EPIX MEDICAL INC, 10-K, 2000-03-20

EPIX MEDICAL INC
10-K, 2000-03-20
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

<TABLE>
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-21863

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EPIX MEDICAL, INC.

(Exact name of Registrant as Specified in its Charter)

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DELAWARE 04-3030815
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
71 ROGERS STREET 02142
CAMBRIDGE, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
</TABLE>

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK, $.01 PAR VALUE PER SHARE

(Title of Class)

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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /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. / /

The aggregate market value, based upon the average bid and asked price of
the shares as reported by the Nasdaq National Market, of voting stock held by
non-affiliates (without admitting that any person whose shares are not included
in such calculation is an affiliate) at March 14, 2000 was $224,334,586.

As of March 14, 2000, 11,729,913 shares of the registrant's Common Stock,
$.01 par value per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report on Form 10-K.

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PART I

ITEM 1. BUSINESS

GENERAL

We are engaged in the development of targeted contrast agents to both
improve the capability and expand the use of magnetic resonance imaging ("MRI")
as a diagnostic tool for a variety of diseases. We were incorporated in Delaware
in 1988 and commenced operations in 1992.

OVERVIEW

We are engaged in the development of targeted contrast agents to both
improve the capability and expand the use of MRI as a tool for diagnosing human
disease. Our principal product under development, AngioMARK (MS-325), is an
injectable intravascular contrast agent designed for multiple cardiovascular
imaging applications, including peripheral vascular disease and coronary artery
disease. We believe that AngioMARK will significantly enhance the quality of MR
images and provide physicians with a clinically superior, non-invasive (i.e., no
more invasive than a peripheral intravenous injection ("I.V.")) and
cost-effective method for diagnosing cardiovascular disease. We also believe
that AngioMARK will simplify the diagnostic pathway for a number of
cardiovascular diseases and in many cases replace highly invasive (i.e., more
invasive than a peripheral I.V. up to and including a surgical procedure) and
expensive X-ray angiography, which is currently considered the definitive
diagnostic exam for assessing cardiovascular disease. We are also investigating
additional imaging applications for AngioMARK, including breast cancer detection
and myocardial perfusion imaging.

As a major component of our corporate strategy, we have sought to enter into
alliances with leaders in the pharmaceutical, diagnostic imaging and MRI
equipment industries to facilitate the development, manufacture, marketing, sale
and distribution of our products. To date, we have formed key alliances with
Mallinckrodt Inc. ("Mallinckrodt") for the development, manufacture and
worldwide (excluding Japan) sale of AngioMARK and Daiichi Radioisotope
Laboratories ("Daiichi") for the sale of AngioMARK in Japan. We have also formed
collaborations with the three major MRI scanner manufacturers, General Electric
Medical Systems, Philips Medical Systems and Siemens Medical Systems, to develop
advanced imaging techniques designed to facilitate the use of AngioMARK-enhanced
MRI. In addition, we have entered into drug discovery collaborations with Dyax
Corp. ("Dyax") and NeoGenesis Pharmaceuticals. Finally, we and Pfizer Inc.
("Pfizer") recently announced positive results from a collaboration intended to
evaluate the potential use of AngioMARK-enhanced MRI in diagnosing and
monitoring female sexual arousal dysfunction. We entered into these alliances,
and will seek to enter into future strategic alliances with industry leaders, in
order to obtain access to resources and infrastructure to leverage our
strengths.

