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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, 1999

         [  ]     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.)

              10030 Barnes Canyon Road, San Diego, California 92121
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (619) 812-7200

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

     Title of each class              Name of each exchange on which registered
  Common Stock, $.01 par value                 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 $42,706,156 as of June 15, 1999 (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 18,733,745 shares outstanding of the registrant's Common
Stock as of June 15, 1999.

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 1999 Annual Meeting of Stockholders to be held August 27, 1999. Certain
exhibits filed with the registrant's prior registration statements and period
reports under the Securities Exchange Act of 1939 are incorporated herein by
reference into Part IV of this report.

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                                    PART I

ITEM 1.           BUSINESS

    THE TEXT OF THIS FORM 10-K, INCLUDING THIS BUSINESS SECTION, MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING
STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE
RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REPORT EVENTS
ON CIRCUMSTANCES ARISING AFTER THE DATE OF THIS ANNUAL REPORT. IN ADDITION TO
RISKS AND UNCERTAINTIES SPECIFICALLY IDENTIFIED IN THESE SECTIONS, FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THE FAILURE OF OPTISON TO GAIN WIDE MARKET ACCEPTANCE, THE
FAILURE OF OPTISON TO GAIN FDA APPROVAL FOR NEW INDICATIONS, ADVERSE RESULTS
IN THE COMPANY'S ONGOING PATENT LAWSUITS, THE FAILURE OF THE COMPANY AND
MALLINCKRODT TO CONCLUDE THEIR AGREEMENT RELATING TO THE TRANSFER OF OPTISON
MANUFACTURING RESPONSIBILITY TO MALLINCKRODT, AND OTHER FACTORS IDENTIFIED IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION AND PRESS
RELEASES.

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 other 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-Registered Trademark- (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"). OPTISON is the only
advanced generation cardiac ultrasound imaging agent commercially available
in the United States and Europe.

    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 with chest pain, and in various forms of stress
echocardiography. Results using OPTISON in each of these applications suggest
a close agreement with nuclear imaging for the detection of ischemia
("reduced blood supply") 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 63 million
ultrasound imaging procedures are performed in the United States each year,
of which approximately 15 million procedures are 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 beam, 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, which has been marketed in the

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United States since January 1998, have a strong safety profile as
demonstrated in over 80,000 patients with no unexpected adverse events.

    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 viewing the left ventricle, the chamber of the
heart 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
depending 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, octafluoropropane.
Because of their composition, the contrast effect from OPTISON microspheres
lasts up to 5 minutes, as opposed to 35-40 seconds with ALBUNEX microspheres.
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% agreement 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 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 currently conducting 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 1998 imaging agent sales of
approximately $760 million. MBI's relationship with Mallinckrodt began in
1988 with the execution of a distribution agreement for ALBUNEX in 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 $13.0 million equity investment in MBI
and committed $20.0 million to the clinical development of OPTISON and
related projects. MBI has received $3.0 million and may receive up to an
additional $9.5 million upon meeting certain territorial and product
development milestones. 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.

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    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
also 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 ("Radiology") and is responsible for conducting all
clinical trials and securing approvals in the other countries in
Mallinckrodt's territory.

    In April 1999, the Company and Mallinckrodt Inc. agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties agreement will
be incorporated into an amendment to ARDA. In addition to the transfer of
manufacturing, the amended agreement will extend Mallinckrodt's
responsibility for funding clinical trials to include all cardiology, as well
as radiology, clinical trials for OPTISON in the United States. MBI will
continue to conduct all cardiology trials for OPTISON and will assume
responsibility for conducting radiology trials in the United States. Under
the amended agreement, Mallinckrodt will reimburse MBI for all manufacturing
expenses, including incremental costs related to the technology transfer and,
in exchange for the transfer of manufacturing and increased financial support
of clinical trials for OPTISON, MBI will receive a reduced royalty rate on
product sales of OPTISON.

    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 $14.0 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 $20.0 million based on the achievement of certain product
development goals in the 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.

    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, MB-840, 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, make
initial diagnoses, confirm diagnoses based on other information, formulate
treatment plans, and 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.

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    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. According to published
reports, approximately 23 million CT examinations are performed annually 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 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. According to published reports,
more than 5 million abdominal x-rays performed annually 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. According to published
reports, more than 9 million MRI procedures are performed annually in the
United States, approximately 29% of which use a contrast imaging agent.

    NUCLEAR IMAGING. Nuclear imaging requires the injection of radioactive
substances into the body. 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. Nuclear imaging is used primarily to detect
cardiovascular disease, malignancies and soft-tissue tumors and is typically
preceded by a stress echocardiogram exam. Nuclear imaging is also the current
"gold standard" used to detect myocardial perfusion. According to published
reports, nearly 13 million nuclear imaging procedures are performed annually
in the United States, approximately 5 million of which are cardiac perfusion
studies.

    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. According to published reports, approximately 1.3 million
interventional angiographic examinations and approximately 3 million cardiac
catheterization procedures are performed annually in the United States.

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:

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         -    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 and, to a less frequent extent,
              CT), 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. According to published
              reports, there are more than 70,000 machines installed in the
              United States. Several large manufacturers such as
              Hewlett-Packard, ATL, Acuson, General Electric and Toshiba compete
              in the ultrasound hardware market.

         -    PRICE. Ultrasound is a relatively inexpensive procedure. According
              to a recent published article on diagnostic costs, an average cost
              of a cardiac perfusion nuclear exam is $670, a cardiac
              catherization is $2,048 and an echocardiogram is $319.

     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.

    "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

OPTISON AND ALBUNEX 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 (in saline), has exhibited a
safety profile in clinical studies equivalent to that of ALBUNEX. ALBUNEX
consists of a 5% albumin solution in which the air-filled microspheres are
suspended.

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Human albumin is a protein extracted from blood and has been used as a blood
expander for many years. Both ALBUNEX, which was first marketed in Japan in
October 1993, and OPTISON, which has been marketed in the United States since
January 1998, have a strong safety profile as demonstrated in over 80,000
patients with no unexpected adverse events.

ALBUNEX

    ALBUNEX the first ultrasound contrast imaging agent to be approved by the
FDA. The FDA approved ALBUNEX 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 OPTISON has replaced ALBUNEX in the market
because of OPTISON's superior performance characteristics.

OPTISON

    OPTISON was the first perfluorocarbon based agent to have been approved
for sale in the United States by the FDA. The Company received FDA approval
for OPTISON in December 1997. 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 enhance 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 ALBUNEX requires, with an equivalent safety profile.

    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% agreemeny 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 will design future Phase 3 studies to
evaluate, among other things, myocardial perfusion in cardiac patients using
ultrasound at both fundamental and harmonic frequencies.

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    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 the development of 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. The Company
plans clinical studies 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 the per-unit manufacturing cost and may
allow for the production of more doses of OPTISON than ALBUNEX using
equivalent manufacturing capacity.

MB-840

    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.

     In 1996, approximately 40% of the 7.25 million CT procedures performed
in the US were specific for the abdomen and liver. The evaluation of
abdominal pain, primary or metastatic cancer and undefined mass or cyst
detection were the most commonly ordered procedures in the multi-billion
dollar iodinated contrast market. The Company anticipates that CT

                                       8
<PAGE>

imaging with contrast will not only become routine for existing applications
but will also create entirely new markets for CT procedures.

     Potential applications of MB-840 include the assessment of gallbladder
disorders, liver transplant efficacy, hepatobiliary duct patency,
disease-induced hepatic dysfunction associated with diabetes, alcoholism,
cirrhosis, fibrosis, and hepatitis hepatobiliary disorders such as
cholecystitis, biliary obstruction, hepatobiliary tumors and
choledocolithiasis. Even if the enhancement profiles of the ITG contrasts
prove to be only as good as those of water-soluble contrast media, the ITG
formulations will still bring advantages to the marketplace because of ease
of use (administered manually at slow injection rates), reduced dose, lower
osmolarity, minimal renal elimination, and positive impact on patient
throughput.

     Competition to MB-840 comes from three primary sources: 1) commercially
available iodinated contrast media; 2) iodinated lipids, emulsions, and
lipophilic derivatives of water-soluble compounds currently under
development; and 3) liver-specific agents designed for use in magnetic
resonance imaging (MRI) or other imaging modalities. A benefit of using CT
imaging with ITG contrast is the localization of the contrast agent to a
target tissue which reduces systemic toxicity, lowers the doses required for
effective enhancement and maximizes diagnostic efficiency in the target
organ. In addition, ITG contrast agents have the potential for evaluation of
physiological function in the liver. Preliminary safety studies with animals
administered ITG have shown no adverse effects.

    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 MB-840. 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 MB-840, 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 is currently conducting pre-clinical trials for
MB-840.

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.

    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 MB-840, 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.

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 was responsible for
conducting clinical trials and securing regulatory approvals of the licensed
products in the United States for cardiac indications, and Mallinckrodt was
responsible for conducting clinical trials and securing regulatory approvals
in the United States for non-cardiac indications and was 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. The Company expects to transfer
the manufacturing responsibility to Mallinckrodt pursuant to an agreement
announced in April 1999 (see below).

    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

                                       9
<PAGE>

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.

     In September 1991, the Company and Mallinckrodt entered into an Amended
and Restated Distribution Agreement ("ARDA"), which strengthened and expanded
the parties' relationship. 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 required the Company to spend at least
$10.0 million for clinical trials to support regulatory filings with the FDA
for cardiac indications 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 $3.0 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 $4.0 million to the Company (upon the achievement of the specified
product development milestone) and $1.8 million to Nycomed (representing 45%
of the $4.0 million payment to the Company). There can be no assurance,
however, that the Company will satisfy this milestone.

     In April 1999, the Company and Mallinckrodt agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties agreement will
be incorporated into an amendment to ARDA. In addition to the transfer of
manufacturing, the amended agreement will extend Mallinckrodt's
responsibility for funding clinical trials to include all cardiology, as well
as radiology, clinical trials for OPTISON in the United States. MBI will
continue to conduct all cardiology trials for OPTISON and will assume
responsibility for conducting radiology trials in the United States. Under
the amended agreement, Mallinckrodt will reimburse MBI for all manufacturing
expenses, including incremental costs related to the technology transfer and,
in exchange for the transfer of manufacturing and increased financial support
of clinical trials for OPTISON, MBI will receive a reduced royalty rate on
product sales of OPTISON.

