Under ARDA, the Company is responsible for manufacturing all licensed 
products for sale to Mallinckrodt at a price generally equal to 40% of 
Mallinckrodt's quarterly average selling price to end users.  The Company is 
responsible for conducting clinical trials and securing regulatory approvals 
of the licensed products in the United States for cardiac indications. 
Mallinckrodt is responsible for conducting clinical trials and securing 
approvals of the licensed products in the United States for non-cardiac 
indications and is responsible for conducting all clinical trials and 
securing approvals in the other countries in Mallinckrodt's territory.
 
  In April 1998, the Company and Chugai entered into a strategic alliance to
develop and commercialize OPTISON and ORALEX in Japan, Taiwan and South Korea. 
(Chugai may market OPTISON under a name other than "OPTISON."  In the Chugai
agreement, OPTISON is referred to as "FS069," MBI's developmental name for
OPTISON.)  In exchange for granting to Chugai a royalty-based license to market
these products in the named countries, MBI received an upfront license fee from
Chugai of $14 million.  In addition, Chugai made an equity investment in MBI
common stock of $8.3 million at a premium of 40% over the then-prevailing market
price.  MBI is eligible to receive milestone payments of up to $20 million based
on the achievement of certain product development goals in the Japanese
territory and will receive royalties from Chugai from the sale of commercialized
products in the territory.
 
BUSINESS STRATEGY

  The Company's objective is to remain a leader in the development and
commercialization of innovative contrast imaging agents. MBI intends to achieve
this objective by implementing the following key strategies.

  DEVELOP OPTISON FOR MULTIPLE INDICATIONS. MBI's primary clinical developmental
objective is to gain additional regulatory approvals in the United States and
abroad for OPTISON for the diagnosis of multiple cardiac indications, such as
cardiac function and myocardial perfusion. Thereafter the Company intends to
expand the application of OPTISON by seeking approval for non-cardiac
(radiology) indications. The Company believes that the extensive knowledge that
it and Mallinckrodt have gained through the marketing of ALBUNEX regarding the
requirements of the medical and third-party payor communities will assist in the
commercialization of OPTISON.

  DEMONSTRATE COST-EFFECTIVENESS. The Company and Mallinckrodt will continue to
design studies to demonstrate the overall cost-effectiveness of using the
Company's ultrasound contrast agents. The Company believes that such studies may
establish that use of OPTISON can significantly reduce the overall cost of
patient care by substituting ultrasound for more expensive diagnostic
modalities, and by enabling more accurate screening of patients to determine
whether follow-up diagnostic or therapeutic procedures are required.


                                       4

<PAGE>

  NEW PRODUCT DEVELOPMENT. The Company has established significant clinical,
regulatory and manufacturing expertise in the development of OPTISON and
ALBUNEX. The Company intends to leverage this expertise for the development of
new, proprietary imaging products such as ORALEX, MB840, and other products.

INDUSTRY BACKGROUND

NON-ULTRASOUND IMAGING TECHNIQUES

  Since the discovery of x-rays, medical imaging has been used extensively to
diagnose and guide the treatment of diseases and injuries to internal organs.
Medical imaging can be used to identify high-risk patients, to make initial
diagnoses, to confirm diagnoses based on other information, to formulate
treatment plans, and to evaluate the effectiveness of treatment and detect the
recurrence of a medical problem. Generally, imaging improves patient care and
lowers health care costs by enabling the detection of disease or abnormal
structures not apparent by routine physical examination.

  There are a variety of medical imaging methods, or "modalities," available 
to the physician. The choice of modality by the physician depends on a number 
of factors, including the part of the body to be imaged, the suspected 
condition to be investigated, the cost of the procedure, the diagnostic 
usefulness of the image and the condition of the patient. Other important 
factors in determining the selection of a modality are the availability of 
equipment and trained operators and the ability to schedule time on the 
equipment. The major non-ultrasound modalities are:

  COMPUTED TOMOGRAPHY ("CT"). CT employs x-rays aimed into the body from several
different angles to create a computerized static "snapshot" image of soft tissue
and bones. CT is used extensively to image the head and neck for injury and
disease, and is also used to detect liver cancer and other hepatobiliary
diseases. CT may employ injectable contrast agents which absorb x-rays and
thereby enhance structural imaging. In 1996, approximately 23.5 million CT
examinations were performed in the United States, approximately 44% of which
employed a contrast agent. While CT is effective in revealing anatomic detail,
it is expensive, does not generally provide real-time images ("moving pictures")
or permit the assessment of blood flow, and exposes patients to radiation. CT is
rarely used to image the heart.

  CONVENTIONAL X-RAY. Familiar procedures such as chest x-rays and mammograms
use x-rays aimed from only a single angle and do not require computer
reconstruction to create an image. In 1994, approximately 5.2 million abdominal
x-rays performed in the United States employed barium as a contrast agent to
examine the gastrointestinal system. Conventional x-ray is not used to assess
heart function.

  MAGNETIC RESONANCE IMAGING ("MRI"). MRI creates an image by exposing the body
to a radio frequency pulse to which the body's hydrogen atoms respond in a way
detectable by the MRI equipment. This information is analyzed by computer and a
cross-sectional image is produced. MRI is used primarily to image soft tissues
in order to detect tumors, lesions, and injuries. An accurate image is produced,
but as with CT, the images are not real-time. In addition, MRI does not
generally provide information on blood flow or perfusion of blood into organs
and tissues, and has not yet been accepted as a primary diagnostic for imaging
of the heart.  In 1996, approximately 8.5 million MRI procedures were performed
in the United States, approximately 29% of which used a contrast imaging agent.
In 1994, MRI equipment cost up to $2 million.

  NUCLEAR IMAGING. Nuclear imaging requires the injection of radioactive
substances into the body. It is typically preceded by a stress echo exam. The
radiation is detected by a special camera and analyzed by computer, resulting in
a static image that does not depict blood flow in real time. Great care is
required in the handling and disposal of radioactive contrast agents. It is used
primarily to detect cardiovascular disease, malignancies and soft-tissue tumors.
It is also the current "gold standard" used to detect myocardial perfusion.
Approximately 10 million nuclear imaging procedures were performed in the United
States in 1994, approximately 3.0 million of which were cardiac perfusion
studies. In 1996, the median Health Care Finance Administration ("HCFA")
reimbursement rate for a nuclear cardiac exam was $850, excluding the cost of
any preceding echocardiogram.


                                      5

<PAGE>

  X-RAY ANGIOGRAPHY. Angiography is used to visualize real-time blood flow in 
the body's vasculature in order to determine the presence of blockages or 
occlusions in the vessels leading to the heart prior to performing bypass 
surgery or balloon angioplasty. A catheter is inserted into a vessel or 
directly into the heart chamber and a contrast agent that is visible using 
special x-ray detection equipment is injected. This procedure requires a 
specially-equipped laboratory. It is effective in locating blockages and 
occlusions, but it is expensive, invasive, and exposes the patient to x-ray 
radiation. In 1996, approximately 4.5 million angiographic examinations were 
performed in the United States, with a median HCFA reimbursement rate for a 
heart angiogram and catheterization procedure of approximately $2,000, 
excluding the cost of any preceding echocardiogram.

ULTRASOUND IMAGING

Ultrasound employs low-power, high-frequency sound waves which are directed at
the organ to be imaged by placing a generating instrument called a "transducer"
on the body near the organ. The sound waves are reflected off of the organ or
tissue back to the ultrasound machine. The ultrasound machine reads the
reflected sound waves and produces a cross-sectional real-time "moving picture"
image of the targeted organ or tissue. Ultrasound is used to image the heart,
liver, kidneys, gall bladder, pancreas, other abdominal structures, blood
vessels, and the reproductive system, and is also being investigated for use
with brain and breast examinations. Cardiac ultrasound examinations are called
"echocardiograms." Non-cardiac diagnostic ultrasound examinations are referred
to as "radiology" indications or applications. The advantages of ultrasound
include:

     SAFETY. The sound waves employed by ultrasound have no noticeable medical
     effect on the body. The same organs or sections of the body may be
     imaged repeatedly for long periods of time with no adverse effects.
     Ultrasound is routinely used in fetal examinations.

     EASE OF USE.  Ultrasound exams are relatively simple to perform and require
     little patient preparation. Unlike machines used for MRI, CT, nuclear
     imaging and x-ray angiography, ultrasound machines are compact and
     portable and do not require specially-equipped facilities or housing.

     REAL-TIME IMAGES. Unlike the other imaging modalities (with the exception
     of x-ray angiography), ultrasound creates a "moving picture" of the
     targeted organ. The organ under study may be safely examined over any
     period of time selected by the physician. This feature is especially
     important in heart examinations, where the dynamics of the beating
     heart are of diagnostic importance to the cardiologist.

     LARGE INSTALLED BASE. There is a large installed base of ultrasound
     machines throughout the world. In 1997, there were approximately
     72,000 machines installed in the United States. Several large
     manufacturers such as Hewlett-Packard, ATL, Acuson and Toshiba compete
     in the ultrasound hardware market.

     PRICE. Ultrasound is a relatively inexpensive procedure. In 1994, the HCFA
     reimbursement rate for a typical echocardiogram was approximately
     $570, while that for a cardiac exam using nuclear imaging was
     approximately $850. A heart angiogram and catheterization cost
     approximately $2,000. The average cost of an ultrasound machine was
     $120,000, while the average cost of nuclear imaging equipment was
     approximately $450,000.

  Although ultrasound is a widely-used imaging modality, the visual clarity of
non-contrast-enhanced ultrasound images is generally inferior to that obtainable
using certain of the other modalities. With each of the other modalities,
contrast agents are frequently used, and in nuclear imaging and x-ray
angiography, an imaging agent is required to create the images. Until the
introduction of ALBUNEX, no imaging agents were available in the United States
for use with ultrasound.


                                       6

<PAGE>

  "Conventional" ultrasound imaging sends and receives sound waves at a 
single frequency; this is called the "fundamental" frequency. The Company's 
products are being tested with new ultrasound techniques which, although 
currently not widely available, may find acceptance in diagnostic imaging 
over the next several years. The most significant of these new techniques is 
"harmonic imaging." Researchers have discovered that if the ultrasound 
machine's transducer is modified to read the sound waves returning from the 
imaged area at a multiple ("harmonic") of the outgoing fundamental frequency, 
and if a contrast agent is used, the resulting image can provide more 
complete information on blood flow and structures in the scanned area than is 
available with a conventional ultrasound exam. This is because the 
microspheres generate a harmonic signal significantly stronger than that 
generated by the tissue, resulting in a significantly enhanced 
signal-to-noise ratio.

PRODUCTS AND MARKETS

ALBUNEX AND OPTISON MICROSPHERE TECHNOLOGY

  Both OPTISON and ALBUNEX are ultrasound contrast imaging agents consisting of
gas-filled human albumin microspheres manufactured using MBI's proprietary
process and albumin microsphere technology. They are injected into an arm vein
and pass through the bloodstream to the right atrium and ventricle of the heart,
where they are pumped through the lungs and into the left atrium and ventricle
of the heart. The left ventricle is the chamber of the heart that pumps
oxygenated blood arriving from the lungs out to the rest of the body and is the
portion of the heart that is of the greatest clinical interest in the diagnosis
of heart disease.

  ALBUNEX microspheres are air-filled, while OPTISON microspheres are filled
with an insoluble gas, octafluoropropane. The use of OPTISON and ALBUNEX as
ultrasound imaging contrast agents relies on the greater acoustic reflectivity
of the microspheres relative to blood, which does not reflect sound waves well
and is effectively invisible to ultrasound imaging, and relative to the tissues
to which the blood carries the microspheres. Areas where OPTISON and ALBUNEX are
present will appear brighter and clearer than areas where no agent is present.
The contrast effect between the blood containing the microspheres and the
surrounding tissues enhances the ability to detect blood flow using ultrasound
imaging and permits the resolution of subtle differences in the density of the
target tissue structures.

  OPTISON, which uses a 1% albumin solution, has exhibited a safety profile in
clinical studies equivalent to that of ALBUNEX.  ALBUNEX consists of a 5%
albumin solution (in saline) in which the air-filled microspheres are suspended.
Human albumin is a protein extracted from human blood that has been used as a
blood expander for many years. Both ALBUNEX, which was first marketed in Japan
in October 1993, and OPTISON, marketed since January 1998, have been given to
over 30,000 patients with no clinically significant side effects.

ALBUNEX

  ALBUNEX is the first ultrasound contrast imaging agent to be approved by the
FDA.  It was approved for marketing in the United States in August 1994 to
assess cardiac function.  It has also been approved in Japan and Europe.  The
Company believes that, with the exception of certain niche applications, such as
the evaluation of fallopian tube patency (described in the "Fallopian Tube
Patency" section below), it is likely that ALBUNEX will be replaced in the
market by OPTISON because of the latter's superior performance characteristics. 

  FALLOPIAN TUBE PATENCY.  MBI and Mallinckrodt have identified fallopian tube
patency ("FTP") as a potentially promising radiology application for ALBUNEX.
Physicians attempting to diagnose female infertility must determine whether the
fallopian tubes are patent (open) or occluded (blocked). The two primary
procedures used to assess FTP are hysterosalpingography ("HSG") and
chromolaparoscopy. HSG involves the injection of an x-ray contrast agent or dye
into the uterus to allow observation and evaluation by x-ray of the flow through
the fallopian tubes. This procedure exposes the patient to radiation, which may


                                       7

<PAGE> 

cause an adverse reaction, and also frequently requires sedation or 
anesthesia. If HSG is inconclusive, a chromolaparoscopy may be ordered. This 
procedure exposes the patient to the risk of bleeding, infection, injury to 
internal structures, and reaction to the anesthetic.

  ALBUNEX may permit the use of ultrasound imaging to assess FTP, potentially
avoiding both surgery and the introduction of radiation into the patient's
reproductive system.  In February of 1997,  Mallinckrodt received unanimous
recommendation for approval from the Radiology Device Advisory Panel of the
United States Food and Drug Administration for ALBUNEX for assessment of FTP. 
Mallinckrodt received market clearance in June 1997 from the FDA for ALBUNEX for
the assessment of FTP and Mallinckrodt is currently selling ALBUNEX for that
purpose.

OPTISON

  OPTISON is the first perfluorocarbon based agent to have been approved for
sale in the United States by the U.S. Food and Drug Administration.  In May
1998, OPTISON became the first perfluorocarbon based agent to receive final
marketing authorization by the European Agency for the Evaluation of Medicinal
Products for use in patients with suspected or known cardiovascular disease. 
OPTISON consists of octafluoropropane-filled albumin microspheres of
approximately the same size and concentration as ALBUNEX. Because
octafluoropropane is insoluble in blood, the microspheres in OPTISON have
greater durability and remain intact in the bloodstream for over 5 minutes,
versus 35 to 40 seconds for ALBUNEX. This greater durability permits more of the
microspheres to pass from the right side of the heart, through the
microvasculature of the lungs, and into the left side of the heart. As a result,
OPTISON is superior to ALBUNEX in its ability to measure endocardial border
delineation and regional wall motion using ultrasound. More importantly, the
durability of the OPTISON microspheres enable them to circulate into the heart
muscle and may permit the assessment of myocardial perfusion using ultrasound.

  CARDIAC FUNCTION.  Clinical studies have demonstrated that OPTISON is
effective in visualizing blood flow in the chambers of the heart, including the
delineation of endocardial borders and the assessment of regional wall motion. 
In 15-20% of the echocardiograms performed annually in the United States, the
location of the wall of the left ventricle, or "endocardial border," cannot be
satisfactorily visualized or its location appears ambiguous.  Clinical studies
demonstrated a high success rate for this indication in cases of suboptimal
chamber wall imaging in both stressed and non-stressed patients. When sufficient
numbers of OPTISON microspheres reach the left ventricle, the acoustical
reflectivity of OPTISON in the chamber permits the endocardial border to be seen
by defining the walls of the chamber, or "endocardial border delineation." This
delineation in turn permits visualization of the movement of the walls of the
chamber as the heart beats, or "regional wall motion." Information regarding
endocardial border delineation and regional wall motion are important for
diagnostic purposes. If the chamber walls appear thicker than normal or are not
moving normally, it is a potential indicator that the surrounding heart muscle
is not receiving sufficient blood or is abnormal in some other way, which, in
turn, may indicate an infarction (heart attack), stenosis (partial blockage of
an artery) or other abnormal condition.  OPTISON has demonstrated efficacy at a
much lower dose than is required for ALBUNEX, with an equivalent safety profile.
The Company received FDA approval for OPTISON in December 1997.

  MYOCARDIAL PERFUSION.  Clinical studies indicate that the longer circulation
time of the octafluoropropane-filled microspheres in OPTISON may allow a
physician to assess myocardial perfusion using ultrasound. The Company conducted
a Phase 1 safety study which demonstrated a safe dosing range of many times the
expected efficacious dose and also showed myocardial perfusion in healthy
patients using a dose as low as 0.5 cc.  Analysis of Phase 2 results indicated a
92% concordance between diagnoses of patients with known or suspected heart
disease made using dipyridamole-stress nuclear imaging, the current perfusion
"gold standard," and dipyridamole-stress harmonic ultrasound imaging using
OPTISON.  In June 1998, the Company announced that results from Phase 2
myocardial perfusion clinical trials for OPTISON indicate that it may be a
useful contrast agent for the evaluation of myocardial perfusion.  The Company's
future Phase 3 studies will be designed to evaluate, among other things,
myocardial perfusion in cardiac patients using ultrasound at both fundamental
and harmonic frequencies.


                                    8

<PAGE>

  Myocardial perfusion is important because it provides oxygenated blood to the
heart muscle. If OPTISON is not detected in a portion of the heart muscle, or
not detected with the expected level of intensity, it means that a portion of
the muscle is not receiving enough blood ("ischemia"). This finding may be
diagnostic of several conditions, including coronary arterial stenosis and
myocardial infarction.

  The ability to rapidly assess the condition of the heart using OPTISON may
also prove efficacious and cost-effective in the emergency room and in the
subsequent treatment of heart attacks. For example, a patient arriving at the
emergency room complaining of chest pain may be quickly assessed using
ultrasound with OPTISON. If no perfusion defect is seen in the heart, a
myocardial infarction may be ruled out. Where a perfusion defect is detected
using OPTISON, the Company believes that information regarding its severity,
size and location may assist the physician in determining the patient's
condition. A patient with an extensive infarction may be sent immediately for an
angiogram and even emergency angioplasty. A patient with a less severe
infarction may be given a thrombolytic (clot-dissolving) agent. This patient may
then undergo an additional OPTISON echocardiogram to see whether the affected
area of the heart muscle has reperfused; that is, whether the thrombolytic agent
was successful in treating the condition. If the OPTISON echocardiogram shows
that the muscle has reperfused, the physician would not have to order any
additional emergency procedures and conventional treatment might begin.
Subsequent OPTISON echocardiograms may be used to assess the effectiveness of
the post-emergency-room treatment; for example, how the heart muscle has
responded to different medications, changes in diet, exercise program, weight
loss and other therapies.

  The Company believes that the assessment of myocardial perfusion may also be
important in screening high-risk patients prior to general surgery or other
potentially stressful treatment regimens. For example, a surgeon may wish to
assess whether an elderly or weakened patient is capable of undergoing a
particular surgery or treatment without a cardiac incident. An OPTISON
echocardiogram may be safely administered to assist the physician in making this
determination.
 
  Commercialization of OPTISON for myocardial perfusion may require the
conversion of present ultrasound equipment to harmonic imaging frequencies. 
Although the Company is aware of efforts to develop commercial harmonic modules
for attachment to existing ultrasound machines as well as efforts to develop new
harmonic imaging machinery by several hardware manufacturers, there can be no
assurance that any of these current efforts will be successfully commercialized.
See "Industry Background - Ultrasound Imaging."

  RADIOLOGY INDICATIONS.  The stability of the OPTISON microspheres renders the
product potentially suitable for a much greater range of indications than
ALBUNEX. In preclinical studies, OPTISON has been shown to perfuse the liver,
which may permit the detection of tumors and lesions using ultrasound.
Preliminary animal studies have shown OPTISON is able to perfuse the kidneys,
ovaries, prostate, testes and peripheral intracranial vessels. Clinical studies
are planned to evaluate the use of OPTISON in the detection of liver pathology
relative to the current imaging "gold standard" for analyzing liver pathology.