We have completed two Phase I clinical trials to date; the first was
completed in February 1997, and the second in February 1998. In June 1998, we
completed a Phase II clinical trial designed to test the safety and preliminary
efficacy of AngioMARK-enhanced MR angiography for the evaluation of peripheral
vascular disease. In June 1999, we initiated a Phase III clinical trial to
determine the efficacy of AngioMARK-enhanced MR angiography for the detection of
aortoiliac occlusive disease. Evaluation for aortoiliac occlusive disease is a
critical component of two common procedures: abdominal aortography, particularly
for the identification of abdominal aortic aneurysm, and leg arteriography, also
known as peripheral run-off, for the detection of atherosclerosis. The trial, a
multi-center, comparative, two-arm study, is designed to compare the diagnostic
accuracy of AngioMARK-enhanced MR angiography with that of X-ray angiography. We
are also currently conducting a Phase II feasibility trial to test the safety
and feasibility of AngioMARK-enhanced MR angiography for the evaluation of
coronary artery disease, and recently completed enrollment for an additional
Phase II feasibility trial to test the safety and preliminary efficacy of
AngioMARK for detecting breast cancer.

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The use of MRI has grown steadily over the past 10 years due to reduced cost
and improved imaging capabilities and now provides an effective diagnostic
modality for a broad range of applications. MRI manufacturers have improved the
hardware and software of their systems, reducing the time per procedure
dramatically while significantly enhancing image resolution. While MRI is
currently used extensively to image many organs and tissues in the body, its use
in imaging the arteries and veins has been limited. Prior attempts to develop
contrast agents to facilitate the clinical utility of MRI, particularly for
coronary arteries, have had limited success. Unlike most currently available MRI
contrast agents, which are non-specific, AngioMARK is a targeted intravascular
contrast agent designed to bind to albumin, the most common blood protein.
Because of its affinity for albumin, AngioMARK remains at high concentrations in
the bloodstream throughout the MRI exam and, consequently, provides the image
acquisition time and signal strength needed to obtain a high contrast, high
resolution image of the cardiovascular system. Like most currently available MRI
contrast agents, AngioMARK is designed to be excreted safely through the kidneys
over time. We believe that the advantages of AngioMARK, coupled with the reduced
cost and improved imaging capabilities of MRI, will lead to significantly
expanded use of MRI to diagnose cardiovascular and other diseases.

CARDIOVASCULAR DISEASE BACKGROUND

The human cardiovascular system consists of the heart and a vast series of
arteries and veins that carry blood throughout the body. Cardiovascular disease,
a broad class of diseases affecting the heart and vasculature, is the number one
cause of death in the United States, with over 950,000 fatalities each year. 1
out of every 2.4 deaths in the United States is attributed to cardiovascular
disease. It is estimated that over 58 million Americans suffer from some form of
this disease.

Atherosclerosis is one of the most common forms of cardiovascular disease.
This condition refers to the accumulation of fatty plaques in the inner lining
of blood vessels, resulting in a thickening or hardening of affected vessels. As
the disease progresses, the arteries can become weakened or increasingly
narrowed, thereby reducing blood flow to vital organs (e.g., the heart and
brain). Recent research in cardiovascular disease has begun to highlight the
systemic nature of plaque buildup. Because major risk factors tend to affect all
vascular regions, clinical manifestations of cardiovascular disease tend to
coexist in many patients. Therefore, patients diagnosed with cardiovascular
disease in one vascular region are at high risk of having

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similar disease in another vascular region. Depending on the artery in which
disease occurs, this condition can have very serious consequences.

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Aorta: The aorta is the main blood vessel that carries blood from
the heart to the rest of the body. Degenerative changes in
the vessel wall often result in the enlargement or bulging
of the lower part of this vessel, known as abdominal aortic
aneurysm. Individuals with this condition are at serious
risk that the aneurysm will rupture, causing
life-threatening bleeding. There are an estimated 200,000
cases of abdominal aortic aneurysm diagnosed each year in
the United States. Because this condition can be
asymptomatic for many years, many physicians have begun to
consider the merits and cost-effectiveness of routine
screening programs for this disease.

Extremities: Atherosclerotic blockages in the major arteries of the
pelvis and legs- the iliac, femoral, popliteal and tibial
arteries--can lead to ischemia (lack of oxygen) or
infarction (death of tissue) in these areas. Complications
from atherosclerotic disease in these vessels include pain,
limitations in mobility, and amputation of the extremities.
Each year approximately 100,000 amputations are performed in
the United States primarily due to some form of
cardiovascular disease.