    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 Chugai may market 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 $14.0 million.
Chugai will pay the Company a royalty on net sales of licensed products which
Chugai manufactures. For licensed products which the Company manufactures,
Chugai will pay the Company 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 $20.0 million based
on Chugai's achievement of certain Japanese product development and
regulatory goals.

                                      10

<PAGE>

    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 which Stephen B. Feinstein,
M.D. owned covering sonicated gas-filled albumin microspheres used for imaging
and any future related patents and applications. In June 1989, the parties
restructured this agreement. The Company paid the licensor $4.5 million as an
additional license fee and $2.0 million as a prepayment of royalties on the
first $66.7 million of sales of the licensed products in the United States, and
the parties agreed to reduce the royalty rate on sales of licensed products 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. The restructured agreement, requires the Company 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, currently under development. The Company paid a
license fee of $20,000 and 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. Effective June 1998, the Company and the University of Michigan
amended their exclusive license agreement. The Company agreed to increase the
annual license maintenance fee to $100,000 and to provide support for research
projects related to MB-840.


PATENTS AND TRADEMARKS

    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 License Agreements - Feinstein License." The
Company itself owns additional United States and foreign patents covering
ALBUNEX and OPTISON that broaden the product coverage of its license. Certain of
these additional patents cover the Company's continuous flow sonication
manufacturing process. Andaris Ltd. challenged the European equivalents of these
manufacturing patents in an opposition proceeding 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 patents covering its method of manufacturing
gas-filled albumin microspheres using a milling process. 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 that third parties will
not challenge any issued patents, 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.


                                      11
<PAGE>

    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 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. See "Item 3-Legal Proceedings."

     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

    During the fiscal year ended March 31, 1999, the Company manufactured
OPTISON and ALBUNEX for commercial sale in the United States in its aseptic
plant at its principal San Diego facility. The plant employed the Company's
patented continuous-flow sonication process in which a mixture of sterile
albumin solution and gas was 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. During fiscal year ended
March 31, 1999, the Company replaced its first generation product, ALBUNEX, with
OPTISON.

    The Company was able to meet all orders for OPTISON and ALBUNEX from
Mallinckrodt. However, in April 1999, the Company and Mallinckrodt agreed to
transfer the manufacture of OPTISON from MBI to Mallinckrodt as part of a
multi-phase program by the Company to reduce expenses and preserve capital. The
parties agreement will be incorporated into an amendment to ARDA. Under the
terms of the amended agreement, which will be retroactive to March 1, 1999,
Mallinckrodt will reimburse MBI for all manufacturing expenses, including
incremental costs related to the technology transfer. In exchange for the
transfer of manufacturing and increased financial support of clinical trials for
OPTISON, MBI


                                      12
<PAGE>

will receive a reduced royalty rate on product sales of OPTISON. The Company
expects that it may take up to two years to fully complete the transfer of
manufacturing from MBI to Mallinckrodt.

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, 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 that the Company develops 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, important competitive factors include 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. 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 MB-840 involves many steps. The Company must submit the results of
laboratory and animal tests to determine efficacy and safety, including
potential toxicity, to the FDA as part of an application for an Investigational
New Drug ("IND") before the Company may begin clinical trials on humans. After
completion of clinical trials, the Company must submit an NDA, in the case of
drugs, to the FDA for review and approval before the Company may begin
commercial marketing and sale for a new indication.

    The FDA classifies OPTISON and ALBUNEX as drugs. As such, the FDA requires
these products 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 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.


                                      13
<PAGE>

    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 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 additional 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.


                                      14
<PAGE>

    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
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
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 an
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 Finance 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, 1999, the Company had 92 full-time employees, including 4
officers. Approximately 23 of the Company's employees were involved directly in
scientific research and development activities. Of these employees, 6 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

    The Company's corporate offices and laboratory, manufacturing and warehouse
facilities are housed in a Company owned 44,000 square foot building located in
San Diego, California. The Company also leases a 30,097 square-foot facility in
San Diego. As part of cost reduction measures implemented in fiscal year 1999,
the Company moved out of the 30,097 square-foot facility and has no plans to
renew this lease when it expires in February 2000. The Company anticipates that
its current facilities will be sufficient to meet its needs into the foreseeable
future.


                                      15
<PAGE>

ITEM 3.           LEGAL PROCEEDINGS

    In July, 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
Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"), ImaRx
Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont Merck and Bracco
- seeking declarations that certain of their ultrasound contrast agent patents
are invalid.

    The complaint 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
that each defendant has claimed or is likely to claim that its patent or patents
cover OPTISON, the Company's advanced generation ultrasound contrast agent, and
will attempt to prevent its commercialization.

    All of the defendants except Nycomed filed motions to dismiss the complaint
on jurisdictional grounds. In January 1998, the court 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
a 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. 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. 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 MBI Case, MBI counterclaimed for
a declaration of invalidity and non-infringement with respect to the Sonus
patents. Additionally, MBI filed a counterclaim which alleges that Sonus
knowingly made false and misleading public statements regarding its patents and
its product, Echogen-Registered Trademark- with the intent to cause damage to
MBI and its product OPTISON. Damages, including punitive damages and attorneys
fees, are requested. These two patents are the same patents for which the
Company was seeking a declaration of invalidity 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. In December 1998, the Company received
correspondence from the PTO with respect to the two Sonus patents involved in
the reexamination proceedings. On the basis of amendments after final rejection,
the PTO has indicated that certain claims in Sonus' U.S. Patent No. 5,558,094
(`094) are allowable by the agency. According to the PTO correspondence, none of
the original `094 patent claims which Sonus had asserted against MBI will be
allowed by the PTO without amendment. The PTO has also indicated that certain
claims of Sonus' U.S. Patent 5,573,751 (`751) are allowable by the agency.
According to the PTO correspondence, certain of the `751 patent claims which
Sonus has asserted against the Company will be allowed in their original form.
In January 1999, the PTO issued reexamination certificates for the `094 and `751
patents.

    In August 1998, the PTO issued a final rejection of all relevant claims of
the Nycomed patent involved in the MBI Case. If the PTO rejection is maintained
on any appeal subsequently filed by Nycomed, the patent Nycomed is attempting to
assert against the Company and Mallinckrodt to block the manufacture and sale of
OPTISON will be invalidated.


                                      16
<PAGE>

    In May and June 1999, the Company received correspondence from the PTO with
respect to the ImaRx patents involved in the reexamination proceedings. The PTO
indicated that all claims of U.S. Patent No. 5,547,656 (`656) and U.S. Patent
No. 5,527,521(`521) will be allowed in their original form.

    On May 5, 1999, the Company and Mallinckrodt announced that the two
companies received notice of a lawsuit filed against them by DuPont
Pharmaceuticals Company ("DuPont) and ImaRx in the United States District Court
for the District of Delaware (the "DuPont Case"). The lawsuit alleges that the
manufacture and sale of OPTISON infringes the `656 patent owned by ImaRx and
exclusively licensed to DuPont. MBI counterclaimed for a declaration of
invalidity and non-infringement with respect to the `656 patent. In June 1999,
DuPont and ImaRx amended their complaint in the DuPont Case to add allegations
that the manufacture and sale of OPTISON also infringes the `521 patent owned by
ImaRx and exclusively licensed to DuPont.

    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

    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>
   Bobba Venkatadri..................................     55     President and Chief Executive Officer
   Howard Dittrich, M.D..............................     46     Executive Vice President
   Joni Harvey ......................................     44     Vice President, Operations
   Elizabeth L. Hougen...............................     37     Executive Director, Finance and Chief Financial
                                                                 Officer
</TABLE>




         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.

         HOWARD DITTRICH, M.D., has served as the Company's Executive Vice
President since December 1998. He served as the Company's Vice President -
Research/Medical & Regulatory Affairs from November 1996 to December 1998 and as
Executive Director of Medical Affairs from May 1996 to November 1996. He served
as a consultant to the Company from


                                      17
<PAGE>

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 - 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 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.

              ELIZABETH L. HOUGEN has served as the Company's Executive
Director, Finance and Chief Financial Officer since January 1999. She served as
the Company's Controller from October 1997 until January 1999. She has been
employed at MBI since 1992. Ms. Hougen has more than 15 years of experience in
finance and accounting in the biomedical, high technology and professional
services industries. Ms. Hougen is a certified management accountant and holds
an MBA from the University of San Diego.


                                      18

<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 15, 1999, there were approximately 1,654 holders of
record of the Company's Common Stock, representing approximately 8,928
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,
1999, 1998, and 1997, respectively, as reported by the New York Stock Exchange.