  OPTISON enjoys several other potential advantages. In clinical studies,
OPTISON has achieved greater efficacy at a fraction of the dose of ALBUNEX
required for the assessment of cardiac function. The Company expects that this
low dosage will make OPTISON attractive to the patient as well as the doctor. In
addition, OPTISON uses a 1% albumin solution, compared to a 5% albumin solution
required for ALBUNEX. The lower dose required and the lesser amount of albumin
used may lower MBI's per-unit manufacturing cost and may allow for the
production of more doses of OPTISON than ALBUNEX using equivalent manufacturing
capacity.

ORALEX
 
  The Company is developing ORALEX, an oral ultrasound contrast agent intended
to enhance images of the abdomen, including the small bowel, stomach lining and
structures adjoining the stomach, in particular the pancreas.

  Gas in the stomach interferes with ultrasound images of the abdominal area by
reflecting nearly all of the sound waves. If the ultrasound "noise" caused by
this gas can be removed, the stomach wall can be more effectively


                                       9

<PAGE>

visualized and the stomach itself can become an "acoustic window" to organs 
next to it which are difficult to visualize, such as the pancreas. ORALEX is 
a polydextrose solution which is administered orally and which may displace 
gas in the stomach for up to 30 minutes. This period of displacement could be 
sufficient to permit effective ultrasound imaging. The Company is evaluating 
the use of ORALEX to make ultrasound imaging as useful for diagnostic 
purposes as costlier and more complex procedures such as CT and more invasive 
procedures such as endoscopy.

  The ability to view the pancreas is of particular interest to physicians
because pancreatic cancer is very difficult to detect at an early stage, and
current imaging modalities are not effective for this purpose. By the time
pancreatic cancer tumors are sufficiently large to be detected using CT, for
example, the cancer has progressed to the point where the patient's condition is
terminal. In 1998, there will be approximately 28,900 deaths in the United
States from pancreatic cancer.
 
  In April 1998, MBI announced completion of its Phase 2 clinical trial of
ORALEX.  The preliminary evaluation of data from this study indicates that
ORALEX provides significant diagnostic utility as compared with non-contrast and
water-contrast imaging.
 
  MBI has entered into a strategic alliance with Chugai to develop and
commercialize ORALEX in Japan, Taiwan and South Korea.  See "General."  In the
United States, the Company is seeking a partner for continued development of
ORALEX. Because of the Company's primary commitment to OPTISON and related
products, it has determined that it will begin Phase 3 clinical trials for
ORALEX only when it has found a collaborative partner to fund a significant
portion of the necessary clinical and regulatory activities in the United
States.

OTHER RESEARCH AND DEVELOPMENT

  The Company's research and development activities seek improvements to
existing products and development of new contrast agents. The Company also
continues to develop process improvements to secure the efficient supply of its
products for developmental and commercial use.

  MBI is developing a novel contrast agent, MB-840, which employs iodinated
triglycerides ("ITG") to target hepatocytes (liver cells), thereby providing a
site-specific contrast agent for CT.  Current CT imaging is not effective in
identifying the very early stages of liver cancer even with the use of
traditional iodinated x-ray contrast agents. The Company believes that MB-840
may make possible consistent early identification of liver cancer by CT.  At
present, the Company is preparing to begin pre-clinical trials for MB-840.

  MBI holds an exclusive license from the University of Michigan for patents 
relating to the ITG technology which requires the Company to exercise 
diligence in the development and commercialization of ITG.  If the Company 
does not enter into a collaborative development relationship with a partner 
or determines that it will no longer invest its own resources in the 
development of ITG, the Company's license from the University of Michigan 
will terminate at the University's option.  At present, the Company continues 
to develop the product and will not actively pursue a marketing and 
development partner until a more optimal point in the development phase.

MARKETING AND LICENSE AGREEMENTS

  MALLINCKRODT, INC.  MBI's distribution agreement with Mallinckrodt forms the
basis of its product development and marketing program for products containing
albumin microspheres such as OPTISON and ALBUNEX.

  In December 1988, the Company entered into a distribution agreement with 
Mallinckrodt granting it the exclusive marketing and distribution rights for 
ALBUNEX as defined and gas-filled albumin microspheres in North and South 
America. Mallinckrodt paid the Company $6.0 million and agreed to pay the 
Company a further $21.0 million based on the successful completion of certain 
product development and regulatory milestones. Mallinckrodt also paid the 
Company $3.0 million for 181,818 unregistered shares of the Company's Common 
Stock. Under the distribution agreement, the Company is responsible for 
conducting clinical trials and securing regulatory approvals of the licensed 
products in the United States for cardiac indications, and Mallinckrodt is 
responsible for conducting 

                                      10
<PAGE>

clinical trials and securing regulatory approvals in the United States for 
non-cardiac indications and is responsible for conducting all clinical trials 
and securing approvals in the other countries in Mallinckrodt's territory.
 
  The Company manufactures all licensed products for sale to Mallinckrodt at a
price generally equal to 40% of Mallinckrodt's quarterly average selling price
to end users. If the Company declines to manufacture OPTISON or ALBUNEX for
Mallinckrodt because the quarterly average selling price falls below a level
specified in the Company's distribution agreement with Mallinckrodt or the
proposed initial price in a new market or for a new indication is below the
specified level, or if the Company is unable to manufacture OPTISON or ALBUNEX
in sufficient quantities to satisfy Mallinckrodt's orders on a timely basis,
Mallinckrodt may exercise certain contingent manufacturing rights. MBI will
receive a royalty of 5-10% on Mallinckrodt's sales of OPTISON or ALBUNEX which
Mallinckrodt has manufactured.
 
  The distribution agreement lasts for the life of the licensed patents and,
prior to amendment in September 1995, granted Mallinckrodt exclusive rights for
five years following the first commercial sale of ALBUNEX in the United States,
after which MBI was granted the assignable right to co-market the licensed
products. In accordance with the distribution agreement, the Company undertook
to acquire license rights from a third party to a United States patent for
certain related technology. The Company acquired these rights in February 1991,
and in connection with this acquisition the Company and Mallinckrodt agreed to
pay royalties to the licensor of 0.8% and 1.2%, respectively, on the net sales
of ALBUNEX in the United States.
 
  The Company's relationship with Mallinckrodt was strengthened and expanded in
September 1995 when the parties entered into an Amended and Restated
Distribution Agreement ("ARDA"). ARDA expands the geographic scope of
Mallinckrodt's exclusive right to market the licensed products to include all of
the countries of the world other than those covered by the Company's then
existing license agreements with Shionogi and Nycomed and extends the duration
of Mallinckrodt's exclusive rights to the later of July 1, 2003 or three years
after the date that the Company obtains approval from the FDA to market OPTISON
for an intravenous myocardial perfusion indication. Mallinckrodt agreed to pay
the Company $20.0 million over four years beginning in October 1995 to support
clinical trials of OPTISON, related regulatory submissions and associated
product development and to pay up to an additional $9.5 million upon the
satisfaction of certain territorial and product development milestones.
 
  ARDA requires the Company to spend at least $10.0 million for clinical trials
to support regulatory filings with the FDA for cardiac indications of OPTISON.
The Company's expenditures will be made in accordance with the directions of a
joint steering committee which the Company and Mallinckrodt have established in
order to coordinate the development and regulatory approval of OPTISON.

  Under a related investment agreement, Mallinckrodt purchased 1,118,761 shares
of the Company's Common Stock for $13.0 million at a premium of 40% above the
then-prevailing market price. In addition, ARDA grants the Company the option to
repurchase all of the shares of the Company's Common Stock that Mallinckrodt
purchased under the related investment agreement for $45.0 million, subject to
various price adjustments. This option is exercisable from the later of July 1,
2000, or the date that the FDA approves OPTISON for a myocardial perfusion
indication, through the later of the third anniversary of such approval or June
30, 2003. If the Company exercises this option, the Company or its assignee may
co-market licensed products in all of the countries covered by ARDA.
 
  In December 1996, the Company and Mallinckrodt amended ARDA to expand the
geographical scope of Mallinckrodt's exclusive marketing and distribution rights
for OPTISON, ALBUNEX and related products.  The amendment extended
Mallinckrodt's exclusive territory to include the territory that the Company had
formerly licensed to Nycomed consisting of Europe, Africa, India and parts of
Asia.  Under the amendment to ARDA, Mallinckrodt agreed to pay fees of up to
$12.9 million plus 40 percent of product sales to cover royalties and
manufacturing.  Mallinckrodt made an initial payment of $7.1 million, consisting
of reimbursement to the Company of $2.7 million that the Company paid to Nycomed
to reacquire the exclusive product rights in Nycomed's territory, payment of $3
million to the Company under the terms of ARDA upon the extension of
Mallinckrodt's exclusive rights to Nycomed's former territory, and payment of
$1.4 million to Nycomed in satisfaction of the Company's obligation to pay 45%
of any amounts that the Company receives in excess of $2.7 million upon the
licensing of the former Nycomed territory to a third party.  Of the remaining
$5.8 million that may be paid, Mallinckrodt will pay $4 


                                      11

<PAGE>

million to the Company (upon the achievement of the specified product 
development milestone) and $1.8 million to Nycomed (representing 45% of the 
$4 million payment to the Company). There can be no assurance, however, that 
this milestone will be satisfied.

  SHIONOGI & CO., LTD.  In March 1989, the Company entered into a license and
cooperative development agreement with Shionogi, of Osaka, Japan. Under this
agreement, the Company granted Shionogi exclusive marketing and distribution
rights for ALBUNEX and other gas-filled albumin microsphere products in Japan,
Taiwan and South Korea.  In September 1996, the Company and Shionogi entered
into an agreement pursuant to which the Company reacquired all product rights
from Shionogi.  See "Item 3 -- Legal Proceedings."
 
  CHUGAI PHARMACEUTICAL CO., LTD.  In an agreement dated March 31, 1998, the
Company entered into a cooperative development and marketing agreement with
Chugai Pharmaceutical Co., Ltd. ("Chugai") of Japan.  The parties entered into
this strategic alliance which covers Japan, Taiwan and South Korea, to develop
OPTISON (which may be marketed under a different name) and ORALEX, as well as
related products.  The Company granted Chugai an exclusive license to develop,
manufacture, and market these products in the subject territory, for which the
Company received an upfront license fee of $14 million.  With respect to
licensed products manufactured by Chugai, Chugai will pay the Company a royalty
on net sales.  For licensed products manufactured by the Company, the Company
will receive royalties on net sales, depending upon the sales volume, in
addition to a transfer price based on average net sales per unit from the
previous quarter. Additionally, Chugai purchased 691,883 shares of the Company's
common stock at a premium of 40% over the then-prevailing market price.  The
equity investment was valued at $8.3 million.  The Company is also eligible to
receive milestone payments of up to $20 million based on Chugai's achievement of
certain Japanese product development and regulatory goals. 
 
  NYCOMED IMAGING AS.  In December 1987, the Company entered into a license 
agreement with Nycomed's predecessor, Nycomed AS, of Oslo, Norway. Under this 
agreement, the Company granted Nycomed exclusive developmental, 
manufacturing, and marketing rights for ALBUNEX and other gas-filled albumin 
microsphere ultrasound imaging agents in the territory comprising Europe, the 
former Soviet Union, Africa and the Middle East. India was later added to 
this territory. While Nycomed performed manufacturing and clinical 
development work on ALBUNEX (called "Infoson" by Nycomed), the Company and 
Nycomed concluded that their respective strategic interests were best served 
by the Company's reacquisition of Nycomed's product rights, and in October 
1995 the parties entered into an amendment of their agreement that 
effectively returned these rights to the Company. The Company agreed to pay 
Nycomed $2.7 million plus 45% of any amounts in excess of $2.7 million that 
the Company receives in payment for the transfer of marketing rights in the 
former Nycomed territory to a third party. The Company also agreed to pay 
Nycomed a royalty of 2-1/2% on the first $30.0 million of annual sales of 
licensed products and 3-1/2% on any annual sales in excess of $30.0 million.

  FEINSTEIN LICENSE. In November 1986, the Company entered into a license 
agreement under which it acquired the exclusive right to develop, use and 
sell any products derived from patents and applications owned by Stephen B. 
Feinstein, M.D. covering sonicated gas-filled albumin microspheres used for 
imaging and any future related patents and applications. In June 1989, this 
agreement was restructured. The Company paid the licensor $4.5 million as an 
additional license fee and $2.0 million as a prepayment of royalties to be 
earned on the first $66.7 million of sales of the licensed products in the 
United States, and the royalty rate on sales of licensed products was reduced 
from 6% to 3% on worldwide net sales by the Company (and United States sales 
by a sublicensee) and from 2-1/2% to 1-1/4% on net sales by sublicensees 
outside of the United States. Under the restructured agreement, the Company 
is required to pay minimum royalties each year, increasing from $100,000 in 
1994 to $600,000 in 1999 and subsequent years.

  ITG AGENT. In November 1991, the Company entered into an exclusive license 
agreement with the University of Michigan for certain patents relating to the 
Company's ITG CT agent, MB-840, under development. The Company paid a license 
fee of $20,000 and pays an annual license maintenance fee of $15,000. The 
Company agreed to pay a royalty of from 2-1/2% to 6% on net sales of licensed 
products, depending upon the jurisdiction and status of the particular 
product, and also agreed to make annual minimum royalty payments increasing 
from $25,000 to $150,000.

PATENTS AND TRADEMARKS


                                      12

<PAGE>

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

  The Company has an exclusive license to certain United States and foreign 
patents relating to gas-filled sonicated albumin microspheres from Steven B. 
Feinstein, M.D.  See "Marketing and Licensing Agreements - Feinstein 
License." The Company itself owns additional United States and foreign 
patents covering ALBUNEX that broaden the product coverage of its license. 
Certain of these additional patents cover the Company's continuous flow 
sonication manufacturing process. The European equivalents of these 
manufacturing patents were challenged in an opposition proceeding brought by 
Andaris Ltd. which was decided in the Company's favor in January 1996. 
Andaris has appealed the decision.  Andaris has also filed an opposition 
against the Company's ALBUNEX composition patent in Europe, and Andaris and 
two other parties have filed a similar opposition in Japan.  No hearing date 
has been set in these latter two oppositions.

  The Company has received a patent covering its method of manufacturing 
gas-filled albumin microspheres using a milling process under development. 
The Company believes that this process may be more efficient than the 
sonication process that the Company currently uses. The Company has also 
received patents on other perfluorocarbon-based technology relating to 
ultrasound contrast agents.
 
  The Company owns a United States patent covering ORALEX and has several 
foreign applications pending. The Company has also filed patent applications 
relating to several early-stage development products. The Company is 
uncertain whether these applications will result in issued patents or whether 
the covered products can or will be commercialized.

  The last-to-expire of the Company's key United States patents covering 
OPTISON and ALBUNEX expires in 2008, and subject to the outcome of the 
oppositions previously described, the last-to-expire of the Company's key 
European patents covering OPTISON and ALBUNEX expires in 2009.
 
  The patent position of medical and pharmaceutical companies is highly 
uncertain and involves complex legal and factual questions.  There can be no 
assurance that the Company will receive patents for all or any of the claims 
included in its pending or future patent applications, that any issued 
patents will provide the Company with competitive advantages or will not be 
challenged by third parties, or that existing or future patents of third 
parties will not have an adverse effect on the Company's ability to 
commercialize its products. Moreover, there can be no assurance that third 
parties will not independently develop similar products, duplicate one or 
more of the Company's products or design around the Company's patents.

  The Company's commercial success also will depend in part upon the Company 
not infringing patents issued to third parties.  There can be no assurance 
that patents issued to third parties will not require the Company to alter 
its products or manufacturing processes, pay licensing fees, or cease 
development of its current or future products. 

     Litigation or administrative proceedings may be necessary to enforce the 
Company's patents, to defend the Company against infringement claims or to 
determine the priority, scope and validity of the proprietary rights of third 
parties.  See "Legal Proceedings."  Any such litigation or administrative 
proceedings could result in substantial costs to the Company, and an 
unfavorable outcome could have a material adverse effect on the Company's 
business, financial condition and results of operation. Moreover, there can 
be no assurance that, in the event of an unfavorable outcome in any 
litigation or administrative proceedings involving infringement claims 
against the Company, the Company would be able to license any proprietary 
rights that it requires on acceptable terms or at all.  The Company's failure 
to obtain a license that it requires to commercialize one of its products 
could have a material adverse effect on the Company's business, financial 
condition and results of operations.

     The Company has become aware of several United States patents issued to 
other companies purportedly covering various attributes of 
perfluorocarbon-containing imaging agents such as OPTISON.  Certain of these 
companies also are pursuing foreign patent protection.  Some of these 
companies are developing or may be

                                       13

<PAGE>

developing ultrasound contrast imaging agents that would compete with 
OPTISON.  The patents and patent applications of these other companies 
involve a number of complex legal and factual issues that are currently 
unresolved.  The Company believes that there may be a substantial overlap 
among many of the claims in their patents and is currently involved in 
various administrative proceedings and litigation in the United States and 
Europe to adjudicate their conflicting rights.

  The Company believes that, for a variety of reasons, its commercialization 
of OPTISON will not infringe any valid patent held by any of these other 
companies.  Depending upon the particular patent claim, these reasons 
include, but are not limited to (i) differences between OPTISON and the 
subject of the claim, (ii) the invalidity of the claim due to the existence 
of prior art, (iii) the inadequacy of the claim's specifications, (iv) lack 
of enablement, (v) inequitable conduct by patentee, and (vi) various other 
defenses as allowed by law.  The Company intends to challenge the validity of 
any such patent granted to one of the other companies if the patent is 
asserted against the Company, and the Company will enforce its own patents if 
any product of one of the other companies infringes the Company's patent 
claims.  See "Legal Proceedings."

  The Company has obtained registered trademarks for "ORALEX" and "ALBUNEX" 
in the United States and in selected foreign countries.  Additionally 
Mallinckrodt has filed for the trademark for "OPTISON" in various countries 
throughout the world.  There can be no assurance that the Company's 
registered or unregistered trademarks and trade names will not infringe on 
the proprietary rights of third parties.
 
  The Company also relies on unpatented trade secrets, proprietary know-how 
and continuing technological innovation which it seeks to protect by, in 
part, confidentiality agreements with its employees, consultants, 
investigators and others. There can be no assurance that these agreements 
will not be breached, that the Company would have an adequate remedy for any 
breach or that the Company's trade secrets or know-how will not otherwise 
become known or independently discovered by third parties.

MANUFACTURING

  The Company manufactures OPTISON and ALBUNEX for commercial sale in the 
United States in its aseptic plant at its principal San Diego facility. The 
plant employs the Company's patented continuous-flow sonication process in 
which a mixture of sterile albumin solution and gas is subjected to 
ultrasonic energy. This treatment denatures the albumin protein and 
facilitates a process known as "cavitation" in which the stable gas-filled 
microspheres are created. The Company believes that its current facilities 
will provide sufficient production capacity for the foreseeable future.
 
  The Company has been able to meet all orders for OPTISON and ALBUNEX 
received to date from Mallinckrodt. The Company believes that its 
manufacturing reliability will continue to improve and that it will not 
experience any significant difficulty in manufacturing products in compliance 
with the FDA's Good Manufacturing Practices.

  The Company is also developing a method of manufacturing gas-filled albumin 
microspheres using a milling process. The Company believes that this patented 
process may be more efficient than the sonication process that it presently 
uses. The milling process is in the last stages of development.  There can be 
no assurance that the process will be successfully developed, that it can be 
successfully integrated with the Company's operations, or that the FDA will 
approve the process.

COMPETITION

  In general, competition in the field of contrast agents is based on such 
factors as product performance and safety, product acceptance by physicians, 
patent protection, manner of delivery, ease of use, price, distribution and 
marketing. The Company's products compete or may compete with new or improved 
contrast agents.

  The Company anticipates that it will face increased competition in the 
future as new products enter the market and advanced technologies become 
available. The Company expects to compete against a number of companies,

                                       14

<PAGE>

many of which have substantially greater financial, technical and human 
resources than the Company and may be better able to develop, manufacture and 
market products. In addition, many of the Company's existing or potential 
competitors have extensive experience in research, preclinical testing and 
human clinical trials, obtaining FDA and other regulatory approvals, and 
manufacturing and marketing their products, or are allied with major 
pharmaceutical companies that can afford them these advantages. As a result, 
competitors may develop and introduce competitive or superior products more 
rapidly than the Company. While the Company was the first to obtain FDA 
approval of ultrasound contrast agents, OPTISON and ALBUNEX, the Company 
expects that one or more of these competitors will develop products that will 
be approved for an indication or indications covered by OPTISON or ALBUNEX, 
including the assessment of cardiac function and myocardial perfusion. There 
can be no assurance that existing products or new products developed by the 
Company's competitors will not be more effective than any products that may 
be developed by the Company. Competitive products may render the Company's 
technology and products obsolete or noncompetitive.

  Any product developed by the Company that gains regulatory approval will 
have to compete for market acceptance and market share. An important factor 
in such competition may be the timing of market introduction of competitive 
products. Accordingly, the relative speed with which the Company can develop 
products, complete clinical testing and the regulatory approval process, gain 
reimbursement acceptance and supply commercial quantities of the product for 
distribution to the market are expected to be important competitive factors. 
In addition, the Company believes that the primary competitive factors in the 
market for ultrasound imaging agents are safety, efficacy, ease of delivery, 
reliability, innovation and price. The Company also believes that physician 
relationships and customer support are important competitive factors.

GOVERNMENT REGULATION

  The Company's diagnostic products are subject to substantial regulation by 
the FDA and comparable agencies in foreign countries. Pursuant to the federal 
Food, Drug and Cosmetic Act, as amended, and the regulations promulgated 
thereunder, the FDA regulates the research, development, clinical testing, 
manufacture, labeling, distribution and promotion of medical products. 
Noncompliance with applicable requirements can result in, among other things, 
fines, injunctions, civil penalties, recall or seizure of products, total or 
partial suspension of production, refusal by the FDA to review New Drug 
Applications ("NDA"), withdrawal of marketing approvals, a recommendation by 
the FDA that the Company not be permitted to enter into government contracts, 
and criminal prosecution.

  The process of obtaining FDA approval of new products like OPTISON, ORALEX 
and MB840 involves many steps.  Results of laboratory and animal tests to 
determine efficacy and safety, including potential toxicity, are submitted to 
the FDA as part of an application for an Investigational New Drug ("IND") 
before clinical trials on humans can begin. After completion of clinical 
trials, an NDA, in the case of drugs, must be submitted to the FDA for review 
and approval before commercial marketing and sale may begin for a new 
indication.

  Classified as drugs by the FDA, OPTISON and ALBUNEX are required to undergo 
the NDA process. An NDA must be supported by valid scientific evidence that 
typically includes extensive data, including preclinical and human clinical 
trial data to demonstrate the safety and efficacy of the drug. If human 
clinical trials of a drug are required, the sponsor of the trial is required 
to file an Investigational New Drug ("IND") Application with the FDA prior to 
beginning human clinical trials. The IND application must be supported by 
data, typically including the results of animal and laboratory testing. If 
the IND application is approved by the FDA and the appropriate institutional 
review boards, human clinical trials may begin at a specific site with a 
specific number of patients, as specified in the approved protocol.  An IND 
supplement must be submitted to and approved by the FDA before a sponsor or 
an investigator may make any change to the investigational plan that may 
affect its scientific soundness or the rights, safety or welfare of human 
subjects.

  In addition to the results of clinical trials, the NDA must also contain 
the results of all relevant bench tests, laboratory and animal studies, a 
complete description of the drug and its components, and a detailed 
description of the methods, facilities and controls used to manufacture the 
drug. In addition, the submission must include the proposed labeling, 
advertising literature and any relevant training methods. Upon receipt of an 
NDA application, the

                                       15

<PAGE>

FDA makes a threshold determination whether the application is sufficiently 
complete to permit a substantive review. If the FDA determines that the NDA 
is sufficiently complete to permit a substantive review, the FDA will accept 
the application for filing. Once the submission is accepted for filing, the 
FDA begins an in-depth review of the NDA. An FDA review of an NDA application 
generally takes one to two years from the date that the NDA application is 
accepted for filing, but may take significantly longer. The review time is 
often significantly extended as a result of the FDA asking for more 
information or for clarification of information already provided in the 
submission. During the review period, an advisory committee, typically a 
panel of clinicians, will likely be convened to review and evaluate the 
application and provide recommendations to the FDA as to whether the drug 
should be approved. The FDA is not bound by the recommendations of the 
advisory panel. Toward the end of the review process, the FDA generally will 
conduct an inspection of the manufacturer's facilities to ensure that the 
facilities are in compliance with the applicable Good Manufacturing Practices 
("GMP") requirements.

  If the FDA's evaluations of both the NDA application and the manufacturing 
facilities are favorable, the FDA will either issue an approval letter or, in 
some cases, an "approvable letter" containing a number of conditions which 
must be met in order to obtain final approval of the NDA. When and if those 
conditions have been fulfilled to the satisfaction of the FDA, the agency 
will issue an NDA approval letter authorizing commercial marketing of the 
drug for the specified indications. If the FDA's evaluation of the NDA 
applications or manufacturing facilities is not favorable, the FDA will deny 
approval of the NDA application or issue a "not approvable" letter. The FDA 
may also determine that additional clinical trials are necessary, in which 
case NDA approval could be delayed for several years while additional 
clinical trials are conducted and submitted in an amendment to the NDA. The 
NDA process can be expensive, uncertain and lengthy, and a number of drugs 
for which approval has been sought by other companies have never been 
approved for marketing.

  Any drugs manufactured or distributed by the Company pursuant to FDA 
approvals are subject to pervasive and continuing regulations by the FDA and 
certain state agencies. The FDA often requires drug manufacturers to conduct 
post marketing surveillance studies following approval to further evaluate 
the safety and effectiveness of the drug. Foreign and domestic regulatory 
approvals, if granted, may include significant limitations on the indicated 
use for which the product may be marketed. In addition, the FDA and certain 
foreign regulatory authorities impose numerous other requirements with which 
medical drug manufacturers must comply. Product approvals could be withdrawn 
for failure to comply with regulatory standards or as a result of the 
occurrence of unforeseen safety or effectiveness problems following initial 
marketing. The Company will also be required to adhere to applicable FDA 
regulations setting forth current GMP requirements, which include testing, 
control and documentation requirements. The Company is also required to 
register with the FDA and with state agencies such as the California 
Department of Health Services as a drug manufacturer and to list its products 
with the FDA. Ongoing compliance with GMP and other applicable regulatory 
requirements is monitored through periodic inspections by state and federal 
agencies, including the FDA, and by comparable agencies in other countries. 
Changes in existing regulations or adoption of new regulations could prevent 
the Company from obtaining, or affect the timing of, future approvals or 
clearances.

  The FDA and equivalent foreign agencies have significant discretion in 
their conduct of each stage of the regulatory process. Adverse decisions are 
effectively unappealable, and agency delays are an unfortunate fact of life 
for the companies they regulate.

  The Company also intends to sell OPTISON and ALBUNEX in foreign countries. 
The time required to obtain approval for sale in foreign countries may be 
longer or shorter than that required for FDA approval, and the requirements 
may differ.

  Labeling, advertising and other promotional activities are subject to 
scrutiny by the FDA and in certain instances by the Federal Trade Commission. 
The FDA actively enforces regulations prohibiting marketing of products for 
unapproved uses, sometimes called "off-label" uses. The Company and its 
products are also subject to a variety of state laws and regulations in those 
states or localities where its products are or will be marketed. Any 
applicable state or local regulations may hinder the Company's ability to 
market its products in those states or localities.

  The Company is also subject to numerous federal, state and local laws 
relating to such matters as safe working conditions, manufacturing practices, 
environmental protection, fire hazard control and disposal of hazardous or 

                                       16

<PAGE>

potentially hazardous substances. There can be no assurance that the Company 
will not be required to incur significant costs to comply with such laws and 
regulations now or in the future or that such laws or regulations will not 
have a material adverse effect upon the Company's ability to do business.

  Changes in existing requirements or the adoption of new requirements or 
policies could adversely affect the ability of the Company to comply with 
regulatory requirements. Failure to comply with regulatory requirements could 
have a material adverse effect on the Company's business, financial condition 
and results of operations. There can be no assurance that the Company will 
not be required to incur significant costs to comply with laws and 
regulations in the future or that laws or regulations will not have a 
material adverse effect on the Company's business, financial condition, or 
results of operations.

THIRD PARTY REIMBURSEMENT
 
  In the United States, the Company's products will be purchased primarily by 
medical institutions that will then bill various third-party payors such as 
Medicare, Medicaid and other government programs and private insurance plans. 
In considering reimbursement for a new medical product, these payors must 
decide both whether to cover the product and how much to pay for it.

  In general, to be covered by Medicare, a health care product or service 
must be "reasonable and necessary" for the diagnosis or treatment of an 
illness or injury. This requirement has been interpreted to mean that the 
product or service must be safe and effective, not experimental or 
investigational (except under certain limited circumstances involving drugs 
furnished pursuant to a FDA-approved clinical trial), and appropriate. 
Medicaid, Blue Cross and Blue Shield plans, commercial insurers and other 
third-party payors generally have limitations on coverage which are similar 
to those of Medicare.

  Even if a drug has received approval or clearance for marketing by the FDA, 
there is no assurance that Medicare or other third-party payors will cover 
the drug or related services. The Company is aware that certain third party 
payors are providing reimbursement for OPTISON contrast echocardiography 
procedures. Plans and programs are in place to develop expanded coverage 
among third party payors.  However, the Company also acknowledges that these 
payors may place certain restrictions on the circumstances in which coverage 
will be available. In making such coverage determinations, the Health Care 
Financing Administration ("HCFA"), which administers the Medicare program, 
and HCFA's contractors consider, among other things, peer-reviewed articles 
concerning the safety and effectiveness of the drug, the opinions of medical 
specialty societies, and input from the FDA, the National Institutes of 
Health, and other government agencies. There is no assurance that the 
Company's products will be covered by Medicare and other third-party payors.

  Failure by hospitals and physicians to receive what they consider to be 
adequate reimbursement for procedures in which the Company's products are 
used would have a material adverse effect on the Company's business, 
financial condition and results of operations.

EMPLOYEES

  As of March 31, 1998, the Company had 148 full-time employees, including 6 
officers.  Approximately 29 of the Company's employees were involved directly 
in scientific research and development activities.  Of these employees, 13 
held Ph.D. or M.D. degrees. The Company considers its relations with its 
employees to be good, and none of its employees is a party to a collective 
bargaining agreement.

ITEM 2.        PROPERTIES

                                       17

<PAGE>

  The Company's corporate offices and laboratory, manufacturing and warehouse 
facilities occupy a total of 74,097 square feet in San Diego, California. The 
Company owns a 44,000 square-foot building purchased in 1989 and leases an 
additional 30,097 square-foot facility under an agreement expiring in 
February 2000.  In addition, during fiscal 1998, the Company leased a 50,000 
square-foot facility under an agreement which was effectively terminated May 
31, 1998.  The Company anticipates that its current facilities will be 
sufficient to meet its needs into the foreseeable future. 

ITEM 3.        LEGAL PROCEEDINGS

  In April 1997, separate lawsuits were filed by Bracco Diagnostics, Inc. 
("Bracco"), DuPont Merck Pharmaceutical Co. ("DuPont Merck"), ImaRx 
Pharmaceutical Corp. ("ImaRx"), and Sonus Pharmaceuticals, Inc. ("Sonus") 
against the United States Food and Drug Administration (the "FDA") seeking a 
preliminary and permanent injunction to keep the FDA from approving the 
Company's pre-market approval application ("PMA") for the Company's 
second-generation ultrasound imaging agent, OPTISON, until the FDA resolved 
the merits of citizen petitions that the plaintiffs previously filed with the 
FDA.   These petitions requested the FDA to regulate all ultrasound imaging 
contrast agents either as drugs (as the plaintiffs' contrast agents under 
development are currently classified) or as medical devices (as both the 
Company's OPTISON and ALBUNEX were then classified).  The lawsuits (the "FDA 
Cases") alleged that the FDA acted in an arbitrary and capricious manner in 
its review of the parties' ultrasound contrast agents and requested the FDA 
to review all ultrasound contrast agents in a consistent manner.
 
  In response, the United States District Court entered an order enjoining 
the FDA from continuing any approval or review procedures relating the 
Company's PMA for OPTISON until ten days after the FDA ruled on the 
plaintiffs' citizen petitions.  In February 1997, the FDA's advisory 
Radiological Devices Panel had recommended approval of the Company's PMA for 
OPTISON as a device.
 
  On July 29, 1997, the FDA ruled that OPTISON could be properly classified 
as a drug under the applicable sections of the Food and Drug Act and FDA 
regulations and for administrative reasons transferred review of the 
Company's PMA for OPTISON from the Center for Devices and Radiological Health 
("CDRH") to the Center for Drug Evaluation and Research ("CDER").
 
  On December 31, 1997, the Company's new drug application for OPTISON, the 
Company's second generation contrast agent for cardiac ultrasound imaging, 
was approved by the FDA. This approval permits the marketing of OPTISON in 
the United States for use in patients with suboptimal echocardiograms to 
opacify the left ventricle and to improve the delineation of the left 
ventricular endocardial borders.
 
  On July 31, 1997 the Company and its marketing partner, Mallinckrodt, Inc. 
("Mallinckrodt") filed suit (the "MBI Case") in United States District Court 
for the District of Columbia against four potential competitors - Sonus, 
Nycomed Imaging AS ("Nycomed"), ImaRx and its marketing partner DuPont Merck 
and Bracco - seeking declarations that certain of their ultrasound contrast 
agent patents are invalid.  On the same day, the Company and Mallinckrodt 
filed counterclaims in cases filed against the FDA by Bracco, Sonus, ImaRx 
and DuPont Merck in which the Company had intervened as a defendant seeking 
the same relief as in the MBI Case.  The court subsequently dismissed these 
counterclaims following the FDA's reclassification ruling (as reported 
above), and resulting mootness of the proceedings against the FDA.
 
  The complaint filed by the Company and Mallinckrodt in the MBI Case alleges 
that each of the defendants' patents is invalid on a variety of independent 
grounds under U.S. patent law.  In addition to requesting that all of the 
patents in question be declared invalid, the complaint requests a declaration 
that, contrary to defendants' contentions, the Company and Mallinckrodt do 
not infringe the defendants' patents, and asks that defendants be enjoined 
from proceeding against the Company and Mallinckrodt for infringement until 
the status of defendants' patents has been determined by the court or the 
U.S. Patent and Trademark Office ("PTO").  The complaint alleges

                                       18

<PAGE>

that each defendant has claimed or is likely to claim that its patent or 
patents cover OPTISON, the Company's second generation ultrasound contrast 
agent, and will attempt to prevent its commercialization.
 
  All of the defendants except Nycomed filed motions to dismiss the complaint 
on juridictional grounds.  In January 1998, the court hearing the MBI Case 
dismissed each of the defendants except Nycomed, ruling that the court lacked 
jurisdiction over those defendants with respect to the Company's claims of 
patent invalidity and non infringement.  The court's ruling does not purport 
to rule on the merits of the Company's claims; the dismissal was based solely 
on jurisdictional grounds.
 
  Following Sonus's dismissal as a defendant in the MBI Case, Sonus activated 
the patent infringement lawsuit (the "Sonus Case") which it had filed in 
August 1997 against the Company and Mallinckrodt in the United States 
District Court for the Western District of Washington.  Sonus's complaint 
alleges that the manufacture and sale of OPTISON by the Company and 
Mallinckrodt infringe two patents owned by Sonus.  As in the original MBI 
case, MBI counterclaimed for a declaration of invalidity and non-infringement 
with respect to the Sonus patents.  These two patents are the same patents 
for which the Company was seeking a declaration of invalidity in the MBI 
Case.  As discussed below, in conjunction with the reexamination proceedings, 
the PTO has issued a final rejection of all claims of the patents involved in 
the Sonus case.  Although the complaint was filed in August 1997, Sonus had 
agreed not to proceed with the Sonus Case until the jurisdictional motions 
were decided in the MBI Case.

  Beginning in July 1997, the Company received the first of five notices from 
the PTO granting the Company's petitions for reexamination which it had filed 
with respect to five patents held by three potential competitors, Sonus, 
Nycomed and ImaRx.  Each of the five notices stated there was a substantial 
new question of patentability raised by the Company's petitions with respect 
to all claims of the patents.  Each of the patents in the reexamination 
process is related to the use of perfluorocarbon gases in ultrasound contrast 
agents and is included among the patents for which the Company was seeking a 
declaration of invalidity in the MBI Case (and for which the Company is 
continuing to seek a declaration of invalidity in the case of Nycomed's 
patents). 

  In late 1997 and early 1998, the PTO issued office actions in connection 
with the Company's patent reexamination petitions filed against Sonus, 
Nycomed and ImaRx. The PTO office actions rejected all relevant claims of 
these patents based on prior art not previously disclosed to the PTO by 
Sonus, Nycomed or ImaRx during prosecution of their patent applications.  In 
June 1998, the PTO issued a final rejection of all claims of the two Sonus 
patents involved in the Sonus Case.  If the PTO's rejection is maintained on 
any appeal subsequently filed by Sonus, the two Sonus patents will be 
invalid.  If the PTO rejection of the Nycomed patent is maintained through 
further proceedings before the patent examiner and on any appeal, the PTO 
rejection will invalidate the patent which Nycomed is attempting to assert 
against the Company and Mallinckrodt to block the manufacture and sale of 
OPTISON.

  Litigation or administrative proceedings relating to these matters could 
result in a substantial cost to the Company; and given the complexity of the 
legal and factual issues, the inherent vicissitudes and uncertainty of 
litigation, and other factors, there can be no assurance of a favorable 
outcome.  An unfavorable outcome could have a material adverse effect on the 
Company's business, financial condition and results of operations.  Moreover, 
there can be no assurance that, in the event of an unfavorable outcome, the 
Company would be able to obtain a license to any proprietary rights that may 
be necessary to commercialize OPTISON, either on acceptable terms or at all.  
If the Company were required to obtain a license necessary to commercialize 
OPTISON, the Company's failure or inability to do so would have a material 
adverse effect on the Company's business, financial condition and results of 
operations.

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

  None.

EXECUTIVE OFFICERS OF THE REGISTRANT

                                       19

<PAGE>

  The following information concerning the names, ages and titles of the 
Company's executive officers as of the date of this report, is included in 
accordance with General Instruction G(3) of Form 10-K:
<TABLE>
<CAPTION>
     NAME                             AGE     POSITION
  
    <S>                               <C>    <C>
     Kenneth J. Widder, M.D. . . . .   45     Chairman of the Board
     Bobba Venkatadri. . . . . . . .   54     President and Chief Executive Officer
     Gerard A. Wills . . . . . . . .   41     Vice President, Finance and Chief 
                                              Financial Officer
     Thomas Jurgensen. . . . . . . .   41     Vice President, Legal and General Counsel
     William I. Ramage, D. Phil. . .   44     Vice President, Marketing
     Howard Dittrich, M.D. . . . . .   44     Vice President, Research/Medical &
                                              Regulatory Affairs
     Joni Harvey . . . . . . . . . .   44     Vice President, Operations
</TABLE>

     KENNETH J. WIDDER, M.D., a founder of the Company, has served as the 
Company's Chairman of the Board since July 1981. Prior to May 1997, Dr. 
Widder also served as the Company's Chief Executive Officer.  He currently 
serves as a director of Titan Pharmaceuticals, Wilshire Technologies, and 
Digivision, Inc.

     BOBBA VENKATADRI has served as the Company's President and Chief 
Executive Officer since May 1997.  He served as the Company's President and 
Chief Operating Officer from October 1995 until May 1997.  Mr. Venkatadri 
served as Executive Vice President of the Pharmaceutical Division of 
Centocor, Inc., from September 1992 until he joined the Company, and as Vice 
President - Operations of Centocor's Pharmaceutical Division from March 1992 
to September 1992.  He was employed by Warner-Lambert Company from 1967 until 
February 1992, most recently serving as Senior Director, Pharmaceutical 
Operations, at its manufacturing facility in Vegabaja, Puerto Rico.

     GERARD A. WILLS has served as the Company's Vice President, Finance and 
Chief Financial Officer since January 1995.  He served as the Company's Chief 
Financial Officer from August 1994 to January 1995 and as its Controller from 
February 1993 to August 1994.  From 1990 until joining the Company in 
February 1993, Mr. Wills served as the Corporate Manager of Finance for 
Maxwell Laboratories, Inc.  From 1986 through 1990, Mr. Wills was employed by 
Intermark, Inc. where he last served as the Corporate Controller.