<TABLE>
<CAPTION>
FISCAL 1999                                                   HIGH             LOW
                                                       -----------     -----------
<S>                                                       <C>               <C>

First Quarter (4/1 to 6/30)                                 10-5/8               7
Second Quarter (7/1 to 9/30)                                 7-3/8           3-5/8
Third Quarter (10/1 to 12/31)                                4-3/8           2-1/2
Fourth Quarter (1/1 to 3/31)                                3-7/16          2-5/16

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
</TABLE>

                                      19
<PAGE>

ITEM 6.           SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,                        1995           1996           1997           1998           1999
----------------------------                  -------------------------------------------------------------------------
(In thousands, except per share data)
<S>                                             <C>            <C>            <C>            <C>            <C>

Consolidated Statement of Operations Data:
Revenues:
   Revenues under collaborative
      agreements                                $ 15,132       $  2,412       $  4,500       $  5,095       $  5,498
   Product and royalty revenues                    1,769            647            626          1,151          4,083
   License Fees                                       40             25          5,725              -         16,371
                                              -------------------------------------------------------------------------
      Total Revenues                              16,941          3,084         10,851          6,246         25,952
Operating expenses:
   Research and development costs                 18,743         13,588          9,902         11,078          9,083
   Costs of products sold                          1,608          1,553          4,748          5,791          7,840
   Selling, general and
      administrative expenses                      5,864          5,862          8,052         11,912         14,191
   Other nonrecurring charges                      3,403          3,110          3,000              -         15,498
                                              -------------------------------------------------------------------------
      Total Expenses                              29,618         24,113         25,702         28,781         46,612
Loss from operations                             (12,677)       (21,029)       (14,851)       (22,535)       (20,660)
Interest expense                                    (694)          (786)          (810)          (721)          (574)
Interest income                                    1,189          1,102          2,377          1,996          1,394
                                              -------------------------------------------------------------------------
Loss before income taxes                         (12,182)       (20,713)       (13,284)       (21,260)       (19,840)
Foreign income tax provision                           -              -              -              -         (1,400)
                                              -------------------------------------------------------------------------
Net loss                                        $(12,182)      $(20,713)      $(13,284)      $(21,260)      $(21,240)
                                              =========================================================================
Loss per common share - basic and diluted       $  (1.02)      $  (1.62)      $  (0.78)      $  (1.19)      $  (1.14)
                                              =========================================================================
Weighted average common
   shares outstanding                             11,999         12,758         16,926         17,793         18,564
                                              =========================================================================

<CAPTION>
AS OF MARCH 31,                                     1995           1996           1997           1998           1999
---------------                               -------------------------------------------------------------------------
<S>                                             <C>            <C>            <C>            <C>            <C>

Consolidated Balance Sheet Data:
Cash, cash equivalents and
   marketable securities                        $ 19,718       $ 20,570       $ 41,414       $ 21,338       $ 18,038
Working capital                                   20,927         18,601         43,843         21,066         10,693
Total assets                                      50,639         43,829         70,159         51,318         31,849
Long-term debt                                     8,408          8,610          7,349          6,082          4,804
Total stockholders' equity                        36,424         28,962         51,746         31,164         16,207
</TABLE>

    The selected financial data set forth above with respect to the Company's
consolidated financial statements has been derived from the audited financial
statements. The data set forth above should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and related
notes included elsewhere in this filing.


                                      20

<PAGE>

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.)

    THIS ANNUAL REPORT ON FORM 10-K MAY CONTAIN PREDICTIONS, ESTIMATES AND
OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. THIS OUTLOOK REPRESENTS THE COMPANY'S CURRENT JUDGMENT ON THE
FUTURE DIRECTION OF ITS BUSINESS. ANY RISKS AND UNCERTAINTIES COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED
BELOW. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS
OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES ARISING AFTER THE DATE OF THIS ANNUAL REPORT.

OVERVIEW

    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. The Company has designed its
products 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 made key operational changes during fiscal year 1999. First,
as fiscal year 1999 was the first full year of OPTISON-Registered Trademark-
sales, the Company made a transition from being a product development company
to a commercial enterprise. In making this transition and in carefully
evaluating cost reduction measures, the Company announced on November 10,
1998 the initiation of a multi-phase program to reduce expenses and preserve
capital. This program included plans to out-source the Company's
manufacturing process.

    In April 1999, the Company and Mallinckrodt, Inc. ("Mallinckrodt") agreed
to transfer the manufacture of OPTISON, the only advanced generation cardiac
ultrasound imaging agent commercially available in the United States and
Europe, from MBI to Mallinckrodt under an amendment to their existing
research support and distribution agreement. In addition to the transfer of
manufacturing, the amended agreement will extend Mallinckrodt's
responsibility for funding clinical trials to include all cardiology, as well
as radiology, clinical trials for OPTISON in the United States. Under the
terms of the agreement, MBI will continue to conduct all cardiology trials
for OPTISON and will assume responsibility for conducting radiology trials in
the United States. The parties agreement will be incorporated into an
amendment to ARDA.

    Under the terms of the amended agreement, which will be retroactive to
March 1, 1999, Mallinckrodt would reimburse MBI for all manufacturing
expenses, including incremental costs related to the technology transfer. In
exchange for the transfer of manufacturing and increased financial support of
clinical trials for OPTISON, MBI would receive a reduced royalty rate on
product sales of OPTISON.

    The out-sourcing of the Company's manufacturing process is not only
expected to reduce the Company's expenditures, but also to better enable the
Company to focus on key research and development opportunities, including
other indications of OPTISON and its liver CT, imaging agent, MB-840.

    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 (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 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 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

                                      21
<PAGE>

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.

      OPTISON is the Company's second generation contrast agent and is a
significant improvement over the Company's first generation contrast agent,
ALBUNEX, in terms of efficacy. The Company has replaced ALBUNEX with OPTISON.
Accordingly, the Company does not foresee any ALBUNEX product sales in the
future.

    Operating losses may occur for at least the next few 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, and (ii) payments received from 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 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.

     For fiscal year 1998 and fiscal year 1999, the transfer price for the
Company's sales of OPTISON to Mallinckrodt was 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.

     Under the anticipated final terms of the April 1999 agreement with
Mallinckrodt, the Company will receive a reduced royalty rate rather than a
transfer price on product sales of OPTISON in exchange for the transfer of
manufacturing of and increased financial support for clinical trials of
OPTISON.

    Royalty revenues during fiscal years 1997, 1998 and 1999 were pursuant to
a licensing agreement between the Company and Abbott Laboratories.

    LICENSE FEES. The Company recognizes license fees at the time of receipt.
The Company generally receives license fees in conjunction with the grant of
product development, manufacturing, marketing and/or distribution rights to
one of the Company's technologies.

IMPACT OF THE YEAR 2000 ISSUE

    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, which could disrupt operations,
including product development, manufacturing, the processing of transactions
and other normal business

                                      22
<PAGE>

activities. The Year 2000 problem may also create unforeseen risks to the
Company from its internal computing systems as well as from computer systems
of third parties with which it deals.

    The Company has conducted a comprehensive review of its information
technology ("IT") and non information technology ("Non-IT") systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed a plan to assess and resolve Year 2000 problems with its IT and
Non-IT systems. The plan includes five phases: inventory, assessment,
evaluation, implementation and testing. The Company has completed the
inventory phase on its IT systems and has identified all IT systems that the
Company believes are at risk. The Company is in the process of inventorying
its Non-IT systems and expects to have identified all Non-IT systems that are
at risk within the next few months.

    The Company completed the assessment phase (in which systems that were
inventoried are prioritized) for all systems in March 1999. The Company has
begun the evaluation phase which involves testing systems and determining
which IT and Non IT systems need to be replaced, repaired or retired. The
evaluation phase is expected to take approximately 3 months.

    Once the evaluation phase is complete, the Company will begin the
implementation phase and repair/replace all noncompliant systems (both IT and
Non-IT), convert data as necessary, and obtain compliance statements. The
implementation phase is expected to take three months to complete. Finally,
the Company will test and validate the repaired noncompliant IT and Non-IT
systems for compliance. This final phase of the process should take 1-2
months and should be complete by November 1999.

    In addition, the Company is in the process of conducting a comprehensive
review of its vendors, service providers (including financial institutions
and insurance companies), and collaborative partners. Although this
assessment is not yet complete, the Company is not currently aware of any
material Year 2000 issues with respect to its dealings with such third
parties. However, if the Company discovers Year 2000 problems with such third
parties' systems, the Company will be unable to control whether its current
and future suppliers', service providers' or collaborative partners' systems
are Year 2000 compliant. To the extent that such third parties would be
hindered by Year 2000 problems, the Company's operations could be materially
adversely affected.

    The Company anticipates that its assessment of both internal and third
party IT and Non-IT systems will be complete by November 1999. At this time,
the Company believes that the Year 2000 problem will not pose significant
operational problems for the Company's computer systems. The Company also
expects that the total costs required to fix the Year 2000 problem will not
be material. To date, the Company has not used, and does not plan to use, any
independent verification and validation process to assess the reliability of
the Company's risk and cost estimates. Since no significant issues have
arisen, the Company does not have a contingency plan to address any material
Year 2000 issues. If significant Year 2000 issues arise, the Company may not
be able to timely develop and implement a contingency plan and the Company's
operations could be adversely affected.

RESULTS OF OPERATIONS

    FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998. Revenues under
collaborative agreements were $5.5 million for the fiscal year ended March
31, 1999, compared to $5.1 million for the fiscal year ended March 31, 1998.
This increase is primarily due to an increase in the quarterly payments from
Mallinckrodt to $1.5 million for the last two quarters in fiscal year 1999
over $1.25 million in the prior year. 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 $4.1 million for fiscal year 1999,
compared to $1.2 million 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. The increase in product revenues for fiscal year
1999 as compared to 1998 results primarily from sales of OPTISON to
Mallinckrodt which were launched in the fourth quarter of fiscal year 1998.
Royalty revenues are pursuant to a license agreement between the Company and
Abbott Laboratories.

    License fees were $16.4 million in fiscal year 1999 compared to none in
fiscal year 1998. These revenues consist of payments from Chugai
Pharmaceutical Co. of Japan pursuant to a strategic alliance which covers
Japan, Taiwan and South Korea to develop OPTISON and ORALEX. The Company
granted Chugai an exclusive license to develop, manufacture and market these
products in exchange for an up-front license fee of $14.0 million plus
additional future royalties on net sales. In addition, Chugai purchased
691,883 shares of the Company's common stock at a premium of 40% to the
then-prevailing market price. This premium was equal to $2.4 million and was
recognized as license revenue.

                                      23
<PAGE>

    Costs of products sold totaled $7.8 million for fiscal year 1999,
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 fiscal year 1998, costs of products sold totaled $5.8 million. The
increase over the prior year is primarily due to two factors. First, the
Company sold OPTISON throughout the entire fiscal year 1999 as compared to
only during the fourth quarter of fiscal year 1998. Second, $1.1 million in
inventories were expensed through cost of sales as a result of the planned
out-sourcing of manufacturing. The Company anticipates an increase in gross
profit margins if and when OPTISON sales volumes increase as OPTISON obtains
market acceptance and when the manufacturing process is out-sourced pursuant
to the anticipated terms of the April 1999 agreement with Mallinckrodt.
During fiscal 1999, manufacturing fixed costs were running at an annual rate
of approximately $4.5 million.