     THOMAS E. JURGENSEN, ESQ. has served as the Company's Vice President of 
Legal and General Counsel since December of 1997.  From 1993 to 1997, he was 
employed by Ligand Pharmaceuticals, initially as the Assistant General 
Counsel, then as the Associate General Counsel.  He served as an Intellectual 
Property Counsel at the 3M Company from 1991 to 1993, and was an associate at 
the firm of Merchant and Gould from 1989 to 1991.

     WILLIAM I. RAMAGE, D. PHIL., has served as the Company's Vice President 
- Marketing since September 1996.  From 1979 to 1996, he was employed by 
DuPont Merck Pharmaceutical Company where he served as Vice President of 
Business Development and Customer Services of the Radiopharmaceutical 
Division from 1995 to 1996 and Director of Business Segments from 1994 to 
1995.  From 1979 to 1994, he served in other management positions with DuPont 
Merck in Billerica, MA, Houston, TX and Wilmington, DE.

     HOWARD DITTRICH, M.D., has served as the Company's Vice President 
- Research/Medical & Regulatory Affairs since November 1996.  He served as the 
Company's Executive Director of Medical Affairs from May 1996 to November 
1996. He served as a Consultant to the Company from 1989 to 1996.  Dr. 
Dittrich was a full-time faculty member of the University of California, San 
Diego, Department of Medicine from 1984 to May 1996.  Currently, Dr. Dittrich 
practices part-time with the University of California, San Diego where he 
holds an appointment as Clinical Professor of Medicine.

     JONI HARVEY has served as Vice President of Operations since April 1998. 
She served as the Company's Executive Director of Operations from November 
1996 to April 1998. From September 1995 to November 1996, she served as 
Director of Manufacturing.  Ms. Harvey served with Genzyme from February 1995 
until rejoining the

                                       20

<PAGE>

Company in September 1995.  From March 1994 to January 1995, Ms. Harvey was 
Associate Director of Manufacturing for the Company.  She originally joined 
the Company in October 1988 as Manager of Manufacturing. From 1980 until 
October 1988, Ms. Harvey held various supervisory positions in Quality and 
Manufacturing with Baxter Healthcare.


                                       21

<PAGE>
                                          
                                      PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
     
     The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "MB."  As of June 16, 1998, there were approximately 1,719 holders of
record of the Company's Common Stock, representing approximately 10,679
beneficial owners.  The Company has not paid dividends on its Common Stock.  The
following table sets forth the quarterly high and low last sale price for a
share of the Company's Common Stock for the three fiscal years ended March 31,
1998, 1997, and 1996, respectively, as reported by the New York Stock Exchange.

<TABLE>
<CAPTION>
<S>                                                <C>               <C>

FISCAL 1998                                             HIGH            LOW
                                                    --------        -------

First Quarter (4/1 to 6/30)                               10          6-5/8
Second Quarter (7/1 to 9/30)                        11-15/16         8-5/16
Third Quarter (10/1 to 12/31)                         12-3/8          7-7/8
Fourth Quarter (1/1 to 3/31)                          10-3/4          7-1/8


FISCAL 1997                                             HIGH            LOW
                                                    --------        -------

First Quarter (4/1 to 6/30)                           11-7/8          8-1/2
Second Quarter (7/1 to 9/30)                           9-1/8          7-1/2
Third Quarter (10/1 to 12/31)                          8-3/4          6-1/2
Fourth Quarter (1/1 to 3/31)                          14-1/2              7


FISCAL 1996                                             HIGH            LOW
                                                    --------        -------

First Quarter (4/1 to 6/30)                                8          6-1/4
Second Quarter (7/1 to 9/30)                              10          6-1/4
Third Quarter (10/1 to 12/31)                          9-1/2              6
Fourth Quarter (1/1 to 3/31)                              10          6-3/8
</TABLE>

                                      22

<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
<S>                                            <C>           <C>            <C>           <C>              <C>   

Selected Financial Data
FISCAL YEARS ENDED MARCH 31,                      1994           1995           1996           1997           1998
----------------------------                  ---------------------------------------------------------------------
(In thousands, except per share data)

Consolidated Statement of Operations Data:
Revenues:
   Revenues under collaborative
      Agreements                               $  5,713      $  15,132       $  2,412       $  4,500       $  5,095
   Product and royalty revenues                   1,056          1,769            647            626          1,151
   License Fees                                   2,015             40             25          5,725              -
                                              ---------------------------------------------------------------------
      Total Revenues                              8,784         16,941          3,084         10,851          6,246
Operating expenses:
   Research and development costs                18,110         18,743         13,588          9,902         11,078
   Costs of products sold                           580          1,608          1,553          4,748          5,791
   Selling, general and
      administrative expenses                     5,743          5,864          5,862          8,052         11,912
   Other nonrecurring charges                     4,726          3,403          3,110          3,000              -
                                              ---------------------------------------------------------------------
      Total Expenses                             29,159         29,618         24,113         25,702         28,781
Loss from operations                            (20,375)       (12,677)       (21,029)       (14,851)       (22,535)
Interest expense                                   (327)          (694)          (786)          (810)          (721)
Interest income                                   1,902          1,189          1,102          2,377          1,996
(Provision) credit for income taxes                   -              -              -              -              -
                                              ---------------------------------------------------------------------
Net loss                                     $  (18,800)    $  (12,182)    $  (20,713)    $  (13,284)    $  (21,260)
                                              ---------------------------------------------------------------------
                                              ---------------------------------------------------------------------
Loss per common share - Basic and diluted      $  (1.58)      $  (1.02)      $  (1.62)      $  (0.78)      $  (1.19)
                                              ---------------------------------------------------------------------
                                              ---------------------------------------------------------------------
Weighted average common
   Shares outstanding                            11,905         11,999         12,758         16,926         17,793

AS OF MARCH 31,                                    1994           1995           1996           1997           1998
--------------                                ---------------------------------------------------------------------

Consolidated Balance Sheet Data:
Cash, cash equivalents and
   marketable securities                      $  29,500      $  19,718      $  20,570      $  41,414      $  21,338
Working capital                                  28,117         20,927         18,601         43,843         21,066
Total assets                                     56,051         50,639         43,829         70,159         51,318
Long-term debt                                    3,917          8,408          8,610          7,349          6,082
Total stockholders' equity                       48,076         36,424         28,962         51,746         31,164

</TABLE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS
                                          
      (REFERENCES TO YEARS ARE TO THE COMPANY'S FISCAL YEARS ENDED MARCH 31.)

OVERVIEW
                                      23
<PAGE>
  Molecular Biosystems, Inc. (the "Company") is a leader in the development,
manufacture and sale of ultrasound contrast imaging agents. These contrast
agents are used primarily to improve the real-time images ("moving pictures") of
organs and body structures, especially the heart, obtained through ultrasound
examinations.  The Company's products are designed to increase the diagnostic
usefulness of ultrasound examinations through enhanced visualization of
structures and vasculature, and to reduce the need for diagnostic procedures
that may be more expensive, time-consuming, or invasive.

  The Company is the first and only company to obtain marketing approval from
the United States Food and Drug Administration ("FDA") for ultrasound contrast
agents, having gained approvals for ALBUNEX-Registered Trademark- in 1994 and
OPTISON-TM-_ (the Company's second-generation agent) in 1997.  In May 1998,
OPTISON received final marketing authorization by the European Agency for the
Evaluation of Medicinal Products ("EMEA") for use in patients with suspected or
known cardiovascular disease.  The authorization covers all 15 member states of
the European Union. 
 
  OPTISON, a significant improvement over ALBUNEX in terms of efficacy, is 
used to detect heart disease by assessing blood flow within the heart 
chambers and by identifying the location of the chamber borders and the 
movement of the chamber walls ("cardiac function"). To increase the potential 
applications of OPTISON, MBI is conducting Phase 2 clinical trials to 
evaluate the product's efficacy in determining whether the heart muscle is 
receiving an adequate blood supply ("myocardial perfusion").  The multiple 
Phase 2 trials include use of OPTISON in the emergency room for patients 
presenting with chest pain, and in various forms of stress echocardiography.  
Results using OPTISON in each of these applications suggest a close agreement 
with nuclear SPECT imaging for the detection of ischemia by wall motion and 
perfusion.  Furthermore, the results indicate that use of OPTISON could help 
to "rescue" a large proportion of uninterpretable non-contrast studies, 
thereby reducing the need for additional, more expensive and time consuming 
testing.  The Company believes the information regarding perfusion will 
enable cardiologists to diagnose heart attacks and coronary artery disease 
more accurately and safely than is currently feasible. MBI is also conducting 
Phase 2 clinical studies using OPTISON to detect abnormalities in other 
organs, such as the liver.

  Operating losses may occur for at least the next several years due to
continued requirements for research and development including preclinical
testing and clinical trials, regulatory activities and the costs of
commercializing new products. The magnitude of the losses and the time required
by the Company to achieve profitability are highly dependent on the market
acceptance of OPTISON and are therefore uncertain. There can be no assurance
that the Company will be able to achieve profitability on a sustained basis or
at all. Results of operations may vary significantly from quarter to quarter
depending on, among other things, the progress, if any, of the Company's
research and development efforts, the timing of milestone payments, the timing
of certain expenses and the establishment of collaborative research agreements.

REVENUE RECOGNITION

  Historically the Company has earned revenues from three primary sources:
revenues under collaborative agreements, product revenues and license fee
revenues.

  REVENUES UNDER COLLABORATIVE AGREEMENTS.  Revenues under collaborative
agreements have been the primary source of revenues for the Company in the past.
They consist of two types of revenues: (i) milestone payments which are earned
on the achievement of certain product development and territorial milestones,
(ii) payments received from Mallinckrodt, Inc. ("Mallinckrodt") under the
Company's Amended and Restated Distribution Agreement ("ARDA") to support
clinical trials, regulatory submissions and product development.

  PRODUCT AND ROYALTY REVENUES.  Product revenues are based upon the Company's
sales to Mallinckrodt and are recognized upon shipment of the product.  Product
revenues in 1996 and 1997 also included sales to Shionogi & Co., Ltd.
("Shionogi"). The transfer prices for the Company's sales of ALBUNEX to
Mallinckrodt and Shionogi were determined under the respective agreements and
were approximately equal to 40% of Mallinckrodt's average net sales price to its
end users of the product and 30% of Shionogi's net sales to its end users.
 
  The transfer price for the Company's sales of OPTISON to Mallinckrodt is
approximately equal to 40% of Mallinckrodt's average net sales price to its end
users of the product for the immediately preceding quarter.  Pursuant to ARDA,
the average net sales price to end users is calculated by dividing the net sales
for the preceding quarter by the total number of units shipped to end users
whether paid for or shipped as samples.  Consistent with industry practice, the
Company considers samples a marketing expense and as such the cost of samples is
recorded as selling, general and administrative expense.

                                      24
<PAGE>
  Royalty revenues are pursuant to a licensing agreement between the Company and
Abbott Laboratories.
 
LICENSE FEES.  License fees are recognized at the time of receipt and are 
generally received in conjunction with the grant of product development, 
marketing, manufacturing and/or distribution rights to one of the Company's 
technologies.
 
IMPACT OF THE YEAR 2000 ISSUE

   The Company has conducted a comprehensive review of its computer systems 
to identify the systems that could be affected by the "Year 2000" issue and 
has implemented a plan to resolve the issue at a cost which is not expected 
to be material.  The Company is also in the process of doing a comprehensive 
review of its vendors, service providers, and collaborative partners and will 
address any issues that arise during this review.  The Year 2000 problem is 
the result of computer programs being written using two digits rather than 
four digits to define the applicable year.  Any of the Company's programs 
that have time-sensitive software may recognize a date using "00" as the year 
1900 rather than the year 2000.  This could result in a major system failure 
or miscalculations. The Company presently believes that the Year 2000 problem 
will not pose significant operational problems for the Company's computer 
systems.

RESULTS OF OPERATIONS

    FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997.  Revenues under collaborative
agreements were $5.1 million for the fiscal year ended March 31, 1998, compared
to $4.5 million for the fiscal year ended March 31, 1997. This increase is
primarily due to an increase in the quarterly payments from Mallinckrodt to
$1.25 million over $1.0 million in the prior year's first two quarters.  These
revenues in both years consist of quarterly payments to support clinical trials,
regulatory submissions and product development received from Mallinckrodt under
ARDA. 
 
  Product and royalty revenues were $1.2 million for fiscal year 1998, compared
to $626,000 for the prior year.  Product revenues in the current year are based
on the Company's sales to Mallinckrodt and are recognized upon shipment of the
product.  Product revenues in 1997 also included sales to Shionogi, also
recognized upon shipment of the product.  The increase in product revenues for
fiscal year 1998 as compared to fiscal year 1997 results primarily from the
market introduction of OPTISON in the fourth quarter which added revenues of
approximately $700,000.  Royalty revenues are pursuant to a license agreement
between the Company and Abbott Laboratories.
 
  There were no license fees in fiscal year 1998 compared to $5.7 million in
fiscal year 1997.  The revenues in the prior year consist of payments from
Mallinckrodt pursuant to an amendment to ARDA that the Company entered into with
Mallinckrodt in December 1996.  The amendment extended Mallinckrodt's exclusive
territory to include the territory that the Company had formerly licensed to
Nycomed Imaging AS ("Nycomed") consisting of Europe, Africa, India and parts of
Asia.
 
  Costs of products sold totaled $5.8 million for fiscal year 1998, resulting in
a negative gross profit margin.  This negative gross profit margin was due to
the fact that the current low levels of production are insufficient to cover the
Company's fixed manufacturing overhead expenses. For fiscal year 1997, costs of
products sold totaled $4.7 million.  The Company anticipates an increase in
gross profit margins if and when OPTISON sales volumes increase as OPTISON
obtains market acceptance.   The increase in sales volume would permit the fixed
costs included in manufacturing overhead to be allocated over a larger number of
vials produced.  Manufacturing fixed costs are currently running at an annual
rate of approximately $5.5 million.  The amount of any increase in the Company's
margins and the time required by the Company to achieve higher margins are
highly dependent on the regulatory approval and market acceptance of current and
future products and are therefore uncertain.
 
  The Company's research and development costs totaled $11.1 million for fiscal
year 1998 as compared to $9.9 million for fiscal year 1997.  The increase of 12%
is due to additional research and development costs associated with the
Company's product development efforts.

  Selling, general and administrative expenses totaled $11.9 million in fiscal
year 1998 as compared to $8.1 million in fiscal year 1997.  This increase of 47%
is primarily due to increased legal expenses.
 
  During fiscal year 1998, the Company did not incur other nonrecurring charges
compared to $3 million for the prior year related to the reacquisition of
license rights from Nycomed.
                                        25
<PAGE>
  Interest expense for fiscal years 1998 and 1997 amounted to $721,000 and
$810,000, respectively. Interest expense consists of mortgage interest on the
Company's manufacturing building and interest related to a note payable, secured
by the tangible assets of the Company, which bears interest at the prime rate
plus 1% and is payable in monthly installments of principal plus interest over
five years. The interest rate on the note was 9.5% in March 1998.
 
  Interest income for fiscal year 1998 was $2.0 million compared to $2.4 million
in fiscal year 1997. This decrease is due to lower average cash balances and
marketable securities balances.
 
  No tax benefit has been recognized for fiscal years 1998 or 1997 as the
Company had fully utilized its operating loss carryback ability in 1993. As of
March 31, 1998, the Company had federal and state operating loss carryforwards
of approximately $90.5 million and $27.2 million, respectively.  Realization of
future tax benefits from utilization of net operating loss carryforwards is
uncertain.

  FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996.  Revenues under collaborative
agreements were $4.5 million for the fiscal year ended March 31, 1997, compared
to $2.4 million for the fiscal year ended March 31, 1996. This increase was due
to the receipt in 1997 of 4 quarterly payments from Mallinckrodt to support
clinical trials versus 2 quarterly payments in 1996. The revenues in 1997
consisted solely of quarterly payments to support clinical trials, regulatory
submissions and product development received from Mallinckrodt under ARDA.
 
  Product and royalty revenues were $626,000 for fiscal year 1997, compared to
$647,000 for 1996.  Product revenues were based on the Company's sales to
Mallinckrodt and Shionogi and were recognized upon shipment of the product. 
Royalty revenues were pursuant to a license agreement between the Company and
Abbott Laboratories.
 
  License fees were $5.7 million and $25,000 in fiscal year 1997 and 1996,
respectively.  License fee revenues in fiscal year 1997 consisted of payments
from Mallinckrodt pursuant to the amendment to ARDA that the Company entered
into with Mallinckrodt in December 1996.
 
  Costs of products sold totaled $4.7 million for fiscal year 1997, resulting in
a negative gross profit margin.  This negative gross profit margin was due to
the fact that the low levels of production were insufficient to cover the
Company's fixed manufacturing overhead expenses.  For the fiscal year ended
March 31, 1996, costs of products sold totaled $1.6 million. In fiscal year
1996, certain expenses related to the development of the manufacturing process
were recorded as research and development costs. Because the Company had left
the pilot manufacturing phase, these costs were classified as costs of goods
sold in fiscal 1997.
 
  The Company's research and development costs totaled $9.9 million for the year
ended March 31, 1997 as compared to $13.6 million for the year ended March 31,
1996.  The decrease of 27% was due to the classification in fiscal year 1996 of
certain expenses associated with the manufacturing of the product as research
and development costs as they represented the cost of developing the Company's
manufacturing process.

  Selling, general and administrative expenses totaled $8.1 million in fiscal
year 1997 as compared to $5.9 million in fiscal year 1996.  This increase was
due in part to increased litigation expenses in addition to increased
compensation costs.
 
  During fiscal year 1997, the Company's other nonrecurring charges totaled 
$3 million as compared to $3.1 million for the prior year.  In December 1996, 
the Company and Mallinckrodt amended ARDA to expand the geographical scope of 
Mallinckrodt's exclusive marketing and distribution rights for ALBUNEX, 
OPTISON and related products to include the territory the Company had 
previously licensed to Nycomed.  As a result of the amendment, the Company 
recorded a one-time charge of $3 million related to the reacquisition of its 
license rights from Nycomed.  In fiscal year 1996, the Company recorded 
one-time charges related to the conclusion of arbitration with Bracco S.p.A., 
the write off of license fees associated with discontinued products and a 
write down to the sale price of two buildings that were subsequently sold in 
March 1996.
 
  Interest expense for fiscal years 1997 and 1996 amounted to $810,000 and
$786,000, respectively. Interest expense consisted of mortgage interest on the
Company's manufacturing building and interest related to a note payable which
bears interest at prime plus 1% and is payable in monthly installments of
principal plus interest over five years. The interest rate on the note was 9.50%
in March 1997.
                                      26
<PAGE>

  Interest income for fiscal year 1997 was $2.4 million compared to $1.1 million
in fiscal year 1996. This significant increase was due to the interest earned
related to higher average cash balances and marketable securities balances as a
result of the Company's public offering in May 1996.
 
  No tax benefit was recognized for fiscal 1997 or 1996 as the Company had fully
utilized its operating loss carryback ability in 1993. As of March 31, 1997, the
Company had federal and state operating loss carryforwards of approximately
$84.4 million and $26.6 million, respectively.
 
LIQUIDITY AND CAPITAL RESOURCES

  At March 31, 1998, the Company had net working capital of $21.1 million
compared to $43.8 million at March 31, 1997.  Cash, cash equivalents and
marketable securities were $21.3 million at March 31, 1998 compared to $41.4
million at March 31, 1997.

  In an agreement dated March 31, 1998, the Company entered into a 
cooperative development and marketing agreement with Chugai Pharmaceutical 
Co., Ltd. ("Chugai") of Japan.  The parties entered into this strategic 
alliance which covers Japan, Taiwan and South Korea, to develop OPTISON 
(which may be marketed under a different name) and ORALEX, as well as related 
products.  The Company granted Chugai an exclusive license to develop, 
manufacture, and market these products in the subject territory, for which 
the Company received an upfront license fee of $14 million.  With respect to 
licensed products manufactured by Chugai, Chugai will pay the Company a 
royalty on net sales.  For licensed products manufactured by the Company, the 
Company will receive royalties on net sales, the amount of which will depend 
upon the sales volume, in addition to a transfer price based on average net 
sales per unit from the previous quarter. Additionally, Chugai purchased 
691,883 shares of the Company's common stock at a premium of 40% over the 
then-prevailing market price.  The equity investment was valued at $8.3 
million.  The Company is also eligible to receive milestone payments of up to 
$20 million based on Chugai's achievement of certain Japanese product 
development and regulatory goals. 

  During fiscal year 1998, the Company used $17.5 million cash for operating
requirements, which was funded primarily by $20.6 million of marketable
securities that matured during fiscal 1998.  Significant cash uses included an
increase in inventories of $1.6 million principally related to the commercial
launch of OPTISON in the U.S. and Europe, purchases of property and equipment of
$1.4 million, and $2.0 million for the reacquisition of license rights from
Shionogi.  Cash was provided primarily by $1.3 million in proceeds from a
sale/leaseback transaction related to equipment financing, receipt of $1.6
million in contract revenue from Chugai, an increase of $2.8 million in accounts
payable and accrued liabilities related to research and development activity for
future products and an increase in legal activity.
 
  On September 7, 1995, the Company entered into an Amended and Restated
Distribution Agreement ("ARDA") and a related investment agreement with
Mallinckrodt which will provide the Company with between $33.0 million and $42.5
million. Under the terms of the agreement, Mallinckrodt is obligated to make
payments to the Company totaling $20.0 million over four years to support
clinical trials, related regulatory submissions and associated product
development of the licensed products, which include, but are not limited to,
ALBUNEX and OPTISON. These payments will be made in 16 quarterly installments of
$1.0 million for the first four quarters, $1.25 million for the following eight
quarters and $1.5 million for the final four quarters. The payments may be
accelerated in the event that the Company's cumulative outlays for clinical
trials are in excess of the amounts received at any point in time. However, the
quarterly payments may not be postponed. The first 11 quarterly payments have
been received by the Company.

  In September 1996, the Company entered into an agreement with Shionogi
pursuant to which the Company reacquired all rights to manufacture, market and
sell its ALBUNEX family of products in the territory, consisting of Japan,
Taiwan and South Korea, formerly exclusively licensed to Shionogi.  Under the
agreement, the company paid $3 million to Shionogi and agreed to pay an
additional $5.5 million over the next three years, of which $2 million had been
paid at March 31, 1998.

  Capital expenditures for facilities, laboratory equipment, furniture and
fixtures were $1.4 million, $726,000, and $2.4 million for fiscal years 1998,
1997 and 1996, respectively.  Expenditures in all three fiscal years consisted
primarily of building improvements and equipment for aseptic manufacturing
facilities being constructed for the manufacture of OPTISON and other products. 
In June 1997, the Company entered into an equipment leasing agreement with
Mellon US Leasing ("Mellon") for a lease line of $1.6 million with a term of 48
months.  The outstanding balance on this line of credit at March 31, 1998 was
$1.3 million.
                                      27
<PAGE>
  The Company currently leases one of its operating facilities in San Diego. The
lease requires aggregate payments of approximately $648,000 through fiscal year
2000.

  For the next several years, the Company expects to incur substantial
additional expenditures associated with product development.  The Company
anticipates that its existing resources, plus payments under its collaborative
agreements, will enable the Company to fund its operations for at least the next
18 months. The Company continually reviews its product development activities in
an effort to allocate its resources to those products that the Company believes
have the greatest commercial potential. Factors considered by the Company in
determining the products to pursue may include, but are not limited to, the
projected markets, potential for regulatory approval, technical feasibility,
intellectual property rights and estimated costs to bring the product to the
market. Based upon these factors, the Company may from time to time reallocate
its resources among its product development activities. The Company may pursue a
number of options to raise additional funds, including borrowings; lease
arrangements; collaborative research and development arrangements; the licensing
of product rights to third parties; or additional public and private financing,
as capital requirements change as a result of strategic, competitive,
technological and regulatory factors. There can be no assurance that funds from
these sources will be available on favorable terms, if at all.

  The Company believes that inflation and changing prices have not had a
material effect on operations for fiscal years 1998, 1997 and 1996 and that the
impact of government regulation on the Company is not materially different from
the impact on other similar enterprises.
                                      28

<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                          
                     INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                             PAGE
                                                                             ----
<S>                                                                          <S>

     Report of Independent Public Accountants                                  30
     Consolidated Balance Sheets as of March 31, 1997 and 1998                 31
     Consolidated Statements of Operations for the Fiscal Years Ended 
     March 31, 1996, 1997 and 1998                                             32
     Consolidated Statements of Stockholders' Equity for the Fiscal Years 
     Ended March 31, 1996, 1997 and 1998                                       33
     Consolidated Statements of Cash Flows for the Fiscal Years Ended 
     March 31, 1996, 1997 and 1998                                             34
     Notes to Consolidated Financial Statements                                35
               
</TABLE>

                                          

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

     None.


                                       29
<PAGE>



                                       
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Molecular Biosystems, Inc.:

     We have audited the accompanying consolidated balance sheets of 
Molecular Biosystems, Inc. (a Delaware corporation) and subsidiaries as of 
March 31, 1997 and 1998, and the related consolidated statements of 
operations, stockholders' equity and cash flows for each of the three years 
in the period ended March 31, 1998. These financial statements are the 
responsibility of the Company's management. Our responsibility is to express 
an opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present 
fairly, in all material respects, the financial position of Molecular 
Biosystems, Inc. and subsidiaries as of March 31, 1997 and 1998, and the 
results of their operations and their cash flows for each of the three years 
in the period ended March 31, 1998, in conformity with generally accepted 
accounting principles.

                                          
                                             ARTHUR ANDERSEN LLP




San Diego, California
May 18, 1998



                                       30
<PAGE>

                                       
                 MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                            (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                            MARCH 31,     MARCH 31,
                                                               1997         1998
<S>                                                         <C>           <C>
                                     ASSETS
Current assets:

     Cash and cash equivalents                               $  587        $  1,064
     Marketable securities, available-for-sale (Note 2)      40,827          20,274
     Accounts and notes receivable                              902           1,498
     License rights (Note 7)                                  8,500           8,500
     Inventories                                                342           1,902
     Prepaid expenses and other assets                          249             400
                                                          ---------       ---------
        Total current assets                                 51,407          33,638
                                                          ---------       ---------

Property and equipment, at cost:

     Building and improvements                               14,544          14,412
     Equipment, furniture and fixtures                        4,567           4,364
     Construction in progress                                   511             471
                                                          ---------       ---------
                                                             19,622          19,247
     Less:  Accumulated depreciation and amortization         6,434           7,073
                                                          ---------       ---------
         Total property and equipment                        13,188          12,174
                                                          ---------       ---------

Other assets:

     Patents and license rights, net of amortization 
       $1,114 and $87, respectively (Notes 5 and 8)             341             320
     Certificate of deposit, pledged (Notes 2 and 4)          3,000           3,000
     Other assets, net                                        2,223           2,186
                                                          ---------       ---------
         Total other assets                                   5,564           5,506
                                                          ---------       ---------
                                                          $  70,159       $  51,318
                                                          ---------       ---------
                                                          ---------       ---------

     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current portion of long-term debt                     $  1,267        $  1,272
     Accounts payable and accrued liabilities (Notes 1 
     and 5)                                                   4,684           7,498
     Compensation accruals                                    1,613           2,227
     Deferred Contract Revenue                                    -           1,575
                                                          ---------       ---------
         Total current liabilities                            7,564          12,572
                                                          ---------       ---------
     Long-term debt, net of current portion (Note 4)          7,349           6,082
                                                          ---------       ---------
     Other noncurrent liabilities                             3,500           1,500
                                                          ---------       ---------
     Commitments and contingencies (Note 5)
     Stockholders' equity (Note 6):
       Common Stock, $.01 par value, 40,000,000 shares
        Authorized, 17,745,897 and 17,846,237 shares
        Issued and outstanding, respectively                    177             178
       Additional paid-in capital                           127,483         128,145
       Accumulated deficit                                  (75,469)        (96,729)
       Unrealized loss on available-for-sale securities         (82)            (67)
       Less 40,470 shares of treasury stock, at cost           (363)           (363)
                                                          ---------       ---------
         Total stockholders' equity                          51,746          31,164
                                                          ---------       ---------
                                                          $  70,159       $  51,318
                                                          ---------       ---------
                                                          ---------       ---------

</TABLE>

  The accompanying notes are an integral part of these consolidated statements.

                                       31
<PAGE>

                                        
                   MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>

                                                               FISCAL YEARS ENDED MARCH 31,
                                                        ----------------------------------------
                                                             1996           1997           1998
<S>                                                      <C>            <C>            <C>
Revenues (Note 7):
     Revenues under collaborative agreements             $  2,412       $  4,500       $  5,095
     Product and royalty revenues                             647            626          1,151
     License fees                                              25          5,725              -
                                                         --------       --------       --------
                                                            3,084         10,851          6,246
                                                         --------       --------       --------
Operating expenses:
     Research and development costs (Note 7)               13,588          9,902         11,078
     Costs of products sold                                 1,553          4,748          5,791
     Selling, general and administrative expenses           5,862          8,052         11,912
     Other nonrecurring charges (Note 8)                    3,110          3,000              -
                                                         --------       --------       --------
                                                           24,113         25,702         28,781
                                                         --------       --------       --------

     Loss from operations                                 (21,029)       (14,851)       (22,535)
Interest expense                                             (786)          (810)          (721)
Interest income                                             1,102          2,377          1,996
                                                         --------       --------       --------
Net loss                                                 $(20,713)      $(13,284)      $(21,260)
                                                         --------       --------       --------
                                                         --------       --------       --------
Loss per common share - Basic and diluted                $  (1.62)      $  (0.78)      $  (1.19)
                                                         --------       --------       --------
                                                         --------       --------       --------
Weighted average common shares
     Outstanding                                           12,758         16,926         17,793
                                                         --------       --------       --------
                                                         --------       --------       --------
</TABLE>

   The accompanying notes are an integral part of these consolidated statements.

                                       32
<PAGE>


                                       
                  MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   COMMON STOCK       ADDITIONAL
                                              COMPREHENSIVE   ----------------------    PAID-IN     ACCUMULATED    TREASURY
                                                  LOSS          SHARE      AMOUNT       CAPITAL       DEFICIT        STOCK
                                             ---------------  ---------  -----------  -----------  -------------  -----------
<S>                                          <C>              <C>        <C>          <C>          <C>            <C>
Balance at March 31, 1995                                     11,999,561  $     120    $  78,422     $ (41,472)    $     (59)
  Comprehensive Loss
    Net loss                                    $ (20,713)           --          --           --       (20,713)           --
    Unrealized gain on available-for-sale
      securities (Note 2)                             112            --          --           --            --            --
                                             ---------------  
  Comprehensive Loss                              (20,601)
                                             ---------------  
  Purchase of treasury stock (Note 6)                                --          --          (79)           --          (108)
  Issuance of shares in settlement of
    stockholder suit                                            172,414           2        1,498            --            --
  Proceeds from sale of Common Stock 
    (Note 7)                                                  1,118,761          11       11,591            --            --
  Exercise of stock options                                       5,450          --           36            --            --
                                                              ---------       -----   -----------  -------------       -----
Balance at March 31, 1996                                    13,296,186   $     133    $  91,468     $ (62,185)    $    (167)
  Comprehensive Loss
    Net loss                                      (13,284)           --          --           --       (13,284)           --
    Unrealized loss on available-for-sale
      securities (Note 2)                             (76)           --          --           --            --            --
                                             ---------------  
  Comprehensive Loss                              (13,360)
                                             ---------------  
  Proceeds from Public Offering                               4,140,000          41       34,045            --            --
  Purchase of treasury stock (Note 6)                                --          --          (85)           --          (196)
  Exercise of stock options                                     295,500           3        1,928            --            --
  Issuance of stock grants                                       14,211          --          127            --            --
                                                              ---------       -----   -----------  -------------       -----
Balance at March 31, 1997                                    17,745,897   $     177    $ 127,483     $ (75,469)    $    (363)
  Comprehensive Loss
    Net loss                                      (21,260)           --          --           --       (21,260)           --
    Unrealized gain on available-for-sale
      securities (Note 2)                              15            --          --           --            --            --
                                             ---------------  
  Comprehensive Loss                              (21,245)
                                             ---------------  
  Exercise of stock options                                     100,340           1          662            --            --
                                             ---------------  ---------       -----   -----------  -------------       -----
Balance at March 31, 1998                                    17,846,237   $     178    $ 128,145     $ (96,729)    $    (363)
                                                              ---------       -----   -----------  -------------       -----
                                                              ---------       -----   -----------  -------------       -----
 
<CAPTION>
                                                                     NOTES
                                             ACCUMULATED OTHER  RECEIVABLE FROM
                                               COMPREHENSIVE    SALE OF COMMON
                                               INCOME (LOSS)         STOCK         TOTAL
                                             -----------------  ---------------  ---------
<S>                                          <C>                <C>              <C>
Balance at March 31, 1995                        $    (118)        $    (469)    $  36,424
  Comprehensive Loss
    Net loss                                            --                --       (20,713)
    Unrealized gain on available-for-sale
      securities (Note 2)                              112                --           112
                                                     -----             -----     ---------
  Comprehensive Loss

  Purchase of treasury stock (Note 6)                   --               188             1
  Issuance of shares in settlement of
    stockholder suit                                    --                --         1,500
  Proceeds from sale of Common Stock 
    (Note 7)                                            --                --        11,602
  Exercise of stock options                             --                --            36
                                                     -----             -----     ---------
Balance at March 31, 1996                        $      (6)        $    (281)    $  28,962
  Comprehensive Loss
    Net loss                                            --                --       (13,284)
    Unrealized loss on available-for-sale
      securities (Note 2)                              (76)               --           (76)
                                                     -----             -----     ---------
  Comprehensive Loss

  Proceeds from Public Offering (Note 6)                --                --        34,086
  Purchase of treasury stock (Note 6)                   --               281            --
  Exercise of stock options                             --                --         1,931
  Issuance of stock grants                              --                --           127
                                                     -----             -----     ---------
Balance at March 31, 1997                        $     (82)        $      --     $  51,746
  Comprehensive Loss
    Net loss                                            --                --       (21,260)
    Unrealized gain on available-for-sale
      securities (Note 2)                               15                --            15
                                                     -----             -----     ---------
  Comprehensive Loss
                                                     -----             -----     ---------
  Exercise of stock options                             --                --           663
                                                     -----             -----     ---------
Balance at March 31, 1998                        $     (67)        $      --     $  31,164
                                                     -----             -----     ---------
                                                     -----             -----     ---------
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.


                                       33

<PAGE>

     MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
       CONSOLIDATED STATEMENTS OF CASH FLOWS
              (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             FISCAL YEARS ENDED MARCH 31,
                                                                             ----------------------------
<S>                                                                    <C>            <C>           <C>                

                                                                           1996           1997           1998
Cash flows from operating activities:

  Net loss                                                            $ (20,713)     $ (13,284)     $ (21,260)
  Adjustments to reconcile net loss to net cash 
      used in operating activities:
    Depreciation and amortization                                         2,217          1,435          1,085
    Loss on disposals/write-downs of property and equipment                 680              1             20
    Loss on write-off of license fees related to discontinued products    1,025              -              -
    Write-off of former Nycomed territory license rights                      -          3,000              -
    Forgiveness of note receivable from sale of Common Stock                 56            109              -
    Changes in operating assets and liabilities:
      Receivables                                                         4,863             29           (702)
      Inventories                                                           773            280         (1,560)
      Prepaid expenses and other assets                                      36           (623)           (45)
      Accounts payable and accrued liabilities                           (1,626)           721          2,814
      Deferred contract revenue                                               -              -          1,575
      Compensation accruals                                                 620            582            614
                                                                      ----------      ----------      --------
      Cash used in operating activities                                 (12,069)        (7,750)       (17,459)
                                                                      ----------      ----------      --------

Cash flows from investing activities:

  Purchases of property and equipment                                    (2,397)          (726)        (1,387)
  Proceeds from sale of property and equipment                            6,484              4              -
  Write off of patents and license rights                                     -              -             17
  Additions to patents and license rights                                (1,045)          (226)           (32)
  Acquisition of license rights from Shionogi                                 -         (3,000)        (2,000)
  Acquisition of license rights from Nycomed                                  -         (2,000)             -
  (Increase) decrease in other assets                                       (28)          (269)            37
  (Increase) decrease in marketable securities                            4,920        (32,876)        20,569
                                                                      ----------      ----------      --------
      Cash provided by (used for) investing activities                    7,934        (39,093)        17,204
                                                                      ----------      ----------      --------

Cash flows from financing activities:
                     
  Proceeds from sale/leaseback transaction                                    -              -          1,331
  Net proceeds from public offering of Common Stock                           -         34,086              -
  Net proceeds from issuance of Common Stock                             11,638          2,058            663
  Long-term debt proceeds                                                 1,438              -              -
  Principal payments on long-term debt                                     (281)        (1,256)        (1,262)
                                                                      ----------      ----------      --------
      Cash provided by financing activities                              12,795         34,888            732
                                                                      ----------      ----------      --------
Increase (decrease) in cash and cash equivalents                          8,660        (11,955)           477

Cash and cash equivalents, beginning of year                              3,882         12,542            587
                                                                      ----------      ----------      --------
Cash and cash equivalents, end of year                                $  12,542         $  587       $  1,064
                                                                      ----------      ----------      --------
                                                                      ----------      ----------      --------

Supplemental cash flow disclosures:
  Interest income received                                             $  1,141       $  1,609       $  2,101
                                                                      ----------      ----------      --------
                                                                      ----------      ----------      --------
  Interest paid                                                        $    780       $    804       $    715
                                                                      ----------      ----------      --------
                                                                      ----------      ----------      --------
    The accompanying notes are an integral part of these consolidated statements.
</TABLE>
                              
                                      34
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     DESCRIPTION OF BUSINESS-

     Molecular Biosystems, Inc. ("MBI" or the "Company") discovers, develops 
     and manufactures proprietary diagnostic ultrasound imaging agents.  The 
     Company's continuing operations have been unprofitable since 1992.  
     Operating losses may occur for at least the next several years due to 
     continued requirements for research and development, including 
     preclinical testing and clinical trials, regulatory activities and the 
     high costs of commercialization activities.  The magnitude of the losses 
     and the time required by the Company to achieve profitability are highly 
     dependent on the market acceptance of OPTISON-TM-_and other future 
     products and are therefore uncertain.  The Company does not foresee 
     product revenues from sales of ALBUNEX-Registered Trademark-, the 
     Company's first product and the first ultrasound imaging agent available 
     in the United States, as resulting in profitable operations for the 
     Company.  There is no assurance that the Company will be able to achieve 
     profitability on a sustained basis or at all.

     PRINCIPLES OF CONSOLIDATION-

     The Consolidated Financial Statements include the accounts of Molecular 
     Biosystems, Inc. and its wholly owned subsidiaries.  All significant 
     intercompany accounts and transactions have been eliminated. 

     Certain amounts in the prior years' financial statements and notes have 
     been reclassified to conform with the current year presentation.

     USE OF ESTIMATES-

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

     RESEARCH AND DEVELOPMENT COSTS-

     All research and development costs and related special purpose equipment 
     costs are charged to expense as incurred.

     REVENUES UNDER COLLABORATIVE AGREEMENTS-

     Revenues under collaborative agreements, which have been the primary source
     of revenues for the Company, consist of two types of revenues.  The first
     type, milestone payments, is earned in connection with research activities
     performed under the terms of research and development license agreements. 
     Revenue is recognized on the achievement of certain milestones, some of
     which relate to obtaining regulatory approvals.  Accordingly, the estimated
     dates of the milestone achievements are subject to revision based on
     periodic evaluations by the Company and its partners of the attainment of
     specified milestones, including the status of the regulatory approval
     process.  Advance payments received in excess of amounts earned are
     classified as deferred contract revenues and the resulting revenues are
     recognized based on work performed at a predetermined rate or level of
     expense reimbursement.

     Additionally, under the terms of the Amended and Restated Distribution
     Agreement ("ARDA") entered into in September 1995, Mallinckrodt, Inc.
     ("Mallinckrodt") will pay the Company $20.0 million over four years to
     further the development of OPTISON (the Company's second-generation
     product) and related products.  These payments will be made in 16 quarterly
     installments starting at $1.0 million for the first four quarters, $1.25
     million for the following eight quarters and $1.5 million for the final
     four quarters. Pursuant to the agreement, half of each payment is
     designated for clinical development expenses and will be recorded as
     deferred revenue until such expenses are incurred, and the remaining half
     of each payment will be recognized as research revenue when received. 