    The Company's research and development costs totaled $9.1 million for
fiscal year 1999 as compared to $11.1 million for fiscal year 1998. The
decrease of 18% is due to previously announced cost reduction measures.

    Selling, general and administrative expenses totaled $14.2 million in
fiscal year 1999 as compared to $11.9 million in fiscal year 1998. This
increase of 19% is primarily due to continuing legal expenses, marketing
costs associated with the launch of OPTISON, and severance costs.
Additionally, a portion of the increase is due to a licensing agreement
between the Company and Schering AG ("Schering") in which the Company
licensed rights to certain Schering patents.

    During fiscal year 1999, the Company incurred nonrecurring charges of
$15.5 million. These nonrecurring charges include $8.5 million related to the
sale to Chugai of territory rights previously reacquired from Shionogi and
$6.1 million of cost reduction measures. The $6.1 million of cost reduction
measures included $3.1 million for the write off of fixed assets, capitalized
license fees and capitalized patent costs that will no longer be used by the
Company as a result of the planned out-sourcing of manufacturing operations
and the discontinuation of certain projects, $2.3 million of severance costs,
and approximately $700,000 of technology transfer costs and other costs
related to the Company's plan to out-source manufacturing. As part of the
cost reduction measures, the Company consolidated facilities and no longer
occupies the 30,097 square-foot leased facility that had become its corporate
headquarters in fiscal year 1998.

    Interest expense for fiscal years 1999 and 1998 amounted to $574,000 and
$721,000, 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 and is payable in monthly installments of principal plus interest
over five years. The interest rate on the note was 7.75% in March 1999. In
September 1998, the Company renegotiated its note payable to reduce the
interest rate from prime plus one to the prime rate and to release
compensating balance requirements.

    Interest income for fiscal year 1999 was $1.4 million compared to $2.0
million in fiscal year 1998. This decrease is due to lower average cash
balances and marketable securities balances.

    No tax benefit has been recognized for fiscal years 1999 or 1998 as the
Company had fully utilized its operating loss carryback ability in 1993. As
of March 31, 1999, the Company had federal and state operating loss
carryforwards of approximately $121 million and $38.9 million, respectively.
Realization of future tax benefits from utilization of net operating loss
carryforwards is uncertain.

    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 was 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 consisted 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 fiscal year 1997. Product revenues in fiscal year
1998 were based on the Company's sales to Mallinckrodt and were recognized
upon shipment of the product. Product revenues in fiscal year 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 resulted primarily from the market introduction of OPTISON in the fourth
quarter which added revenues of approximately $700,000. Royalty revenues were
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 fiscal year 1997 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

                                      24
<PAGE>

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 low levels of production were insufficient to
cover the Company's fixed manufacturing overhead expenses. For fiscal year
1997, costs of products sold totaled $4.7 million.

    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% was 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% was primarily due to increased legal expenses.

    During fiscal year 1998, the Company did not incur any nonrecurring
charges compared to $3 million in nonrecurring charges for fiscal year 1997
related to the reacquisition of license rights from Nycomed.

    Interest expense for fiscal years 1998 and 1997 amounted to $721,000 and
$810,000, respectively. Interest expense consisted 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 bore interest at the
prime rate plus 1% and was 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 was due to lower average cash
balances and marketable securities balances.

    No tax benefit was 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.

LIQUIDITY AND CAPITAL RESOURCES

    At March 31, 1999, the Company had net working capital of $10.7 million
compared to $21.1 million at March 31, 1998. Cash, cash equivalents and
marketable securities were $18.0 million at March 31, 1999 compared to $21.3
million at March 31, 1998.

    For the next several years, the Company expects to incur substantial
additional expenditures associated with product development. The Company
anticipates that its existing resources, including up-front license fees
received from Chugai, and interest thereon, plus payments under its
collaborative agreements with Mallinckrodt, will enable the Company to fund
its operations for at least the next fifteen 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 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 with pharmaceutical companies; 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, or at all.

    During fiscal year 1999, the Company used $11.0 million cash for
operating requirements, which was funded primarily by $6.4 million of
marketable securities that matured during fiscal 1999 and $8.3 million in net
proceeds from the sale of common stock to Chugai. Other significant cash uses
included purchases of property and equipment of $791,000, $2.0 million for
the reacquisition of license rights from Shionogi and $1.3 million in
principal payments on long term debt.

    In an agreement dated March 31, 1998, the Company entered into a
cooperative development and marketing agreement with Chugai. The parties
entered into this strategic alliance which covers Japan, Taiwan and South
Korea, to develop

                                      25
<PAGE>

OPTISON (which Chugai may be market 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 $14.0 million during
fiscal year 1999. 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 $20.0 million based on Chugai's
achievement of certain Japanese product development and regulatory goals.

    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 14 quarterly payments have been received by the Company as of March 31,
1999.

    In April 1999, the Company and Mallinckrodt Inc. entered into an
agreement to transfer the manufacture of OPTISON from MBI to Mallinckrodt
under an amendment to ARDA. The terms of the agreement also extends
Mallinckrodt's responsibility for funding clinical trials to include all
cardiology, as well as radiology, clinical trials for OPTISON in the United
States. MBI will continue to conduct all cardiology trials for OPTISON and
will assume responsibility for conducting radiology trials in the United
States. Under the terms of the agreement, which is retroactive to March 1,
1999, Mallinckrodt will reimburse MBI for all manufacturing expenses,
including incremental costs related to the technology transfer. In exchange
for the transfer of manufacturing and increased financial support of clinical
trials for OPTISON, MBI will receive a reduced royalty rate on product sales
of OPTISON.

    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 $3.0 million to Shionogi and agreed to
pay an additional $5.5 million over the next three years, of which $4.0
million had been paid at March 31, 1999.

    Capital expenditures for facilities, laboratory equipment, furniture and
fixtures were $791,000, $1.4 million, and $726,000 for fiscal years 1999,
1998 and 1997, 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 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,
1999 was $1.0 million.

    The Company currently leases one of its facilities in San Diego. The
lease requires aggregate payments of approximately $324,000 through February
2000.

    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.

    The Company believes that inflation and changing prices have not had a
material effect on operations for fiscal years 1999, 1998 and 1997 and that
the impact of government regulation on the Company is not materially
different from the impact on other similar enterprises.

                                      26
<PAGE>

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                     INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



        Report of Independent Public Accountants
        Consolidated Balance Sheets as of March 31, 1998 and 1999
        Consolidated Statements of Operations for the Fiscal Years Ended
        March 31, 1997, 1998 and 1999
        Consolidated Statements of Stockholders' Equity for the Fiscal Years
        Ended March 31, 1997, 1998 and 1999
        Consolidated Statements of Cash Flows for the Fiscal Years Ended
        March 31, 1997, 1998 and 1999
        Notes to Consolidated Financial Statements



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

         None.


                                      27
<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, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
in the period ended March 31, 1999. 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years
in the period ended March 31, 1999, in conformity with generally accepted
accounting principles.

                                               ARTHUR ANDERSEN LLP



San Diego, California
April 30, 1999


                                      28
<PAGE>

                   MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                               MARCH 31,       MARCH 31,
                                                                                 1998            1999
                                   ASSETS
<S>                                                                         <C>             <C>
Current assets:
    Cash and cash equivalents                                               $   1,064       $   1,056
    Marketable securities, available-for-sale (Note 4)                         20,274          16,982
    Accounts and notes receivable                                               1,498           2,320
    License rights (Notes 1 and 9)                                              8,500               -
    Inventories                                                                 1,902             748
    Prepaid expenses and other assets                                             400             425
                                                                          -----------      ----------
         Total current assets                                                  33,638          21,531
                                                                          -----------      ----------

Property and equipment, at cost:
    Building and improvements                                                  14,412          11,113
    Equipment, furniture and fixtures                                           4,364           2,893
    Construction in progress                                                      471             930
                                                                          -----------      ----------
                                                                               19,247          14,936
    Less:  Accumulated depreciation and amortization                            7,073           6,672
                                                                          -----------      ----------
         Total property and equipment                                          12,174           8,264
                                                                          -----------      ----------

Other assets:
    Patents and license rights, net of amortization of
        $87 in 1998  (Notes 7 and 10)                                             320               -
    Certificate of deposit, pledged (Notes 4 and 6)                             3,000               -
    Other assets, net                                                           2,186           2,054
                                                                          -----------      ----------
         Total other assets                                                     5,506           2,054\
                                                                          -----------      ----------
                                                                            $  51,318       $  31,849
                                                                          ===========      ==========

                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term debt                                       $   1,272       $   1,278
    Accounts payable and accrued liabilities (Notes 1 and 7)                    7,498           7,395
    Compensation accruals                                                       2,227           2,165
    Deferred Contract Revenue                                                   1,575               -
                                                                          -----------      ----------
         Total current liabilities                                             12,572          10,838
                                                                          -----------      ----------
Long-term debt, net of current portion (Note 6):                                6,082           4,804
                                                                          -----------      ----------
Other noncurrent liabilities                                                    1,500               -
                                                                          -----------      ----------
Commitments and contingencies (Note 7):
Stockholders' equity (Note 8):
    Common Stock, $.01 par value, 40,000,000 shares
    authorized, 17,846,237 and 18,580,745 shares
      issued and outstanding, respectively                                        178             186
    Additional paid-in capital                                                128,145         134,347
    Accumulated deficit                                                       (96,729)       (117,969)
    Unrealized loss on available-for-sale securities                              (67)              6
    Less  40,470 shares of treasury stock, at cost                               (363)           (363)
                                                                          -----------      ----------

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

                                      29
<PAGE>

         Total stockholders' equity                                            31,164          16,207
                                                                          -----------      ----------
                                                                            $  51,318       $  31,849
                                                                          ===========      ==========
</TABLE>






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

                                      30
<PAGE>

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


<TABLE>
<CAPTION>
                                                           FISCAL YEARS ENDED MARCH 31,
                                                   ------------------------------------------
                                                          1997           1998           1999
<S>                                                   <C>            <C>            <C>