                                       35
<PAGE>


     REVENUE RECOGNITION FOR PRODUCT SOLD-

     The Company recognizes revenue when goods are shipped to its customer, 
     Mallinckrodt. The transfer price for the Company's sales of OPTISON to 
     Mallinckrodt is equal to 40% of Mallinckrodt's average net sales price 
     to its end users of the product for the immediately preceding quarter.  
     Pursuant to ARDA, the average net sales price to end users is calculated 
     by dividing the net sales for the preceding quarter by the total number 
     of units shipped to end users whether paid for or shipped as samples.  
     Consistent with industry practice, the Company considers samples a 
     marketing expense and as such the cost of samples is recorded as 
     selling, general and administrative expense.

     REVENUE RECOGNITION FOR LICENSE FEES-

     The Company recognizes revenue when license fees are received, provided 
     the Company has no future obligations.

     INCOME TAXES-

     The Company accounts for income taxes in accordance with Statement of 
     Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for 
     Income Taxes."  SFAS No. 109 is an asset and liability approach that 
     requires the recognition of deferred assets and liabilities for the 
     expected future tax consequences of events that have been recognized 
     differently in the Company's financial statements or tax returns.  
     Deferred tax assets are reduced by a valuation allowance when, in the 
     opinion of management, it is more likely than not that some portion or 
     all of the deferred tax assets will not be realized.

     CASH EQUIVALENTS-

     Cash equivalents include marketable securities with original maturities 
     of three months or less when acquired. The Company has not realized any 
     losses on its cash equivalents.

     MARKETABLE SECURITIES

     In accordance with Statement of Financial Accounting Standards ("SFAS") 
     No. 115, "Accounting for Certain Investments in Debt and Equity 
     Securities," the Company's management has classified its investment 
     securities as available-for-sale and records holding gains or losses as 
     a separate component of stockholders' equity. 

     CONCENTRATION OF CREDIT RISK-

     The Company invests its excess cash in debt instruments of financial 
     institutions and corporations with strong credit ratings.  The Company 
     has established guidelines relative to diversification and maturities 
     that maintain safety and liquidity.  These guidelines are periodically 
     reviewed and modified to take advantage of trends in yields and interest 
     rates.

     INVENTORIES-

     Inventories are stated at lower of cost (first-in, first-out) or market,
     and consist of the following major classes (in thousands):

<TABLE>
<CAPTION>
                                                                 MARCH 31,
                                                           --------------------
                                                             1997         1998
             <S>                                           <C>        <C>
             Raw materials and supplies                    $  253      $ 1,639
             Work in process                                   45           74
             Finished goods                                    44          189
                                                           ------      -------
                                                           $  342      $ 1,902
                                                           ------      -------
                                                           ------      -------
</TABLE>

     Work in process and finished goods include the cost of materials, direct
     labor and manufacturing overhead.

     PROPERTY AND EQUIPMENT-

     Property and equipment are stated at cost.  Depreciation and amortization
     are provided using the straight-line method over estimated useful lives of
     five years for equipment, 31 years for buildings and improvements and the
     term of the lease for leasehold improvements. 


                                       36
<PAGE>


     PATENTS AND LICENSE RIGHTS AND OTHER ASSETS-

     Patents and license rights are amortized on the straight-line method 
     over their estimated useful lives of five to ten years.

     In June 1989, the Company prepaid $2.0 million in royalties on the first 
     $66.6 million of sales of ALBUNEX and OPTISON in the United States.  
     Included in other assets at March 31, 1997 and 1998 is approximately 
     $1.9 million which is the portion of this prepayment which has not yet 
     been expensed.  Additionally, other assets at March 31, 1997 and 1998 
     include $300,000 of real estate investment related to an employment 
     agreement with one of the Company's officers.

     The Company periodically reevaluates the original assumptions and 
     rationale utilized in the assessment of the carrying value and estimated 
     lives of these and other long-lived assets.  The determinants used for 
     this evaluation include management's estimate of the asset's ability to 
     generate positive income and cash flow as well as the strategic 
     significance of the respective assets.

     IMPAIRMENT OF LONG-LIVED ASSETS-

     The Company accounts for long lived assets in accordance with Statement of
     Financial Accounting Standards No. 121, "Accounting for the Impairment of
     Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). 
     The statement requires that long-lived assets and certain identifiable
     intangibles to be held and used by an entity be reviewed for possible
     impairment whenever events or changes in circumstances indicate that the
     carrying amount of an asset may not be fully recoverable.

     ACCOUNTS PAYABLE AND ACCRUED LIABILITIES-

     Accounts payable and accrued liabilities consist of the following major
     classes (in thousands):

<TABLE>
<CAPTION>
                                                            MARCH 31,
                                                     ---------------------
                                                        1997         1998
     <S>                                             <S>          <C>
     Accrued legal and professional fees               1,250        1,540
     License rights payable and related fees (Note 7)  2,000        2,000
     Accounts payable - trade                          1,162        3,394
     Other miscellaneous accruals                        272          565
                                                      ------       ------
                                                     $ 4,684      $ 7,499
                                                      ------       ------
                                                      ------       ------

</TABLE>

     STOCK BASED COMPENSATION-

     The Company has elected to adopt the disclosure only provisions of 
     Statement of Financial Accounting Standards No. 123, "Accounting for 
     Stock-Based Compensation" (SFAS 123).  Accordingly the Company accounts 
     for its stock based compensation plans under the provisions of APB No. 
     25.

     LOSS PER SHARE-

     Basic and diluted loss per common share has been computed by dividing the
     loss by the weighted average number of common shares outstanding during the
     years.  Warrants and options do not impact the per share loss since they
     would be antidilutive.  In March 1997, the Financial Accounting Standards
     Board issued Statement of Financial Accounting Standards No. 128, "Earnings
     per Share" (SFAS 128), which changes the method of calculating earnings per
     share.  SFAS 128 is effective for financial statements issued after
     December 15, 1997.  The earnings per share of the Company for the years
     ended March 31, 1996, 1997 and 1998 would not be materially different under
     SFAS 128 as that presented therein.


                                       37


<PAGE>
     COMPREHENSIVE INCOME-

     In June 1997, Statement of Financial Accounting Standards No. 130, 
     "Reporting Comprehensive Income," was issued.  The Company has adopted
     this standard which requires the display of comprehensive income and its
     components in the financial statements.  The Company has chosen to disclose
     Comprehensive Loss, which encompasses net loss and unrealized gains and
     losses on available-for-sale securities, in the Consolidated Statements of 
     Stockholders' Equity.  Prior years have been restated to conform to the 
     SFAS No. 130 requirements.


2.   MARKETABLE SECURITIES

     Investments are recorded at estimated fair market value, and consist 
     primarily of treasury securities, government agency securities and 
     corporate obligations.  The Company has classified all of its investments
     as available-for-sale securities. The following table summarizes available-
     for-sale securities at March 31, 1997 (in thousands):


<TABLE>
<CAPTION>
                                                        COST NET OF
                                                         PREMIUMS/       GROSS          GROSS        ESTIMATED
                                                         DISCOUNTS     UNREALIZED     UNREALIZED       FAIR
                                                         AMORTIZED       GAINS          LOSSES        VALUE
                                                       -------------   ----------     ----------    ----------
     <S>                                                <C>               <C>            <C>         <C>
     U.S. treasury securities and obligations
       of U.S. government agencies                         $   3,503     $      -        $   (8)     $   3,495
     Corporate obligations                                    37,406            -           (74)        37,332
                                                       -------------   ----------     ----------    ----------
     Marketable securities available-for-sale              $  40,909     $      -        $  (82)     $  40,827
                                                       -------------   ----------     ----------    ----------
                                                       -------------   ----------     ----------    ----------

</TABLE>


     The following table summarizes available-for-sale securities at March 31,
     1998 (in thousands):

<TABLE>
<CAPTION>

                                                        COST NET OF
                                                         PREMIUMS/       GROSS          GROSS        ESTIMATED
                                                         DISCOUNTS     UNREALIZED     UNREALIZED       FAIR
                                                         AMORTIZED       GAINS          LOSSES        VALUE
                                                       -------------   ----------     ----------    ----------
<S>                                                     <C>               <C>            <C>         <C>
     U.S. treasury securities and obligations
       of U.S. government agencies                         $   4,501     $      -        $   (6)      $  4,495
     Corporate obligations                                    15,840            -           (61)        15,779
                                                       -------------   ----------     ----------    ----------
     Marketable securities available-for-sale              $  20,341     $  -            $  (67)      $ 20,274
                                                       -------------   ----------     ----------    ----------
                                                       -------------   ----------     ----------    ----------

</TABLE>


     There were no gross realized gains or losses on sales of available-for-sale
     securities for the year ended March 31, 1998.

     The amortized cost and estimated fair value of debt and marketable
     securities at March 31, 1998, by contractual maturity, are shown below. 
     Expected maturities may differ from contractual maturities because the 
     issuers of the securities may have the right to prepay obligations without
     prepayment penalties.


<TABLE>
<CAPTION>
                                                                     COST LESS
                                                                     PREMIUMS/        ESTIMATED
                                                                     DISCOUNTS           FAIR
                                                                     AMORTIZED          VALUE
     <S>                                                             <C>              <C>
     Due in one year or less                                         $  17,665        $  17,601
     Due after one year through three years                              2,676            2,673
                                                                     ---------        ---------
                                                                     $  20,341        $  20,274
                                                                     ---------        ---------
</TABLE>



                                       38

<PAGE>

     At March 31, 1998 a $3 million certificate of deposit was held as a
     compensating balance under the Company's debt agreement (see note 4).

3.   INCOME TAXES

     As described in Note 1, the Company uses the asset and liability method of
     computing deferred income taxes in accordance with Statement of Financial
     Accounting Standards No. 109, "Accounting for Income Taxes."

     The effective income tax rate on the loss before income taxes differs from
     the statutory U.S. federal income tax rate as follows (in thousands):

<TABLE>
<CAPTION>

                                                                        FISCAL YEARS ENDED MARCH 31,
                                                                  --------------------------------------
                                                                       1996         1997        1998
              <S>                                                  <C>          <C>           <C>
              Computed statutory tax                               $(7,036)     $(4,517)      $(7,342)
              State income taxes                                    (1,270)        (843)       (1,275)
              Tax exempt interest                                      (74)         (29)          (64)
              Losses without income tax benefit                      8,376        5,362         8,634
              Other                                                      4           27            47
                                                                   --------     --------      --------
              Provision for income taxes                           $     -      $     -       $     -
                                                                   --------     --------      --------
</TABLE>


     At March 31, 1998, the Company has deferred tax assets of approximately 
     $38.3 million relating to the following tax loss carryforwards for income
     tax purposes (in thousands):


<TABLE>
<CAPTION>
                                                                                     EXPIRATION
                                                                        AMOUNT         DATES
                                                                    -----------      ----------
     <S>                                                            <C>               <C>
     Federal ($90,480) and state ($27,170) net operating losses     $  117,650        1998-2013
     Research and development credit - federal                           2,150        1998-2013
     Research and development credit - state                               976        1998-2013
     Alternative minimum tax credit                                        300        Indefinite

</TABLE>


     For financial reporting purposes, a valuation allowance has been recognized
     to offset the deferred tax assets related to the carryforwards.  If 
     realized, approximately $1.0 million of the tax benefit for those items 
     will be applied directly to paid-in capital, related to deductible expenses
     reported as a reduction of the proceeds from issuing common stock in 
     connection with the exercise of stock options.


4.   LONG-TERM DEBT

     Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>

                                                                 MARCH 31,
                                                         ---------------------
                                                           1997         1998
             <S>                                         <C>          <C>
             Note payable - due 2004                     $  3,816     $  3,754
             Note payable - due 2001                        4,800        3,600
                                                         --------     --------
                                                            8,616        7,354
             Less - current portion                         1,267        1,272
                                                         --------     --------
                                                         $  7,349     $  6,082
                                                         --------     --------
                                                         --------     --------
</TABLE>

                                       39

<PAGE>

     The note payable due in 2004 bears interest at a variable rate based upon
     the weighted average Eleventh District cost of funds plus 2.35 percent.  
     The interest rate on this note is adjusted semi-annually and was 8 percent
     at March 31, 1997 and 1998.  The note is secured by the Company's 
     manufacturing facility and certain of the equipment contained therein and
     is payable in monthly installments of principal and interest. As of March
     31, 1998, maturities of this note in each of the next five fiscal years 
     are:   $72,000, $79,000, $85,000, $92,000 and $100,000.

     The note payable due in 2001 bears interest at the prime rate plus one
     percent (9.50 percent at March 31, 1998) and is payable in monthly 
     installments of $100,000 plus accrued interest through April, 2001. The 
     loan contains covenants relating to cashflow coverage, minimum cash 
     balances and requires a compensating balance of $3.0 million.  The loan is
     secured by the tangible assets of the Company.


5.   COMMITMENTS AND CONTINGENCIES

     LEASES

     The Company conducts certain of its operations in leased premises and also
     leases equipment through lease financing.  Terms of the leases, including
     renewal options, vary by lease.  Future minimum rental commitments for all
     noncancelable operating leases that have initial or remaining lease terms 
     in excess of one year are as follows (in thousands):                

<TABLE>
<CAPTION>
          FISCAL YEAR ENDED MARCH 31,                      AMOUNT
          <S>                                              <C>
          1999                                           $    730
          2000                                                673
          2001                                                378
          2002                                                234
          2003                                                  2
                                                         --------
          Total minimum lease payments                   $  2,017
                                                         --------
                                                         --------
</TABLE>

     In fiscal 1998, the Company entered into a new lease for its corporate
     headquarters.  The lease expires in February 2000.  The Company is 
     obligated to pay real estate taxes, insurance and utilities on its portion
     of the leased property.  Rental expense for the years ended March 31, 1996,
     1997 and 1998 was $350,000, $194,000 and $245,000, respectively. 

     In June 1997, the Company entered into an equipment leasing agreement with
     Mellon US Leasing ("Mellon") for a lease line of $1.6 million with a term
     of 48 months.  The outstanding balance on this line of credit at March 31,
     1998 was $1.3 million.

     LICENSE AGREEMENTS

     The Company has entered into license agreements requiring future royalty
     payments ranging from 1 1/4%  to 3% of specified product sales relating to
     the licensed technologies.  Additionally, there is a minimum royalty 
     payment of $600,000 due to one licensor in each calendar year.

     In April 1998, the Company and Chugai Pharmaceutical Co., Ltd. 
     ("Chugai") entered into a strategic alliance to develop and 
     commercialize OPTISON (which may be marketed under a different name) and 
     ORALEX-Registered Trademark- in Japan, Taiwan and South Korea. In 
     exchange for granting to Chugai a royalty-based license to market these 
     products in the named countries, MBI received an upfront license fee 
     from Chugai of $14 million.  In addition, Chugai made an equity 
     investment in MBI common stock.  MBI is eligible to receive milestone 
     payments of up to $20 million based on the achievement of certain 
     product development goals and will receive royalties from Chugai from 
     the sale of commercialized products in the territory.

     PATENT MATTERS

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

                                       40

<PAGE>

     The Company has an exclusive license to certain United States and foreign
     patents relating to gas-filled sonicated albumin microspheres from Steven 
     B. Feinstein, M.D. (see - Business - Marketing and Licensing Agreements - 
     Feinstein License)  The Company itself owns additional United States and 
     foreign patents covering ALBUNEX that broaden the product coverage of its
     license. Certain of these additional patents cover the Company's continuous
     flow sonication manufacturing process. The European equivalents of these
     manufacturing patents were challenged in an opposition proceeding brought 
     by Andaris Ltd. which was decided in the Company's favor in January 1996.
     Andaris has appealed the decision.  Andaris has also filed an opposition
     against the Company's ALBUNEX composition patent in Europe, and Andaris 
     and two other parties have filed a similar opposition in Japan.  No hearing
     date has been set in these latter two oppositions.

     The Company has received a patent covering its method of manufacturing
     gas-filled albumin microspheres using a milling process under development.
     The Company believes that this process may be more reliable and efficient 
     than the sonication process that the Company currently uses. The Company 
     has also received patents on other perfluorocarbon-based technology 
     relating to ultrasound contrast agents.

     The Company owns a United States patent covering ORALEX and has several
     foreign applications pending. The Company has also filed patent 
     applications relating to several early-stage development products. The
     Company is uncertain whether these applications will result in issued
     patents or whether the covered products can or will be commercialized.

     The last-to-expire of the Company's key United States patents covering
     ALBUNEX and OPTISON expires in 2008, and subject to the outcome of the
     oppositions previously described, the last-to-expire of the Company's key
     European patents covering ALBUNEX and OPTISON expires in 2009.

     The patent position of medical and pharmaceutical companies is highly
     uncertain and involves complex legal and factual questions.  There can be 
     no assurance that the Company will receive patents for all or any of the 
     claims included in its pending or future patent applications, that any 
     issued patents will provide the Company with competitive advantages or will
     not be challenged by third parties, or that existing or future patents of 
     third parties will not have an adverse effect on the Company's ability to
     commercialize its products. Moreover, there can be no assurance that third
     parties will not independently develop similar products, duplicate one or
     more of the Company's products or design around the Company's patents.

     The Company's commercial success also will depend in part upon the Company
     not infringing patents issued to third parties.  There can be no assurance
     that patents issued to third parties will not require the Company to alter
     its products or manufacturing processes, pay licensing fees, or cease 
     development of its current or future products. 

     Litigation or administrative proceedings may be necessary to enforce the
     Company's patents, to defend the Company against infringement claims or to
     determine the priority, scope and validity of the proprietary rights of 
     third parties.  See Item 3, "Legal Proceedings".  Any such litigation or
     administrative proceedings could result in substantial costs to the
     Company, and an unfavorable outcome could have a material adverse effect on
     the Company's business, financial condition and results of operation.
     Moreover, there can be no assurance that, in the event of an unfavorable
     outcome in any litigation or administrative proceedings involving
     infringement claims against the Company, the Company would be able to
     license any proprietary rights that it requires on acceptable terms or at
     all.  The Company's failure to obtain a license that it requires to
     commercialize one of its products could have a material adverse effect on
     the Company's business, financial condition and results of operations.

     The Company has become aware of several United States patents issued to 
     other companies purportedly covering various attributes of
     perfluorocarbon-containing imaging agents such as OPTISON.  Certain of 
     these companies also are pursuing foreign patent protection.  Some of 
     these companies are developing or may be developing ultrasound contrast 
     imaging agents that would compete with OPTISON.  The patents and patent
     applications of these other companies involve a number of complex legal and
     factual issues that are currently unresolved.  The Company believes that 
     there may be a substantial overlap among many of

                                       41

<PAGE>

     the claims in their patents and is currently involved in various 
     administrative proceedings and litigation in the United States and Europe
     to adjudicate their conflicting rights.

     The Company believes that, for a variety of reasons, its commercialization
     of OPTISON will not infringe any valid patent held by any of these other
     companies.  Depending upon the particular patent claim, these reasons
     include, but are not limited to, (i) differences between OPTISON and the
     subject of the claim, (ii) the invalidity of the claim due to the existence
     of prior art, (iii) the inadequacy of the claim's specifications, (iv) lack
     of enablement, (v) inequitable conduct by patentee, and (vi) various other
     defenses as allowed by law.  The Company intends to challenge the validity
     of any such patent granted to one of the other companies if the patent is
     asserted against the Company, and the Company will enforce its own patents
     if any product of one of the other companies infringes the Company's patent
     claims.

     The Company has obtained registered trademarks for "ALBUNEX" and "ORALEX" 
     in the United States and in selected foreign countries.  Additionally
     Mallinckrodt has filed for the trademark for "OPTISON" in various countries
     throughout the world.  There can be no assurance that the Company's 
     registered or unregistered trademarks and trade names will not infringe on
     the proprietary rights of third parties.

     The Company also relies on unpatented trade secrets, proprietary know-how
     and continuing technological innovation which it seeks to protect by, in
     part, confidentiality agreements with its employees, consultants, 
     investigators and others. There can be no assurance that these agreements 
     will not be breached, that the Company would have an adequate remedy for 
     any breach or that the Company's trade secrets or know-how will not
     otherwise become known or independently discovered by third parties.

     OTHER

     The Company is periodically a defendant in other legal actions incidental
     to its business activities.  While any litigation has an element of 
     uncertainty, the Company believes that the outcome of any of these actions
     or all of them combined will not have a materially adverse effect on its
     financial condition or results of operations.



                                       42

<PAGE>

6.   STOCKHOLDERS' EQUITY

     Mallinckrodt has certain registration rights with respect to the 
     Common Stock issued and issuable to them.