Revenues (Note 9):
    Revenues under collaborative agreements           $  4,500       $  5,095       $  5,498
    Product and royalty revenues                           626          1,151          4,083
    License fees                                         5,725              -         16,371
                                                    -----------   ------------   ------------
                                                        10,851          6,246         25,952
                                                    -----------   ------------   ------------

Operating expenses:
    Research and development costs (Note 9)              9,902         11,078          9,083
    Costs of products sold                               4,748          5,791          7,840
    Selling, general and administrative expenses         8,052         11,912         14,191
    Other nonrecurring charges (Note 10)                 3,000              -         15,498
                                                    -----------   ------------   ------------
                                                        25,702         28,781         46,612
                                                    -----------   ------------   ------------

    Loss from operations                               (14,851)       (22,535)       (20,660)

Interest expense                                          (810)          (721)          (574)
Interest income                                          2,377          1,996          1,394
                                                    -----------   ------------   ------------
Loss before income taxes                               (13,284)       (21,260)       (19,840)
Foreign income tax  provision                                -              -         (1,400)
                                                    -----------   ------------   ------------
      Net Loss                                        $(13,284)      $(21,260)      $(21,240)
                                                    ===========   ============   ============

Loss per common share - Basic and diluted             $  (0.78)      $  (1.19)      $  (1.14)
                                                    ===========   ============   ============

Weighted average common shares
    outstanding                                         16,926         17,793         18,564
                                                    ===========   ============   ============
</TABLE>


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


                                      31
<PAGE>

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

<TABLE>
<CAPTION>
                                                  COMMON STOCK         ADDITIONAL
                                           ------------------------     PAID-IN         ACCUMULATED       TREASURY
                                               SHARES        AMOUNT     CAPITAL           DEFICIT           STOCK
                                           -------------    -------    ----------       -----------      -----------
<S>                                        <C>              <C>        <C>              <C>              <C>
Balance at March 31, 1996                    13,296,186      $ 133      $ 91,468        $ (62,185)       $    (167)
    Comprehensive Loss
        Net loss                                      -          -             -          (13,284)               -
        Unrealized loss on available-
           for-sale securities                        -          -             -                -                -
    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)               -
        Unrealized gain on available-
           for-sale securities                        -          -             -                -                -
    Exercise of stock options                   100,340          1           662                -                -
                                             ----------      -----      --------       ----------        ---------
Balance at March 31, 1998                    17,846,237      $ 178      $128,145       $  (96,729)       $    (363)

    Comprehensive Loss
        Net loss                                    -0-        -0-           -0-          (21,240)             -0-
        Unrealized gain on available-
           for-sale securities                      -0-        -0-           -0-              -0-              -0-
    Sale of common stock to Chugai              691,883          7         5,922                -                -
    Exercise of stock options                    42,625          1           280              -0-              -0-
                                             ----------      -----      --------       ----------        ---------
Balance at March 31, 1999                    18,580,745      $ 186      $134,347       $ (117,969)       $    (363)
                                             ==========      =====      ========       ==========        =========

<CAPTION>
                                                                NOTES
                                              ACCUMULATED    RECEIVABLE
                                                 OTHER        FROM SALE
                                             COMPREHENSIVE    OF COMMON                  COMPREHENSIVE
                                                INCOME          STOCK         TOTAL          LOSS
                                             -------------   -----------   -----------   -------------
<S>                                          <C>             <C>           <C>           <C>
Balance at March 31, 1996                     $       (6)    $     (281)   $   28,962
    Comprehensive Loss
        Net loss                                       -              -       (13,284)       (13,284)
        Unrealized loss on available-
           for-sale securities                       (76)             -           (76)           (76)
    Proceeds from Public
      Offering                                         -              -        34,086            -0-
    Purchase of treasury stock (Note 6)                -            281             -            -0-
    Exercise of stock options                          -              -         1,931            -0-
    Issuance of stock grants                           -              -           127            -0-
                                              ----------     ----------    ----------     ----------
Balance at March 31, 1997                     $      (82)    $        -    $   51,746     $  (13,360)
                                                                                          ==========
    Comprehensive Loss
        Net loss                                       -              -       (21,260)       (21,260)
        Unrealized gain on available-
           for-sale securities                        15              -            15             15
    Exercise of stock options                          -              -           663            -0-
                                              ----------      ---------    ----------     ----------
Balance at March 31, 1998                     $      (67)     $       -    $   31,164     $  (21,245)
                                                                                          ==========
    Comprehensive Loss
        Net loss                                     -0-            -0-       (21,240)       (21,240)
        Unrealized gain on available-
           for-sale securities                        73            -0-            73             73
    Sale of common stock to Chugai                     -              -         5,929            -0-
    Exercise of stock options                        -0-            -0-           281            -0-
                                              ----------      ---------    ----------     ----------
Balance at March 31, 1999                     $        6      $       -    $   16,207     $  (21,167)
                                              ==========      =========    ==========     ==========
</TABLE>


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

                                      32

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                    FISCAL YEARS ENDED MARCH 31,
                                                                              --------------------------------------
                                                                                1997           1998           1999
<S>                                                                           <C>            <C>            <C>
Cash flows from operating activities:
    Net loss                                                                  ($13,284)      ($21,260)      ($21,240)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
       Depreciation and amortization                                             1,435          1,085          1,915
       Loss on disposals/write-downs of tangible and intangible property             1             20          3,092
       Write-off of former Nycomed/Shionogi territory license rights             3,000              -          8,500
       Forgiveness of note receivable from sale of Common Stock                    109              -              -
       Premium received on Chugai Investment                                         -              -         (2,371)
       Changes in operating assets and liabilities:
        Receivables                                                                 29           (702)        (1,171)
        Inventories                                                                280         (1,560)         1,154
        Prepaid expenses and other assets                                         (623)           (45)           326
        Accounts payable and accrued liabilities                                   721          2,814            397
        Deferred contract revenue                                                    -          1,575         (1,575)
        Compensation accruals                                                      582            614            (62)
                                                                              --------       --------       --------
              Cash used in operating activities                                 (7,750)       (17,459)       (11,035)
                                                                              --------       --------       --------

Cash flows from investing activities:
    Purchases of property and equipment                                           (726)        (1,387)          (791)
    Proceeds from sale of property and equipment                                     4              -             42
    Write off of patents and license rights                                          -             17              -
    Additions to patents and license rights                                       (226)           (32)           (30)
    Acquisition of license rights from Shionogi                                 (3,000)        (2,000)        (2,000)
    Acquisition of license rights from Nycomed                                  (2,000)             -              -
    (Increase) decrease in other assets                                           (269)            37            132
    (Increase) decrease in marketable securities                               (32,876)        20,569          6,365
                                                                              --------       --------       --------
              Cash provided by (used for) investing activities                 (39,093)        17,204          3,718
                                                                              --------       --------       --------

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 sale of common stock to Chugai                                 -              -          8,300
    Net proceeds from issuance of Common Stock                                   2,058            663            281
    Principal payments on long-term debt                                        (1,256)        (1,262)        (1,272)
                                                                              --------       --------       --------
              Cash provided by financing activities                             34,888            732          7,309
                                                                              --------       --------       --------

Increase (decrease) in cash and cash equivalents                               (11,955)           477             (8)

Cash and cash equivalents, beginning of year                                    12,542            587          1,064
                                                                              --------       --------       --------
Cash and cash equivalents, end of year                                        $    587       $  1,064       $  1,056
                                                                              ========       ========       ========

Supplemental cash flow disclosures:
    Interest income received                                                  $  1,609       $  2,101       $  1,744
                                                                              ========       ========       ========
    Interest paid                                                             $    804       $    715       $    568
                                                                              ========       ========       ========
</TABLE>

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

                                      33

<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 annual continuing operations have been unprofitable since
         1992. The Company believes that 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-Registered Trademark- and other future products
         and are therefore uncertain. The Company has replaced its first
         generation product, ALBUNEX-Registered Trademark-, with OPTISON. There
         is no assurance that the Company will be able to achieve profitability
         with sales of OPTISON or other future products 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, as restated in May
         1999, 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.

                                       34

<PAGE>


         REVENUE RECOGNITION FOR PRODUCT SOLD-

         The Company recognizes revenue when goods are shipped to its customer,
         Mallinckrodt. For fiscal years 1998 and 1999, the transfer price for
         the Company's sales of OPTISON to Mallinckrodt was 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.

         Under the terms of the May 1999 amended agreement with Mallinckrodt,
         the Company will receive a receive a reduced royalty rate on product
         sales of OPTISON in exchange for the transfer of manufacturing of and
         increased financial support for clinical trials of OPTISON.

         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,
                                                     --------------------
                                                       1998          1999
<S>                                                  <C>             <C>
               Raw materials and supplies            $ 1,639         $551
               Work in process                            74           92
               Finished goods                            189          105
                                                     -------         ----
                                                     $ 1,902         $748
                                                     =======         ====
</TABLE>

                                       35

<PAGE>

         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.

         PATENTS AND LICENSE RIGHTS AND OTHER ASSETS-

         The Company periodically reevaluates the original assumptions and
         rationale utilized in the assessment of the carrying value and
         estimated lives of 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.

         Patents and license rights are amortized on the straight-line method
         over their estimated useful lives of five to ten years. During fiscal
         year 1999, the Company reevaluated its patent estate and wrote off
         approximately $300,000 in capitalized patent and license rights that
         will no longer be used by the Company as a result of the planned
         out-sourcing of manufacturing operations and discontinuation of certain
         products.

         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, 1999 is approximately
         $1.7 million which is the portion of this prepayment which has not yet
         been expensed. Additionally, other assets at March 31, 1998 and 1999
         include $300,000 of real estate investment related to an employment
         agreement with one of the Company's officers.

         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.

         During fiscal year 1999, the Company wrote off approximately $2.8
         million of fixed assets that will no longer be used by the company as a
         result of the planned out-sourcing of manufacturing operations and
         discontinuation of certain projects.



         ACCOUNTS PAYABLE AND ACCRUED LIABILITIES-

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


<TABLE>
<CAPTION>
                                                                                   MARCH 31,
                                                                              --------------------
                                                                                1998         1999
<S>                                                                           <C>          <C>
         Accrued legal and professional fees                                  $ 1,540      $ 3,031
         License rights payable and related fees (Note 7)                       2,000        1,500
         Restructuring accruals                                                     -        1,041

         Accounts payable - trade                                               3,394        1,226
         Other miscellaneous accruals                                             564          597
                                                                              -------      -------
                                                                              $ 7,498      $ 7,395
                                                                              =======      =======
</TABLE>

                                       36

<PAGE>

         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-

         In December 1997, the Company adopted Statement of Financial Accounting
         Standards No. 128, "Earnings Per Share" (SFAS 128). The statement
         specifies the computation, presentation, and disclosure requirements
         for earnings per share (EPS). SFAS 128 requires companies to compute
         net income (loss) per share under two different methods, basic and
         diluted per share data for all periods for which an income statement is
         presented. Basic earnings per share was computed by dividing net income
         (loss) by the weighted average number of common shares outstanding
         during the period. Diluted earnings per share reflects the potential
         dilution that could occur if net income were divided by the
         weighted-average number of common shares and potential common shares
         from outstanding stock options for the period. Potential common shares
         are calculated using the treasury stock method and represent
         incremental shares issuable upon exercise of the Company's outstanding
         options. For the years ended March 31, 1997, 1998, and 1999, the
         diluted loss per share calculation excludes effects of outstanding
         stock options as such inclusion would be anti-dilutive.

         COMPREHENSIVE LOSS-

         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 or
         loss 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.       COST REDUCTION MEASURES

         On November 10, 1998, as a result of the slower than planned ramp up of
         OPTISON sales, the Company announced the initiation of a multi-phase
         program to reduce expenses and preserve capital. The initial phase of
         cost reduction affected approximately 40 employees of the Company's
         140-person workforce. The next reduction in force, in April 1999,
         affected an additional 26 employees. The Company will implement a
         further reduction in force in the future when the out-sourcing of the
         Company's manufacturing operations is complete.

         The impact of the cost reduction measures on the Company's financial
         results included a one-time charge of $7.2 million for the year ended
         March 31, 1999. This charge included $6.1 million in nonrecurring
         charges and $1.1 million in cost of sales. The $6.1 million
         nonrecurring charge included $3.1 million for the write off of fixed
         assets, capitalized license fees and capitalized patent costs that will
         no longer be used by the Company as a result of the planned
         out-sourcing of manufacturing operations and the discontinuation of
         certain projects, $2.3 million of severance costs, and approximately
         $700,000 of technology transfer costs and other costs related to the
         Company's plan to out-source manufacturing.

         Additionally, the Company wrote off $1.2 million in fixed assets
         through accelerated depreciation during fiscal year 1999 and expects to
         write off another $1.6 million in fixed assets through accelerated
         depreciation over the next 12 months as the manufacturing process is
         out-sourced. As of March 31, 1999, the Company had approximately $1.0
         million in accrued liabilities related to the future costs of
         out-sourcing.



3.       THE CHUGAI AGREEMENT

         In April, 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

                                       37

<PAGE>

         which covers Japan, Taiwan and South Korea, to develop OPTISON (which
         may be marketed under a different name) and ORALEX-Registered
         Trademark-, 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 up-front
         license fee of $14.0 million in fiscal year 1999. 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. This
         premium was equal to $2.4 million and was recognized as revenue in the
         first quarter of fiscal year 1999. The equity investment was valued at
         $8.3 million. The Company is also eligible to receive milestone
         payments of up to $20.0 million based on Chugai's achievement of
         certain Japanese product development and regulatory goals.

         The accompanying consolidated statements of operations incorporate the
         impact of the Chugai transaction. Proforma unaudited consolidated
         operating results of the Company for the year ended March 31, 1999,
         excluding the impact of the Chugai transaction, are summarized below
         (in thousands, except per share amounts):


<TABLE>
<CAPTION>
                                                                         Year Ended March 31, 1999
                                                                 Results
                                                                Including        Impact of         Results
                                                                 Chugai           Chugai          Excluding
                                                               Transaction      Transaction        Chugai
                                                               -----------      -----------       ---------
<S>                                                            <C>              <C>               <C>
         Revenues                                               $ 25,952         $ 16,371         $  9,581
         Operating Expenses                                      (46,612)          (9,378)         (37,234)
         Interest Income, net                                        820                -              820
                                                                ------------------------------------------
         Income (Loss) before income taxes                       (19,840)           6,993          (26,833)
         Foreign income taxes                                     (1,400)          (1,400)               -
                                                                ------------------------------------------
         Net Income (Loss)                                      $(21,240)        $  5,593         $(26,833)
                                                                ==========================================

         Net Income (Loss) per share - Basic and Diluted        $  (1.14)        $   0.30         $  (1.44)
         Weighted Avg. Common shares Outstanding                  18,564           18,564           18,564
</TABLE>


4.       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, 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

                                       38

<PAGE>

                                                           -------        -----         ------         -------
         Marketable securities available-for-sale          $20,341        $   -         $  (67)        $20,274
                                                           =======        =====         ======         =======
</TABLE>


         The following table summarizes available-for-sale securities at March
31, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                       COST NET OF
                                                        PREMIUMS/         GROSS         GROSS       ESTIMATED
                                                        DISCOUNTS      UNREALIZED     UNREALIZED      FAIR
                                                        AMORTIZED         GAINS         LOSSES        VALUE
                                                       -----------     ----------     ----------    ---------
<S>                                                     <C>            <C>            <C>           <C>
         Money market                                    $ 2,682           $ -           $ -        $ 2,682
         Certificate of Deposit                            3,000             -             -          3,000
         U.S. treasury securities and obligations
             of U.S. government agencies                   1,500             -             -          1,500
         Corporate obligations                             9,794             6             -          9,800
                                                         -------           ---           ---        -------
         Marketable securities available-for-sale        $16,976           $ 6           $ -        $16,982
                                                         =======           ===           ===        =======
</TABLE>

         There were no gross realized gains or losses on sales of
         available-for-sale securities for the year ended March 31, 1999.

         The amortized cost and estimated fair value of debt and marketable
         securities at March 31, 1999, 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                         $16,599       $16,605
                      Due after one year through three years              377           377
                                                                      -------       -------
                                                                      $16,976       $16,982
                                                                      =======       =======
</TABLE>


         At March 31, 1998 a $3.0 million certificate of deposit was held as a
         compensating balance under the Company's debt agreement. In September
         1998, this loan was renegotiated and the compensating balance
         requirement was removed (see note 6). Accordingly, the certificate of
         deposit was included in the marketable securities balances for the
         fiscal year March 31, 1999, but not for the fiscal year ended March 31,
         1998.



5.       INCOME TAXES

                                       39

<PAGE>

         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,
                                                     ----------------------------------
                                                        1997        1998         1999
<S>                                                  <C>         <C>          <C>
                  Computed statutory tax             $ (4,517)   $ (7,342)    $ (7,221)
                  State income taxes                     (843)     (1,275)      (1,274)
                  Tax exempt interest                     (29)        (64)         (23)
                  Losses without income tax benefit     5,362       8,634        8,508
                  Other                                    27          47           10
                                                     --------    --------     --------
                  Provision for income taxes         $      -    $      -     $      -
                                                     ========    ========     ========
</TABLE>

         At March 31, 1999, the Company has deferred tax assets of approximately
         $48.9 million relating to the following tax loss carryforwards for
         income tax purposes (in thousands):

<TABLE>
<CAPTION>
                                                                                       EXPIRATION
                                                                           AMOUNT         DATES
                                                                          --------     ----------
<S>                                                                       <C>          <C>
         Federal ($120,975) and state ($38,855) net operating losses      $159,830      1999-2019
         Research and development credit - federal                           2,572      1999-2014
         Research and development credit - state                             1,328      1999-2014
         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 $1.1 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.

         The foreign income tax provision of $1.4 million included in the
         Company's fiscal 1999 net loss represents foreign taxes paid during the
         year related to the Chugai transaction.


6.       LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                                         MARCH 31,
                                                                                  ----------------------
                                                                                   1998            1999
<S>                                                                               <C>             <C>
                 Note payable - due 2004                                          $3,754          $3,682
                 Note payable - due 2001                                           3,600           2,400
                                                                                  ------          ------
</TABLE>

                                       40

<PAGE>


<TABLE>
<S>                                                  <C>              <C>
                                                       7,354           6,082
                 Less - current portion                1,272           1,278
                                                     -------          ------
                                                     $ 6,082          $4,804
                                                     =======          ======
</TABLE>

         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, 1998 and 1999. 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, 1999, maturities of this note in each of the
         next five fiscal years are: $79,000, $85,000, $92,000, $100,000 and
         $3,326,000.

         The note payable due in April, 2001 bears interest at the prime rate
         (7.75 percent at March 31, 1999) and is payable in monthly installments
         of $100,000 plus accrued interest. The loan contains covenants relating
         to cashflow coverage and minimum cash balances. In September 1998, the
         terms of the loan were renegotiated which lowered the interest rate
         from prime plus one percent to the prime rate and released a
         compensating balance requirement. The loan is secured by the tangible
         assets of the Company.



7.       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>
                  2000                                              $  703
                  2001                                                 379
                  2002                                                 234
                  2003                                                   9
                  2004                                                   -
                                                                    ------
                  Total minimum lease payments                      $1,325
                                                                    ======
</TABLE>

         In fiscal 1998, the Company entered into a 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, 1997, 1998 and 1999 was $194,000, $245,000, and $297,000,
         respectively. As part of the cost reduction measures implemented in
         fiscal year 1999, the Company consolidated facilities and no longer
         occupies the building that had become its corporate headquarters in
         fiscal year 1998. As a result of this move, the Company recognized
         approximately $370,000 of the remaining rent expense through the end of
         the lease term as other nonrecurring charges in fiscal year 1999.
         However, because the Company has not yet paid rent for the period April
         1999 through February 2000, the remaining lease payments are included
         in the schedule above.