     In April 1998, the Company entered into a Common Stock Purchase 
     Agreement with Chugai.  Under this agreement, the Company sold to Chugai 
     691,883 shares of common stock for $12.00 per share which represented a 
     40% premium over the then-prevailing market price for a total equity 
     investment of $8.3 million. These shares are subject to certain 
     covenants and restrictions, including "standstill" rights of the 
     Company, a market stand-off provision and restrictions on 
     transferability.

     COMMON SHARES RESERVED   

     Common shares were reserved for the following purposes (in thousands):

<TABLE>
<CAPTION>

                                                                 MARCH 31,
                                                          ----------------------
                                                             1997         1998
          <S>                                               <C>          <C>
          Options granted                                   2,685        3,139
          Future grants of options                            994          488
                                                            -----        -----
                                                            3,679        3,627
                                                            -----        -----
                                                            -----        -----
</TABLE>

     STOCK OPTIONS-

     In fiscal 1998, the Board of Directors and the shareholders of the 
     Company approved the 1997 Directors' Option Plan and authorized the 
     issuance of options for 300,000 shares pursuant to the plan.  The Plan 
     provides for the grant of both qualified incentive stock options and 
     nonstatutory stock options to purchase Common Stock to non-employee 
     directors of the Company at no less than the fair value of the stock on 
     the date of grant.  Options granted under these plans are exercisable 
     per the terms specified in each individual option, but not before one 
     year (unless the option exercisability is accelerated by the Company's 
     Board of Directors), or later than ten years from the date of grant.
     

     1993 PLANS

     In 1993 both the Board of Directors and the shareholders of the Company 
     approved the 1993 Stock Option Plan and the 1993 Outside Directors Stock 
     Option Plan (together, the 1993 Plans).  The 1993 Plans were intended to 
     replace the Company's 1984 Incentive Stock Option Plan and the 1984 
     Nonstatutory Stock Option Plan (together, the 1984 Plan), under which 
     all of the options authorized to be granted have been granted.  The 1993 
     Plans provide for the grant of both qualified incentive stock options 
     and nonstatutory stock options to purchase Common Stock to employees 
     (1993 Stock Option Plan) or non-employee directors of the Company (1993 
     Outside Directors Stock Option Plan) at no less than the fair value of 
     the stock on the date of grant.  Options granted under these plans are 
     exercisable per the terms specified in each individual option, but not 
     before one year (unless the option exercisability is accelerated by the 
     Company's Board of Directors), or later than ten years from the date of 
     grant. 

     During fiscal 1997, the shareholders approved the Company's Board of 
     Directors recommendation to amend the Company's 1993 Stock Option Plan 
     to increase the maximum number of shares from 2,500,000 shares to 
     3,250,000 shares.

     1984 PLAN

     The Company had an Incentive Stock Option Plan and Nonstatutory Stock 
     Option Plan (together, the 1984 Plan) which provided for the grant of 
     options to purchase Common Stock to employees or non-employee directors 
     of the Company at no less than the fair value of the stock on the date 
     of grant.  Options granted under the 1984 Plan were exercisable per the 
     terms specified in each individual option, but not before one year 
     (unless the option exercisability was accelerated by the Company's Board 
     of Directors) or later than five years from the date of grant.  The 1984 
     Plan expired in July 1994 and there are no shares reserved for future 
     grants.


                                       43
<PAGE>


     On May 11, 1995, the Board of Directors voted to offer the Company's 
     non-executive employees the opportunity to reprice certain stock options 
     which were originally granted under the 1984 Plan to the closing price 
     on May 31, 1995. The Board approved this repricing because it believed 
     retaining key employees was in the best interests of the stockholders 
     and the Company. During the fourth quarter of fiscal 1995, following a 
     decline in the stock price and a restructuring which included a 
     twenty-five percent staff reduction, key employees were being contacted 
     by other companies and agencies about employment opportunities 
     elsewhere. The Board believed the repricing of the options was the most 
     effective employment retention tool available.

     OTHER OPTION GRANTS-

     The Company has granted to employees, consultants and scientific 
     advisors options to purchase shares of common stock.  These options are 
     exercisable per the terms specified in each individual option and lapse 
     pursuant to the terms in the applicable plan.  The options were granted 
     at amounts per share which were not less than the fair market value at 
     the date of grant. 

     Additional information with respect to the Company's option plans is as 
     follows:

<TABLE>
<CAPTION>

                                            EMPLOYEE'S OPTION PLANS                         DIRECTORS' OPTION PLANS
                                          ------------------------------------         -------------------------------------
                                                              OPTION PRICE                                  OPTION PRICE
                                             SHARES            PER SHARE                SHARES                PER SHARE
                                           ----------     --------------------         --------        ----------------------
     <S>                                   <C>            <C>         <C>              <C>             <C>           <C>
     Options Outstanding at Mar 31, 1995   2,072,479      $  7.00  -  $  31.13           40,000        $  8.13  -    $  17.00
     Granted                                 723,602         6.00  -      8.63           20,000           8.63
     Exercised                                (5,450)        6.38  -      7.38                -
     Expired or lapsed                      (622,676)        6.38  -     28.75                -
                                           ---------      -------     --------          -------        -------       --------
     Options Outstanding at Mar 31, 1996   2,167,955         6.00  -     31.13           60,000           8.13  -       17.00
     Granted                                 914,375         6.50  -     11.13           15,000           6.88
     Exercised                              (295,500)        6.00  -     10.63                -
     Expired or lapsed                      (176,760)        6.00  -     31.13                -
                                           ---------      -------     --------          -------        -------       --------
     Options Outstanding at Mar 31, 1997   2,610,070         6.00  -     22.25           75,000           6.88  -       17.00
                                           ---------      -------     --------          -------        -------       --------
     Granted                                 724,100         6.63        10.38           78,000           9.13           9.25
     Exercised                              (100,340)        6.00         8.63                -
     Expired or lapsed                      (248,250)        6.25        22.25                -
                                           ---------      -------     --------          -------        -------       --------
     Options Outstanding at Mar 31, 1998   2,985,580         6.00  -     22.25          153,000           6.88          17.00
                                           ---------      -------     --------          -------        -------       --------
     Options exercisable at Mar 31, 1998   1,542,605                                    114,000
                                           ---------                                    -------
     Reserved for future grants at 
       Mar 31, 1998                          266,280                                    222,000
                                           ---------                                    -------
</TABLE>


     The following table summarizes information about fixed stock options
     outstanding at March 31, 1998:

<TABLE>
<CAPTION>

                                  OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                         -----------------------------------------   ---------------------------
                                         Weighted-Avg    Weighted-                     Weighted-
                           Number         Remaining       Average      Number           Average
        Range of         Outstanding     Contractual     Exercise    Exercisable       Exercise
    Exercise Prices      at 3/31/98      Life (years)      Price     at 3/31/98          Price
    ---------------      -----------     ------------   ---------    -----------      -----------
     <S>                 <C>              <C>           <C>          <C>              <C>
     6.00 - 7.4375        1,259,067           8.34         7.0954      481,192           6.8427
     7.50 - 10.625        1,000,863           8.24         8.3310      524,963           8.1261
     10.75 - 22.25          878,650           6.85        14.7428      650,450          16.0119
                          ---------        --------      --------    ---------          -------
     6.00 - 22.25         3,138,580           7.88         9.6342    1,656,605          10.8496

</TABLE>

     As permitted, the Company has adopted the disclosure only provisions of 
     SFAS 123 effective April 1, 1996.  Accordingly, no compensation expense 
     has been recognized for the stock option plans.  Had compensation cost 
     for the Company's 1998 grants for stock-based compensation plans been 
     determined consistent with SFAS 123, the Company's net loss, net loss 
     applicable to common share owners, and net 


                                       44
<PAGE>

     loss per common share for March 31, 1996, 1997 and 1998 would approximate
     the pro forma amounts below (in thousands, except per share amounts).

<TABLE>
<CAPTION>
                                                 Fiscal  Years Ended, March 31,
                                             -------------------------------------
                                                 1996         1997          1998
     <S>                                     <C>            <C>          <C>
     Net income (loss) - as reported         $(20,173)      $(13,284)    $(21,260)
     Net income (loss) - pro forma           $(21,274)      $(14,559)    $(23,877)
     Earning per share (loss) - as reported    $(1.62)        $(0.78)      $(1.19)
     Earning per share (loss) - pro forma      $(1.67)        $(0.86)      $(1.34)
        
</TABLE>

     Because the SFAS 123 method of accounting has not been applied to 
     options granted prior to April 1, 1995, the resulting pro forma 
     compensation cost may not be representative of that to be expected in 
     future years.  The fair value of each option grant was estimated on the 
     date of grant using the Black Scholes option-pricing model with the 
     following weighted average assumptions used for grants in fiscal year 
     1998: risk free rate of 5.39%, expected option life of 4 years, expected 
     volatility of 58% and a dividend rate of zero.   The weighted average 
     fair value of options granted from the Employee stock option plans 
     during fiscal 1996, 1997 and 1998 was $6.93, $9.29 and $7.85, 
     respectively.  The weighted average fair value of options granted from 
     the Outside Director stock option plan during fiscal 1996, 1997 and 1998 
     was $8.63, $6.88 and $9.19, respectively. 
          

      NOTES RECEIVABLE FROM SALE OF COMMON STOCK-

      During fiscal year 1997, the Company repurchased 21,500 shares of 
     Common Stock and forgave notes receivable from related parties of 
     approximately $390,000 relating to the exercise of options to purchase 
     common stock of the Company by officers and other employees. Of this 
     amount, approximately $109,000 was included in accounts and notes 
     receivable and represents taxes payable by the individuals at the time 
     of these option exercises plus accrued interest thereon, as well as 
     accrued interest on purchase price notes.  The amounts relating to the 
     purchase price of the common stock are recorded as a reduction to 
     stockholders' equity.

     During fiscal year 1996, the Company repurchased 15,000 shares of Common 
     Stock in a similar transaction whereby the Company forgave notes 
     receivable of $244,000.  Of this amount, approximately  $56,000 was 
     included in accounts receivable that related to taxes payable by the 
     individuals at the time of the option exercise date, accrued interest 
     thereon, and accrued interest on the notes receivable.
     

7.    SIGNIFICANT RESEARCH CONTRACTS

     The Company conducts all of its research and development activities on 
     its own behalf.  Under the terms of its collaborative research 
     agreements, the Company retains all ownership rights to its proprietary 
     technologies, subject to licensing arrangements made with its licensees.

     In December 1987, December 1988 and March 1989, the Company entered into 
     respective agreements (the Original Agreements) with Nycomed A.S. 
     (Nycomed), a Norwegian corporation, Mallinckrodt, Inc. (Mallinckrodt), 
     of St. Louis, Missouri and Shionogi & Co., Ltd. (Shionogi), a Japanese 
     corporation, under which the Company granted exclusive licenses, 
     restricted to certain geographic areas, to test, evaluate, develop and 
     sell products covered by specified patents of the Company relating 
     directly to the design, manufacture or use of microspheres for 
     ultrasound imaging in vascular applications. The Company also granted 
     rights to sublicense, use, make and sell the licensed products under 
     specified royalty arrangements.

     Under the terms of the Original Agreements, as amended, the Company 
     earned and received license fees of $6.5 million.  The Original 
     Agreements also provide for total payments to the Company aggregating up 
     to $66.5 million, to continue product development, clinical trials, 
     preproduction and premarketing activities relating to the Company's 
     ultrasound imaging contrast agents for vascular applications. These


                                       45
<PAGE>

     amounts are to be received in installments based on the 
     achievement of certain milestones by the Company. 

     In September 1995, the Company entered into an Amended and Restated 
     Distribution Agreement ("ARDA"), as well as a related investment 
     agreement, with Mallinckrodt. Under ARDA, the geographical scope of 
     Mallinckrodt's exclusive right was expanded to include all of the 
     countries of the world other than those covered by the Company's license 
     agreements with Shionogi and Nycomed. Additionally, the duration of 
     Mallinckrodt's exclusive right was also extended from October 1999 until 
     the later of July 1, 2003 or three years after the date that the Company 
     obtains approval from the United States Food and Drug Administration 
     ("FDA") to market OPTISON for an intravenous myocardial perfusion 
     indication.

     The agreement provides the Company with between $33.0 million and $42.5 
     million in financing (including the $13.0 million common stock 
     investment discussed below).  Under the terms of the agreement, 
     Mallinckrodt must make guaranteed payments to the Company totaling $20.0 
     million over four years to support clinical trials, related regulatory 
     submissions and associated product development of the licensed products, 
     which include but are not limited to ALBUNEX and OPTISON.  These 
     payments will be made in 16 quarterly installments of $1.0 million for 
     the first four quarters, $1.25 million for the following eight quarters 
     and $1.5 million for the final four quarters.  The payments may be 
     accelerated in the event that the Company's cumulative outlays for 
     clinical trials are in excess of the amounts received at any point in 
     time.  However, the quarterly payments may not be postponed.  As of 
     March 31, 1998 the first ten quarterly payments had been received by the 
     Company.

     ARDA requires the Company to spend at least $10.0 million of the $20.0 
     million it receives over four years on clinical trials to support 
     regulatory filings with the FDA for cardiac indications of the licensed 
     products.  The Company's expenditure of this $10.0 million will be made 
     in accordance with the directions of a joint steering committee which 
     the Company and Mallinckrodt established in order to expedite the 
     development and regulatory approval of OPTISON by enabling the parties 
     to share their expertise relating to clinical trials and the regulatory 
     approval process.  The Company and Mallinckrodt have each appointed 
     three of the six members of the joint steering committee.

     In connection with ARDA, the Company also entered into an investment 
     agreement whereby the Company sold 1,118,761 unregistered shares of its 
     common stock to Mallinckrodt for $13.0 million, or a price of $11.62 per 
     share before related costs.  Combined with the 181,818 shares of the 
     Company's common stock that Mallinckrodt acquired in December 1988, 
     Mallinckrodt currently owns approximately 7.3% of the Company's issued 
     and outstanding shares.

     In addition, ARDA grants the Company the option (at its own discretion) 
     to repurchase all of the shares of the Company's common stock that 
     Mallinckrodt purchased under the investment agreement for $45.0 million, 
     subject to various price adjustments.  This option is exercisable 
     beginning the later of July 1, 2000 or the date that the Company obtains 
     approval from the FDA to market OPTISON for an intravenous myocardial 
     perfusion indication and ending on the later of June 30, 2003 or three 
     years after the date that the Company obtains approval from the FDA to 
     market OPTISON for an intravenous myocardial perfusion. If the Company 
     exercises this option, the Company may co-market ALBUNEX, OPTISON and 
     related products in all of the countries covered by the amended 
     distribution agreement.

     In December 1996, the Company and Mallinckrodt amended ARDA to expand 
     the geographical scope of Mallinckrodt's exclusive marketing and 
     distribution rights for ALBUNEX, OPTISON and related products. The 
     amendment extended Mallinckrodt's exclusive territory to include the 
     territory that the Company had formerly licensed to Nycomed consisting 
     of Europe, Africa, India and parts of Asia. Under the amendment to ARDA, 
     Mallinckrodt agreed to pay fees up to $12.9 million plus 40 percent of 
     product sales to cover royalties and manufacturing. Mallinckrodt made an 
     initial payment of $7.1 million, consisting of reimbursement to the 
     Company of $2.7 million that the Company paid to Nycomed to reacquire 
     the exclusive product rights in Nycomed's territory, payment of $3 
     million to the Company under the terms of ARDA upon the extension of 
     Mallinckrodt's exclusive rights to Nycomed's former territory, and 
     payment of $1.4 million to Nycomed in satisfaction of the Company's 
     obligation to pay 45 percent of any amounts that the Company receives in 
     excess of $2.7 million upon the licensing of the former Nycomed 
     territory to a third party.  Of the remaining $5.8 million that may be 
     paid, Mallinckrodt will pay $4 million to the Company (upon the 
     achievement of the specified product development milestone) and $1.8 
     million to Nycomed (representing 45% of the $4 million payment to the 
     Company). 


                                       46
<PAGE>

     There can be no assurance, however, that this milestone will be 
     satisfied.  The Company has included all costs related to the 
     reacquisition of its license rights from Nycomed in other nonrecurring 
     charges in the financial statements.  Of these costs, approximately $1 
     million was paid in fiscal 1996 and the remainder was paid in fiscal 
     1997.

     Mallinckrodt is the Company's principal strategic marketing partner for 
     its ALBUNEX and OPTISON ultrasound contrast agents.  Under the Company's 
     arrangements with Mallinckrodt, Mallinckrodt has substantial control 
     over all aspects of marketing the Company's product in its territories.

     In October 1995, the Company entered into an agreement whereby it 
     reacquired all rights to INFOSON (the European designation for ALBUNEX), 
     OPTISON and related products from Nycomed, the Company's European 
     licensee.  The Company agreed to pay Nycomed $2.7 million and 45% of any 
     amounts in excess of $2.7 million that the Company receives in payment 
     for the transfer of marketing rights in the former Nycomed territory to 
     a third party.  The Company also agreed to pay Nycomed a royalty based 
     on future sales, as defined in the agreement.  As stated above, the 
     license rights were resold to Mallinckrodt for amounts stipulated in the 
     amendment to ARDA.

     In September 1996, the Company entered into an agreement with Shionogi 
     pursuant to which the Company reacquired all rights to manufacture, 
     market and sell its ALBUNEX family of products in the territory 
     consisting of Japan, Taiwan and South Korea, formerly exclusively 
     licensed to Shionogi.  This agreement settled an outstanding dispute 
     between the two companies concerning the license and distribution 
     agreement for ALBUNEX and resulted in the dismissal of all claims raised 
     by the companies against each other.  Under the agreement the Company 
     paid $3 million to Shionogi and will pay an additional $5.5 million over 
     the next three years.

     In April 1998, the Company and Chugai entered into a strategic alliance 
     to develop and commercialize OPTISON (which may be marketed under a 
     different name) and ORALEX in Japan, Taiwan and South Korea.  In 
     exchange for granting to Chugai a royalty-based license to market these 
     products in the named countries, MBI received an upfront license fee 
     from Chugai of $14 million.  In addition, Chugai made an equity 
     investment in the Company's common stock. The Company is eligible to 
     receive milestone payments of up to $20 million based on the achievement 
     of certain product development goals and will receive royalties from 
     Chugai from the sale of commercialized products in the territory.

     During the years ended March 31, 1996, 1997 and 1998, the Company 
     received contract research payments and earned revenue under the above 
     agreements as follows (in thousands):

     <TABLE>
     <CAPTION>

                                                FISCAL YEARS ENDED MARCH 31,
                                           -------------------------------------
                                             1996         1997        1998
     <S>                                  <C>            <C>          <C>
     Contract payments received:
          Chugai                          $     -       $       -     $  1,575
          US Government                         -               -           95
          Mallinckrodt                       6,257         10,200        5,000
                                          --------       --------     --------
          Total                           $  6,257       $ 10,200     $  6,670
                                          --------       --------     --------
                                          --------       --------     --------
     Contract payments earned:
          Chugai                          $      -       $      -     $      -
          US Government                          -              -           95
          Mallinckrodt                       2,412         10,200        5,000
                                          --------       --------     --------
          Total                           $  2,412      $  10,200     $  5,095
                                          --------       --------     --------
                                          --------       --------     --------

</TABLE>

8.  OTHER NONRECURRING CHARGES

    Other nonrecurring charges include the following for the years
    presented:

<TABLE>
<CAPTION>

                                                FISCAL YEARS ENDED MARCH 31,
                                             ----------------------------------
                                              1996           1997         1998
<S>                                          <C>           <C>           <C>


                                        47

<PAGE>

     Write-off of license rights of former 
     Nycomed territory (Note 7)                $    -       $3,000         $  -
     Write-off of license fees related to 
     discontinued products                      1,025            -            -
     Legal settlements and related costs 
     (Note 5)                                   1,418            -            -
     Loss on sale of real estate                  667            -            -
                                              -------       ------         -----
                                              $ 3,110       $3,000         $  -
                                              -------       ------         -----
                                              -------       ------         -----
</TABLE>

     In September 1996, the Company entered into an agreement with Nycomed for 
     the repurchase of the rights to manufacture, market and sell its ALBUNEX 
     family of products in the territory formerly exclusively licensed to 
     Nycomed (see note 7).  As a result, during fiscal year 1997 the Company 
     wrote off the license rights of the former Nycomed territory in the 
     amount of $3 million.