         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, 1999 was $1.0 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.

                                           41
<PAGE>

         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 $14.0 million. In addition, Chugai made an equity
         investment in MBI common stock. MBI is eligible to receive milestone
         payments of up to $20.0 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.

         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 and
         OPTISON 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 patents covering its method of manufacturing
         gas-filled albumin microspheres using a milling process. 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

                                         42
<PAGE>

         proprietary rights of third parties. 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
         operations. 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 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.



8.       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

                                           43
<PAGE>

         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,
                                                               -----------------
                                                               1998         1999
<S>                                                            <C>          <C>
                  Options granted                              3,139        3,855
                  Future grants of options                       488        1,699
                                                               -----        -----
                                                               3,627        5,554
                                                               =====        =====
</TABLE>


         STOCK OPTIONS-

         1998 PLAN

         In fiscal 1999, the Board of Directors and the shareholders of the
         Company approved the 1998 Stock Option Plan as the sucessor to the
         Company's 1993 and 1997 Plans. All outstanding options under the 1993
         and 1997 Plans were incorporated into the 1998 Plan plus an additional
         2.0 million shares. The 1998 Plan provides for the grant of both
         qualified incentive stock options and nonstatutory stock options to
         purchase Common Stock to employees, non-employee directors, independent
         consultants and advisors of the Company under four separate equity
         incentive programs. The exercise price per share may be either 85% of
         the fair value on the date of grant or fair market value of the stock
         on date of grant depending on the program. Options granted under this
         plan 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.

         1997 OUTSIDE DIRECTORS' PLAN

         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 this plan 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

                                          44
<PAGE>

         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.

         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 OPTION PLANS             DIRECTORS' OPTION PLAN
                                                       --------------------------------    -----------------------------
                                                                        OPTION PRICE                      OPTION PRICE
                                                        SHARES           PER SHARE         SHARES          PER SHARE
                                                        ------         ---------------     ------       ----------------
<S>                                                    <C>             <C>        <C>      <C>          <C>        <C>
         Options Outstanding at March 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         -        -0-         -0-
         Expired or lapsed                              (176,760)      6.00 -     31.13         -        -0-         -0-
                                                       ---------       -----      -----   -------       ----       -----
         Options Outstanding at March 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         -        -0-         -0-
         Expired or lapsed                              (248,250)      6.25 -     22.25         -        -0-         -0-
                                                       ---------       -----      -----   -------       ----       -----
         Options Outstanding at March 31, 1998         2,985,580       6.00 -     22.25   153,000       6.88 -     17.00
                                                       ---------       -----      -----   -------       ----       -----
         Granted                                       1,194,288       0.93 -      9.69         -        -0-         -0-
         Exercised                                       (42,625)      6.00 -     10.13         -        -0-         -0-
         Expired or lapsed                              (434,912)      3.31 -     22.00         -        -0-         -0-
                                                       ---------       -----      -----   -------       ----       -----
         Options Outstanding at March 31, 1999         3,702,331       0.93 -     22.25   153,000       6.88 -     17.00
                                                       ---------       -----      -----   -------       ----       -----
         Options exercisable at March 31, 1999         2,402,807        -0-         -0-   153,000        -0-         -0-
                                                       ---------                          -------
         Reserved for future grants at March 31, 1999  1,674,404        -0-         -0-    25,000        -0-         -0-
                                                       ---------                          -------
</TABLE>



         The following table summarizes information about fixed stock options
         outstanding at March 31, 1999:

                                          45
<PAGE>

<TABLE>
<CAPTION>
                                        Options Outstanding                 Options Exercisable
                              -----------------------------------------    ---------------------
                                              Weighted-Avg      Weighted-              Weighted-
                                 Number        Remaining        Average      Number     Average
            Range of           Outstanding  Contractual Life    Exercise   Exercisable  Exercise
         Exercise Prices       at 3/31/99     Life (years)       Price     at 3/31/99    Price
         ---------------       ----------     ------------       -----     ----------    -----
<S>                            <C>                <C>            <C>        <C>         <C>
         0.9281- 7.00          1,339,880          8.34            4.8179      580,116    6.4920
         7.125 - 9.6875        1,610,068          8.04            8.7301    1,151,306    8.0887
         9.875 -22.25            905,383          6.16           14.2934      824,385   14.5654
                               ---------          ----           -------    ---------   -------
         0.9281-22.25          3,855,331          7.70            8.4682    2,555,807    9.8153
</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 1999 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 loss per common share for
         March 31, 1997, 1998 and 1999 would approximate the pro forma amounts
         below (in thousands, except per share amounts).

<TABLE>
<CAPTION>
                                                             Fiscal Years Ended, March 31,
                                                       -------------------------------------------
                                                         1997             1998             1999
<S>                                                    <C>              <C>              <C>
         Net income (loss) - as reported               $(13,284)        $(21,260)        $(21,240)
         Net income (loss) - pro forma                 $(14,559)        $(23,877)        $(26,429)
         Earning per share (loss) - as reported        $  (0.78)        $  (1.19)        $  (1.14)
         Earning per share (loss) - pro forma          $  (0.86)        $  (1.34)        $  (1.42)
</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
         1999: risk free rate of 4.75%, expected option life of 4 years,
         expected volatility of 65% and a dividend rate of zero. The weighted
         average fair value of options granted from the Employee stock option
         plans during fiscal 1997, 1998 and 1999 was $9.29, $7.85 and $5.43,
         respectively. The weighted average fair value of options granted from
         the Outside Director stock option plan during fiscal 1997 and 1998 was
         $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.



9.       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

                                            46
<PAGE>

         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
         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, 1999 the first 14 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

                                          47
<PAGE>

         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 $3.0 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 $4.0 million to the Company (upon the achievement of the
         specified product development milestone) and $1.8 million to
         Nycomed (representing 45% of the $4.0 million payment to the
         Company). 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 $1.0 million was paid in fiscal 1996 and the
         remainder was paid in fiscal 1997.

         In April 1999, the Company and Mallinckrodt agreed to transfer the
         manufacture of OPTISON from MBI to Mallinckrodt. The parties agreement
         will be incorporated into an amendment to ARDA. In addition to the
         transfer of manufacturing, the amended agreement will extend
         Mallinckrodt's responsibility for funding clinical trials to include
         all cardiology, as well as radiology, clinical trials for OPTISON in
         the United States. MBI will continue to conduct all cardiology trials
         for OPTISON and will assume responsibility for conducting radiology
         trials in the United States. Under the amended agreement, which will be
         retroactive to March 1, 1999, Mallinckrodt will reimburse MBI for all
         manufacturing expenses, including incremental costs related to the
         technology transfer. In exchange for the transfer of manufacturing and
         increased financial support of clinical trials for OPTISON, MBI will
         receive a reduced royalty rate on product sales of OPTISON.

         Mallinckrodt is the Company's principal strategic marketing partner for
         its ALBUNEX and OPTISON ultrasound contrast agents for all areas of the
         world except Japan, Taiwan and South Korea, which are exclusively
         licensed to Chugai. 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 $3.0 million to Shionogi and agreed to pay an additional
         $5.5 million over the next three years, of which $4.0 million had been
         paid at March 31, 1999.

         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 $14.0 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.

                                          48
<PAGE>

         During the years ended March 31, 1997, 1998 and 1999, the Company
         received contract research payments and earned revenue under the above
         agreements as follows (in thousands):

<TABLE>
<CAPTION>
                                                                          FISCAL YEARS ENDED MARCH 31,
                                                                       ---------------------------------
                                                                         1997         1998        1999
<S>                                                                    <C>          <C>         <C>
         Contract payments received:
             Chugai                                                    $      -     $ 1,575     $ 14,796
             US Government                                                    -          95            -
             Mallinckrodt                                                10,200       5,000        5,500
                                                                       --------     -------     --------
             Total                                                     $ 10,200     $ 6,670     $ 20,296
                                                                       ========     =======     ========
         Contract payments earned:
             Chugai                                                    $      -     $     -     $ 16,371
             US Government                                                    -          95            -
             Mallinckrodt                                                10,200       5,000        5,500
                                                                       --------     -------     --------
             Total                                                     $ 10,200     $ 5,095     $ 21,871
                                                                       ========     =======     ========
</TABLE>


         10.   OTHER NONRECURRING CHARGES

         Other nonrecurring charges include the following for the years
         presented:

<TABLE>
<CAPTION>
                                                                       FISCAL YEARS ENDED MARCH 31,
                                                                       ----------------------------
                                                                        1997       1998       1999
<S>                                                                    <C>          <C>      <C>
         Write-off of license rights of  former Nycomed territory      $ 3,000      $ -      $     -
         (Note 9)
         Impact of Cost Reduction Measures  (Note 2)                         -        -        6,120
         Write-off of reacquired Shionogi license rights (Note 3)            -        -        8,500
         Bankers fees related to Chugai (Note 3)                             -        -          878
                                                                       -------      ---      -------
                                                                       $ 3,000      $ -      $15,498
                                                                       =======      ===      =======
</TABLE>


         As a result of slower than planned OPTISON sales, the Company initiated
         a cost reduction plan in fiscal 1999 to reduce expenses and preserve
         capital. The impact of the cost reduction measures, out-sourcing of the
         Company's manufacturing operations and discontinuation of certain
         projects resulted in a one-time charge of $6.1 million. The Company
         wrote off $1.2 million in fixed assets through accelerated depreciation
         during fiscal year 1999 and expects to write-off another $1.6 million
         in fixed assets through accelerated depreciation over the next 12
         months as the manufacturing process is out-sourced.

         In fiscal 1999, the Company wrote off $8.5 million of license rights
         related to the sale to Chugai of territory rights previously reacquired
         from Shionogi. In addition, the Company incurred a one-time charge of
         $878,000 in bankers fees in connection with the Chugai Agreement.

         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 9). As a result, during fiscal year 1997
         the Company wrote off the license rights of the former Nycomed
         territory in the amount of $3.0 million.

                                          49
<PAGE>



11.      SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION

         The following is a summary of the unaudited quarterly results of
         operations for the years ended March 31, 1999 and 1998 (in thousands,
         except per share amounts):


<TABLE>
<CAPTION>
         Quarter Ended:                                                  Jun 30     Sep 30     Dec 31     Mar 31
         --------------                                                  ------     ------     ------     ------
<S>                                                                     <C>        <C>         <C>        <C>
         Fiscal 1999
         Revenues                                                       $ 18,988   $  2,666    $ 2,185    $ 2,113
         Research and Development Costs                                    2,227      2,409      2,358      2,089
         Total Operating Costs and Expenses                               17,113      9,950     14,238      5,311
         Net Income/(Loss)                                                   740     (7,068)   (11,870)    (3,042)
         Income/(Loss) Per Common Share                                     0.04      (0.38)     (0.64)     (0.16)
         Weighted Average Common Shares Outstanding                       18,512     18,581     18,581     18,581

         Quarter Ended:                                                  Jun 30     Sep 30     Dec 31     Mar 31
         --------------                                                  ------     ------     ------     ------
         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 Income/(Loss)                                                (4,799)    (4,621)    (5,903)    (5,937)
         Income/(Loss) Per Common Share                                    (0.27)     (0.26)     (0.33)     (0.33)
         Weighted Average Common Shares Outstanding                       17,752     17,768     17,813     17,793
</TABLE>



12.      SUBSEQUENT EVENTS

         In April 1999, the Company and Mallinckrodt agreed to transfer the
         manufacture of OPTISON, the only advanced generation cardiac ultrasound
         imaging agent commercially available in the United States and Europe,
         from MBI to Mallinckrodt. The parties agreement will be incorporated
         into an amendment to ARDA. In addition to the transfer of
         manufacturing, the amended agreement will extend Mallinckrodt's
         responsibility for funding clinical trials to include all cardiology,
         as well as radiology, clinical trials for OPTISON in the United States.
         MBI will continue to conduct all cardiology trials for OPTISON and will
         assume responsibility for conducting radiology trials in the United
         States. Under the terms of the amended agreement, which will be
         retroactive to March 1, 1999, Mallinckrodt will reimburse MBI for all
         manufacturing expenses, including incremental costs related to the
         technology transfer. In exchange for the transfer of manufacturing and
         increased financial support of clinical trials for OPTISON, MBI will
         receive a reduced royalty rate on product sales of OPTISON.

         In May and June 1999, the Company received correspondence from the PTO
         with respect to the ImaRx patents involved in the reexamination
         proceedings. The PTO indicated that all claims of U.S. Patent No.
         5,547,656 (`656) and U.S. Patent No. 5,527,521(`521) will be allowed in
         their original form.

         In May 1999, the Company and Mallinckrodt received notice of a lawsuit
         filed against them by DuPont Pharmaceuticals Company ("DuPont) and
         ImaRx in the United States District Court for the District of Delaware
         (the "DuPont Case"). The lawsuit alleges that the manufacture and sale
         of OPTISON infringes the `656 patent owned by ImaRx and exclusively
         licensed to DuPont. MBI has counterclaimed for a declaration of
         invalidity and non-infringement with respect to the `656 patent. In
         June 1999, DuPont and ImaRx amended their complaint in the DuPont case
         to add allegations that the manufacture and sale of OPTISON also
         infringes the `521 patent owned by ImaRx and exclusively licensed to
         DuPont.

         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

                                         50
<PAGE>

         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.








                                        51
<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 1999 Annual Meeting of
Stockholders to be held on August 26, 1999 ("1999 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 1999 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 1999 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 1999
Proxy Statement.



                                      52

<PAGE>

                                   PART IV

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

<TABLE>
<S>               <C>
  (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".

         (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.
                  (Incorporated by reference from Exhibit 3.2 to the Company's
                  Annual Report on Form 10-K for the fiscal year ended March 31,
                  1998.)

         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

                                           53
<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 10.30 to the Company's
                  Annual Report on Form 10-K for the fiscal year ended March 31,
                  1992.)

                                          54
<PAGE>

         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.)

         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.)

                                            55
<PAGE>

         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. (Incorporated by
                  reference from Exhibit 10.32 to the Company's Annual Report on
                  Form 10-K for the fiscal year ended March 31, 1998.)

         10.33+   Third Amendment to 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, 1998.)

         10.34+   1998 Stock Option Plan. (Incorporated by reference to the
                  Company's Proxy Statement on Form 14A for the fiscal year
                  ended March 31, 1998.)

         10.35+*  1998 Stock Option Plan (as amended and restated through
                  September 22, 1998.)

         10.36+   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.)




         10.37+   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.)

         10.38+   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.)

                                             56
<PAGE>


         10.39+   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).

         10.40+   Employment Agreement dated as of September 1, 1997 between the
                  Company and Gerard A. Wills. (Incorporated by reference from
                  Exhibit 10.38 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended March 31, 1998.)

         10.41+   Employment Agreement dated as of September 1, 1997 between the
                  Company and William I. Ramage. (Incorporated by reference from
                  Exhibit 10.39 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended March 31, 1998.)

         10.42+   Employment Agreement dated as of December 1, 1997 between the
                  Company and Thomas Jurgensen. (Incorporated by reference from
                  Exhibit 10.40 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended March 31, 1998.)

         10.43+   Employment Agreement dated as of September 1, 1997 between the
                  Company and Joni Harvey. (Incorporated by reference from
                  Exhibit 10.41 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended March 31, 1998.)

         10.44+   Employment Agreement dated as of September 1, 1997 between the
                  Company and Howard Dittrich. (Incorporated by reference from
                  Exhibit 10.42 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended March 31, 1998.)

         10.45+   Separation Agreement effective May 30, 1997 between the
                  Company and Allan Mizoguchi, Ph.D. (Incorporated by reference
                  from Exhibit 10.43 to the Company's Annual Report on Form 10-K
                  for the fiscal year ended March 31, 1998.)

         10.46+   Separation Agreement effective May 30, 1997 between the
                  Company and James Barnhart, Ph.D. (Incorporated by reference
                  from Exhibit 10.44 to the Company's Annual Report on Form 10-K
                  for the fiscal year ended March 31, 1998.)

         10.47+   Separation Agreement effective September 4, 1998 between the
                  Company and Kenneth J. Widder, M.D. (Incorporated by reference
                  from Exhibit 10.1 to the Company's Quarterly Report on Form
                  10-Q for the quarterly period ended September 30, 1998.)

         10.48+*  Separation Agreement effective December 31, 1998 between the
                  Company and Gerard A. Wills.

         10.49+*  Separation Agreement effective March 3, 1999 between the
                  Company and William T. Ramage.

         10.50+*  Separation Agreement effective March 3, 1999 between the
                  Company and Thomas Jurgensen.

                                            57
<PAGE>

         10.51    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.)

         10.52    First Amendment to Sublease dated February 27, 1998 between
                  the Company and Dura Pharmaceuticals, Inc. (Incorporated by
                  reference from Exhibit 10.46 to the Company's Annual Report on
                  Form 10-K for the fiscal year ended March 31, 1998.)

         10.53    Sublease dated October 1, 1997 between the Company and Dura
                  Pharmaceuticals, Inc. (Incorporated by reference from Exhibit
                  10.47 to the Company's Annual Report on Form 10-K for the
                  fiscal year ended March 31, 1998.)

         10.54    Equipment Lease Agreement dated June 30, 1997 between the
                  Company and Mellon US Leasing. (Incorporated by reference from
                  Exhibit 10.48 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended March 31, 1998.)

         10.55    Sublease dated February 16, 1998 between the Company and
                  ComStream Corporation. (Incorporated by reference from Exhibit
                  10.49 to the Company's Annual Report on Form 10-K for the
                  fiscal year ended March 31, 1998.)

         10.56    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.)

         10.57    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.)

         10.58    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.)

         10.59*   License Agreement dated March 26, 1999 between the Company and
                  Schering Aktiengesellschaft.

         19       Documents not previously filed are marked with an asterisk (*).

         23*      Consent of Arthur Andersen LLP.
</TABLE>


                                             58
<PAGE>

(b)     REPORT ON FORM 8-K

        A Current Report on Form 8-K dated November 10, 1998 was filed on
        January 11, 1999 reporting the following: (1) that as a result of slower
        than planned ramp up of OPTISON sales, the Company had initiated a
        multi-phase program to reduce expenses and preserve capital; (2) that
        changes in management had occurred; and (3) that the U.S. Patents &
        Trademark Office would allow certain of the `751 patent claims filed by
        Sonus Pharmaceuticals to be filed against the Company in their original
        form.








                                      59
<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 28, 1999.

                                  MOLECULAR BIOSYSTEMS, INC.


                                  By: /s/ Bobba Venkatadri
                                      --------------------------------
                                          Bobba Venkatadri
                                          President and Chief Executive Officer

      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>
          Signature                                Title                                 Date
          ---------                                -----                                 ----
<S>                                    <C>                                           <C>
/s/ Bobba Venkatadri                   President, Chief Executive                    June 28, 1999
--------------------------------           Officer (Principal Executive
    Bobba Venkatadri                       Officer)

/s/ Elizabeth L. Hougen                Executive Director-Finance                    June 28, 1999
--------------------------------           and Chief Financial Officer
    Elizabeth L. Hougen                    (Principal Financial and
                                           Accounting Officer)

/s/ Robert W. Brightfelt               Director                                      June 28, 1999
--------------------------------
    Robert W. Brightfelt

/s/ Charles C. Edwards, M.D.           Director                                      June 28, 1999
--------------------------------
    Charles C. Edwards, M.D.

/s/ Gordon C. Luce                     Director                                      June 28, 1999
--------------------------------
    Gordon C. Luce

/s/ David Rubinfien                    Director                                      June 28, 1999
--------------------------------
    David Rubinfien

/s/ David W. Barry, M.D.               Director                                      June 28, 1999
--------------------------------
    David W. Barry, M. D.

/s/ Jerry Jackson                      Director                                      June 28, 1999
--------------------------------
    Jerry Jackson
</TABLE>

                                      60