     The Company recorded one-time charges in fiscal year 1996 related to the 
     conclusion of arbitration with Bracco S.p.A., the write off of license 
     fees associated with discontinued products and a write down to the sale 
     price of two buildings that were subsequently sold in March 1996.

9.   SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION

     The following is a summary of the unaudited quarterly results of operations
     for the years ended March 31, 1998 and 1997 (in thousands, except per share
     amounts):
     
<TABLE>
<CAPTION>

     QUARTER ENDED:                         JUN 30         SEP 30       DEC 31           MAR 31
     --------------                       ---------      --------    ----------        ---------
     <S>                                  <C>            <C>          <C>              <C>
     Fiscal 1998
     Revenues                             $  1,474       $  1,426     $  1,373         $  1,973
     Research and Development Costs          2,185          2,680        2,939            3,274
     Total Operating Costs and Expenses      6,736          6,401        7,517            8,127
     Net Loss                               (4,799)        (4,621)      (5,903)          (5,937)
     Loss Per Common Share                   (0.27)         (0.26)       (0.33)           (0.33)
     Weighted Average Common Shares 
        Outstanding                         17,752         17,768       17,813           17,838
     
     QUARTER ENDED:                         JUN 30         SEP 30       DEC 31           MAR 31
                                           -------         ------       ------          -------
     Fiscal 1997
     Revenues                             $  1,178       $  1,216     $  7,007         $  1,450
     Research and Development Costs          2,636          2,328        2,354            2,584
     Total Operating Costs and Expenses      5,691          5,465        8,298            6,248
     Net Loss                               (4,384)        (3,693)        (879)          (4,328)
     Loss Per Common Share                    (.30)          (.21)        (.05)            (.24)
     Weighted Average Common Shares 
        Outstanding                         14,787         17,560       17,572           17,711

</TABLE>

10.  SUBSEQUENT EVENTS

     In April 1998, the Company and Chugai entered into a strategic alliance 
     to develop and commercialize OPTISON (which may be marketed under a 
     different name) and ORALEX in Japan, Taiwan and South Korea.  In 
     exchange for granting to Chugai a royalty-based license to market these 
     products in the named countries, MBI received an upfront license fee 
     from Chugai of $14 million. Additionally, Chugai purchased 691,883 
     shares of the Company's common stock at a premium of 40% over the 
     then-prevailing market price.  The equity investment was valued at $8.3 
     million.  The Company is eligible to receive milestone payments of up to 
     $20 million based on the achievement of certain product development 
     goals and will receive royalties from Chugai from the sale of 
     commercialized products in the territory.

                                       48

<PAGE>

      
     On May 18, 1998, OPTISON, the Company's second-generation contrast agent 
     for cardiac ultrasound imaging, received final marketing authorization 
     by the European Agency for the Evaluation of Medicinal Products for use 
     in patients with suspected or known cardiovascular disease.  The 
     authorization covers all 15 member states of the European Union.


                                       49
<PAGE>

                                      PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information concerning directors is incorporated in this report by
reference to the information contained under the caption "Election of Directors"
in the Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders to be held on August 13, 1998 ("1998 Proxy Statement"). 
Information concerning executive officers is included in Part I of this report. 


ITEM 11.  EXECUTIVE COMPENSATION

     Information concerning executive compensation is incorporated in this
report by reference to the information contained under the caption "Executive
Compensation" in the Company's 1998 Proxy Statement.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information concerning security ownership is incorporated in this report by
reference to the information contained under the caption "Stock Ownership" in
the Company's 1998 Proxy Statement.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information concerning certain relationships and related transactions is
incorporated in this report by reference to the information contained under the
caption "Certain Relationships and Related Transactions" in the Company's 1998
Proxy Statement.

                                      50

<PAGE>

                                     PART IV

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

(a) (1)     FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

    (2)     The financial statements and financial statement schedules
            filed as a part of this Report are listed in the "Index to
            Consolidated Financial Statements and Schedules" on page 29.
          
    (3)     Exhibits -Exhibits marked with an asterisk are filed with
            this Report;  all other Exhibits are incorporated by
            reference.  Exhibits marked with a dagger are management
            contracts or compensatory plans or arrangements.              

     3.1    Certificate of Incorporation of the Company, as amended to
            date (by amendments filed March 4, 1981, March 30, 1982,
            March 14, 1983, April 18, 1983, and November 20, 1987). 
            (Incorporated by reference from Exhibit 3.1 to the Company's
            Annual Report on Form 10-K for the fiscal year ended March
            31, 1988.)
     
     3.2*   Certificate of Amendment to Certificate of Incorporation of
            Molecular Biosystems, Inc. dated August 20, 1996.
     
     3.3    Certificate of Incorporation of Syngene, Inc. as amended
            September 20, and December 31, 1989.  (Incorporated by
            reference from Exhibit 3.2 to the Company's Annual Report of
            Form 10-K for the fiscal year ended March 31, 1990.)
                    
     3.4    By-Laws of the Company, as amended and restated September
            18, 1990.  (Incorporated by reference from Exhibit 3.3 to
            the Company's Annual Report on Form 10-K for the fiscal year
            ended March 31, 1991).
     
     3.5    First Amendment, dated August 20, 1992 to the By-Laws of the
            Company, as amended and restated September 18, 1990.  
            (Incorporated by reference from Exhibit 3.4 to the Company's
            Annual Report on Form 10-K for the fiscal year ended March
            31, 1994.)

     3.6    By-Laws of Syngene, Inc. (Incorporated by reference from
            Exhibit 3.4 to the Company's Annual Report on form 10-K for
            the fiscal year ended March 31, 1990.)
     
    10.1    Restated License Agreement dated June 1, 1989 between the
            Company and Steven B. Feinstein, M.D., and related Research
            and Supply Agreement dated June 1, 1989.  (Incorporated by
            reference from Exhibits 10.1 and 10.2 to the Company's
            Current Report on Form 8-K filed on June 9, 1989.)

    10.2    Amendment to Research Support and Supply Agreement dated
            December 15, 1992 between the Company and Steven B.
            Feinstein, M.D. (Incorporated by reference from Exhibit 10.2
            to the Company's Annual Report on Form 10-K for the fiscal
            year ended March 31, 1993.)
          
    10.3    License and Cooperative Development Agreement dated December
            31, 1987 between the Company and Nycomed AS ("Nycomed"), and
            related Investment Agreement dated December 31, 1987,
            Registration Agreement dated December

                                      51

<PAGE>

            31, 1987 and Common Stock Purchase Warrant dated January 19, 1988.
            (Incorporated by reference from Exhibit 10.8 to the
            Company's Annual Report on Form 10-K for the fiscal year
            ended March 31, 1988.)
          
    10.4    Amendment to License and Cooperative Development Agreement
            dated June 15, 1989 between the Company and Nycomed. 
            (Incorporated by reference from Exhibit 10.8 to the
            Company's Annual Report on Form 10-K for the fiscal year
            ended March 31, 1989.)
               
    10.5    Amendment No. 3 to License and Cooperative Development Agreement
            dated October 24, 1995 between the Company and Nycomed
            Imaging AS. (Incorporated by reference from Exhibit 10.3 to
            the Company's Quarterly Report on Form 10-Q/A for the
            quarterly period ended December 31, 1995.)
     
    10.6    Amended and Restated Distribution Agreement dated September 7,
            1995 between the Company and Mallinckrodt Medical, Inc.
            (Incorporated by reference from Exhibit 10.1 to the
            Company's Quarterly Report on Form 10-Q for the quarterly
            period ended December 31, 1995.)
     
    10.7    Amendment to Amended and Restated Distribution Agreement
            dated November 4, 1996 between the Company and Mallinckrodt
            Medical, Inc. (Incorporated by reference from Exhibit 10.7
            to the Company's Annual Report on Form 10-K for the fiscal
            year ended March 31, 1997.)
     
    10.8    Investment Agreement dated December 7, 1988 between the
            Company and Mallinckrodt Medical, Inc.(Incorporated by
            reference from Exhibit 10.9 to the Company's Annual Report
            on form 10-K for the fiscal year ended March 31, 1989.)
     
    10.9    Investment Agreement dated September 7, 1995 between
            the Company and Mallinckrodt Medical, Inc. (Incorporated by
            reference from Exhibit 10.2 to the Company's Quarterly
            Report on Form 10-Q/A for the quarterly period ended
            December 31, 1995.)
     
    10.10   Cooperative Development and Marketing Agreement
            effective March 31, 1998 between the Company and Chugai
            Pharmaceutical Co., Ltd. (Incorporated by reference from
            Exhibit 2.1 to the Company's Current Report on Form 8-K
            dated April 7, 1998)
     
    10.11   Common Stock Purchase Agreement effective March 31,
            1998 between the Company and Chugai Pharmaceutical Co., Ltd.
            (Incorporated by reference from Exhibit 2.2 to the Company's
            Current Report on Form 8-K dated April 7, 1998)
     
    10.12   Letter Agreement dated February 18, 1991 between the
            Company and Schering Aktiengesellschaft.  (Incorporated by
            reference from Exhibit 10.9 to the Company's Annual Report
            of Form 10-K for the fiscal year ended March 31, 1991.)
          
    10.13   Settlement Agreement and Mutual Release dated September 10, 1996
            between the Company and Shionogi & Co., Ltd. (Incorporated by
            reference from Exhibit 10.11 to the Company's Annual Report
            of Form 10-K for the fiscal year ended March 31, 1997.)
     
    10.14   Exclusive License Agreement dated April 1, 1992 between
            the Company and The Regents of the University of California. 
            (Incorporated by reference from Exhibit

                                      52

<PAGE>

            10.30 to the Company's Annual Report on Form 10-K for the fiscal
            year ended March 31, 1992.)
     
    10.15   License Agreement dated August 23, 1991 between the Johns Hopkins
            University, Towson State University and the Company.  (Incorporated 
            by reference from Exhibit 10.31 to the Company's Annual Report on
            Form 10-K for the fiscal year ended March 31, 1992.)
     
    10.16   License Agreement dated November 11, 1991 between the Company and 
            the Regents of the University of Michigan. (Incorporated by
            reference from Exhibit 10.32 to the Company's Annual Report on Form 
            10-K for the fiscal year ended March 31, 1992.)
     
    10.17   Exclusive License Agreement dated July 31, 1990 between the Company
            and the Regents of the University of California, and Amendment 
            Agreement dated April 1, 1992.  (Incorporated  by reference from
            Exhibit 10.33 to the Company's Annual Report on Form 10-K for the 
            fiscal year ended March 31, 1992.) 

    10.18   License Option Agreement dated January 29, 1993 between the Company 
            and Abbott Laboratories. (Incorporated by reference from Exhibit
            10.1 to the Company's Current Report on Form 8-K dated January 29,
            1993.)
               
    10.19+  Molecular Biosystems, Inc. Pre-1984 Nonstatutory Stock Option Plan. 
            (Incorporated by reference from Exhibit 10.11 to the Company's 
            Annual Report on Form 10-K for the fiscal year ended March 31, 
            1989.)
     
    10.20+  Molecular Biosystems, Inc. 1984 Incentive Stock Option Plan and 1984
            Nonstatutory Stock Option Plan, as amended by First and Second
            Amendments. (Incorporated by reference from Exhibit 10.15 to the 
            Company's Annual Report on Form 10-K for the fiscal year ended 
            March 31, 1988.)
     
    10.21+  Third and Fourth Amendments to Molecular Biosystems, Inc. 1984 
            Incentive Stock Option Plan and 1984 Nonstatutory Stock Option Plan.
            (Incorporated by reference from Exhibit 10.13 to the Company's 
            Annual Report on Form 10-K for the fiscal year ended March 31, 
            1989.)
          
    10.22+  Fifth Amendment to Molecular Biosystems, Inc. 1984 Incentive Stock 
            Option Plan and 1984 Nonstatutory Stock Option Plan. (Incorporated 
            by reference from Exhibit 10.15 to the Company's Annual Report on 
            Form 10-K for the fiscal year ended March 31, 1990.)
                    
    10.23+  Sixth and Seventh Amendments to Molecular Biosystems, Inc. 1984 
            Incentive Stock Option Plan and 1984 Nonstatutory Stock Option Plan.
            (Incorporated by reference from Exhibit 10.15 to the Company's 
            Annual Report on Form 10-K for the fiscal year ended March 31, 
            1991.)
     
    10.24+  Eighth and Ninth Amendments to Molecular Biosystems, Inc. 1984
            Incentive Stock Option Plan and 1984 Nonstatutory Stock Option Plan.
            (Incorporated by reference from Exhibit 10.25 to the Company's 
            Annual Report on Form 10-K for the fiscal year ended March 31, 
            1993.)
     
    10.25+  Form of Stock Option Agreement used with the Company's 1984 
            Incentive Stock Option Plan and 1984 Nonstatutory Stock Option Plan.
            (Incorporated by reference from Exhibit 10.16 to the Company's
            Annual Report on Form 10-K for the fiscal year ended March 31, 
            1988.)
     
                                      53

<PAGE>

    10.26+  Molecular Biosystems, Inc. 1993 Stock Option Plan.  (Incorporated by
            reference from Exhibit 4.2 to the Company's Registration Statement 
            No. 33-78572 on Form S-8, dated May 3, 1994, filed on May 5, 1994.)
     
    10.27+  Form of Stock Option Agreement used with the Company's 1993 Stock 
            Option Plan. (Incorporated by reference from Exhibit 10.33 to the 
            Company's Annual Report on Form 10-K for the fiscal year ended 
            March 31, 1994.)
          
    10.28+  Molecular Biosystems, Inc. 1993 Outside Directors Stock Option Plan.
            (Incorporated by reference from Exhibit 4.2 to the Company's 
            Registration Statement No. 33-78564 on Form S-8, dated May 3, 
            1994, filed on May 5, 1994.)
     
    10.29+  Form of Stock Option Agreement used with the Company's 1993 Outside
            Directors Stock Option Plan. (Incorporated by reference from Exhibit
            10.35 to the Company's Annual Report on Form 10-K for the fiscal
            year ended March 31, 1994.)
          
    10.30   First Amendment to the Molecular Biosystems, Inc. 1993 Stock Option
            Plan (Incorporated by reference from Exhibit 4.1 to the Company's 
            Registration Statement on Form S-8 filed on September 15, 1997 
            (Registration No. 333-35633.)  

    10.31   Molecular Biosystems, Inc. 1997 Outside Directors Stock Option Plan
            (Incorporated by reference from Exhibit 4.1 to the Company's 
            Registration Statement on Form S-8 filed on September 15, 1997 
            (Registration No. 333-35631.) 
          
    10.32+* Second Amendment to 1993 Stock Option Plan
     
    10.33+* Third Amendment to 1993 Stock Option Plan
     
    10.34+  Employment Agreement dated April 25, 1995 between the Company and 
            Kenneth J. Widder, M. D. (Incorporated by reference from Exhibit
            10.30 to the Company's Annual Report on Form 10-K for the fiscal 
            year ended March 31, 1995.) 

    10.35+  Employment Agreement dated November 1, 1995 between the Company and
            Bobba Venkatadri. (Incorporated by reference from Exhibit 10.41 to 
            the Company's Annual Report on Form 10-K for the fiscal year ended 
            March 31, 1996.)
     
    10.36+  First Amendment to Employment Agreement dated April 30, 1996 
            between the Company and Bobba Venkatadri. (Incorporated by reference
            from Exhibit 10.34 to the Company's Annual Report of Form 10-K for
            the fiscal year ended March 31, 1997.)

    10.37   Partnership Agreement dated October 18, 1996 between the Company 
            and Bobba and Annapurna Venkatadri.  (Incorporated by reference 
            from Exhibit 10.36 to the Company's Annual Report on Form 10-K for
            the fiscal year ended March 31, 1997).
     
    10.38+* Employment Agreement dated as of September 1, 1997 between the 
            Company and Gerard A. Wills.
     
                                      54

<PAGE>


    10.39+* Employment Agreement dated as of September 1, 1997 between the
            Company and William I. Ramage.
     
    10.40+* Employment Agreement dated as of December 1, 1997 between the 
            Company and Thomas Jurgensen.
     
    10.41+* Employment Agreement dated as of September 1, 1997 between the
            Company and Joni Harvey. 
     
    10.42+* Employment Agreement dated as of September 1, 1997 between the 
            Company and Howard Dittrich. 
          
    10.43+* Separation Agreement effective May 30, 1997 between the Company 
            and Allan Mizoguchi, Ph.D. 

    10.44+* Separation Agreement effective May 30, 1997 between the Company and
            James Barnhart, Ph.D. 

    10.45   Triple Net Lease dated June 19, 1995 between the Company and 
            Radnor/Collins/Sorrento Partnership. (Incorporated by reference from
            Exhibit 10.43 to the Company's Annual Report on Form 10-K for the 
            fiscal year ended March 31, 1995.)
     
    10.46*  First Amendment to Sublease dated February 27, 1998 between the 
            Company and Dura Pharmaceuticals, Inc.
     
    10.47*  Sublease dated October 1, 1997 between the Company and Dura 
            Pharmaceuticals, Inc. 

    10.48*  Equipment Lease Agreement dated June 30, 1997 between the Company 
            and Mellon US Leasing.
          
    10.49*  Sublease dated February 16, 1998 between the Company and ComStream
            Corporation.
          
    10.50   Promissory note dated December 31, 1993 between the Company and 
            James L. Barnhart. (Incorporated by reference from Exhibit 10.48 to
            the Company's Annual Report on Form 10-K for the fiscal year ended 
            March 31, 1994.)
     
    10.51   Second Amendment to Promissory note dated June 24, 1996 between the
            Company and James L. Barnhart. (Incorporated by reference from 
            Exhibit 10.52 to the Company's Annual Report on Form 10-K for the 
            fiscal year ended March 31, 1996.) 
     
    10.52   Promissory note dated December 31, 1993 between the Company and 
            John W. Young. (Incorporated by reference from Exhibit 10.49 to the
            Company's Annual Report on Form 10-K for the fiscal year ended 
            March 31, 1994.)

    19      Documents not previously filed are marked with an asterisk (*).
     
    23*     Consent of Arthur Andersen LLP.

(b)    REPORTS ON FORM 8-K

                                      55

<PAGE>


     A Current Report on Form 8-K dated May 18, 1998, was filed on May 22,
     1998, reporting final marketing authorization of OPTISON by the
     European Agency for the Evaluation of Medicinal Products.

     A Current Report on Form 8-K dated April 7,1998, was filed on April
     22, 1998, reporting (1) a Cooperative Development and Marketing
     Agreement effective March 31, 1998 between the Company and Chugai
     Pharmaceutical Co., Ltd., and (2) a Common Stock Purchase Agreement
     effective March 31, 1998 between the Company and Chugai Pharmaceutical
     Co., Ltd.

                                      56

<PAGE>

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on
June 25, 1998.

                              MOLECULAR BIOSYSTEMS, INC.


                                   By: /s/ Kenneth J. Widder, M.D.     
                                       -------------------------------- 
                                           Kenneth J. Widder, M.D.
                                           Chairman of the Board
     
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. 

<TABLE>
<CAPTION>
<S>                                     <C>                                <C>

     SIGNATURE                                TITLE                           DATE

/s/ Kenneth J. Widder, M.D.             Chairman of the Board              June 25, 1998
------------------------------         
    Kenneth J. Widder, M.D.         

/s/ Bobba Venkatadri                    President, Chief Executive         June 25, 1998
------------------------------          Officer
    Bobba Venkatadri                    

/s/ Gerard A. Wills                     Vice President - Finance           June 25, 1998
------------------------------          and Chief Financial Officer
    Gerard A. Wills                     (Principal Financial and
                                        Accounting Officer

/s/ Robert W. Brightfelt                Director                           June 25, 1998
------------------------------         
    Robert W. Brightfelt

/s/ Charles C. Edwards, M.D.            Director                           June 25, 1998
------------------------------         
    Charles C. Edwards, M.D.

/s/ Gordon C. Luce                      Director                           June 25, 1998
------------------------------         
    Gordon C. Luce

/s/ David Rubinfien                     Director                           June 25, 1998
------------------------------         
    David Rubinfien

/s/ David W. Barry, M.D.                Director                           June 25, 1998
------------------------------         
    David W. Barry, M. D.

/s/ Jerry Jackson                       Director                           June 25, 1998
------------------------------         
    Jerry Jackson

</TABLE>

                                      57