Coronary Arteries: The coronary arteries are responsible for supplying blood to
the heart muscle (myocardium). When these arteries are
narrowed or clogged due to atherosclerotic buildup, the
result can be chest pain (angina pectoris) or heart attack
(myocardial infarction). This condition, known as coronary
artery disease, is estimated to afflict 7 million Americans.
Coronary artery disease is primarily responsible for the
nearly 500,000 heart attack deaths each year, making it the
number one cause of death in the United States.

Renal Arteries: The renal arteries are the vessels which carry blood to the
kidneys. Blockage of these arteries can result in renal
failure, and is estimated to account for up to 10% of all
cases of hypertension, a condition which afflicts
approximately 50 million individuals in the United States.
Early diagnosis can be extremely helpful for patients with
renovascular hypertension because it can be treated with
various revascularization procedures; however, X-ray
angiography, the current definitive diagnosis for this
condition, carries elevated risk for patients with renal
impairment.

Cerebrovascular Individuals with atherosclerotic lesions in the carotid and
Vessels: intracranial arteries can be at serious risk of complete
vessel blockage. Blocked arteries can prevent areas of the
brain from receiving the necessary blood supply, leading to
stroke. A significant portion of the 600,000 strokes each
year in the United States are a result of atherosclerotic
disease in the vessels of the head and neck.
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DIAGNOSING CARDIOVASCULAR DISEASE

Cardiovascular disease is currently diagnosed using a number of different
imaging technologies ("modalities"), including ultrasound, nuclear medicine,
computed tomography ("CT"), X-ray angiography, and MRI. These modalities can be
separated into two broad categories according to the types of structures they
are designed to image: angiographic imaging and cardiac imaging.

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- Angiography refers to the imaging of arteries. While ultrasound, CT and,
more recently, MRI are sometimes used to detect disease in the certain
vessels, X-ray angiography represents the current reference standard
("gold standard") for diagnosing cardiovascular disease. Invented in the
1920's, an X-ray angiogram is an invasive procedure performed in a
surgical setting that requires the insertion of a catheter through a
puncture of the femoral artery in the patient's groin. Once the catheter
is placed in the relevant artery, toxic X-ray contrast dye is injected
into the bloodstream and a 2-dimensional image is acquired of that
vascular region. A coronary X-ray angiogram typically costs between $2,000
and $6,000, while a peripheral (i.e., non-coronary artery) angiogram
typically costs between $1,000 and $3,000. These procedures carry
significant risk of complications, particularly for imaging the coronary
arteries, where patients are at risk of renal failure and even death.
While peripheral X-ray angiograms have slightly lower morbidity rates
compared to coronary X-ray angiograms, there is a risk of significant
complications, including limb loss and renal failure. In addition, X-ray
angiography does not always provide sufficient information for clinical
decision-making, particularly in the coronary arteries. While this
procedure identifies the location of arterial blockages, in many cases it
cannot conclusively determine their impact on blood flow. Therefore, for
many blockages, additional studies must be performed to enable the
physician to make a definitive diagnosis. Finally, a significant portion
of those patients undergoing diagnostic X-ray angiography do not require
invasive therapy such as percutaneous transluminal coronary angioplasty
("PTCA") or coronary artery bypass graft ("CABG"). It is estimated that
40% of all coronary angiography patients are diagnosed with conditions
that do not warrant invasive therapy. Based on available procedure data,
we estimate that over 4.5 million X-ray angiograms were performed in the
United States in 1998, of which approximately 2.1 million were coronary
angiograms.

- Cardiac imaging comprises those imaging modalities designed to give
functional information about the heart muscle itself, rather than vessels
supplying blood to the heart. The two primary cardiac imaging techniques
are stress echocardiograms and nuclear stress perfusion studies. Stress
echocardiograms use transthoracic ultrasound to measure motion of the
walls of the heart under physical or pharmacological stress. In most
cases, a lack of blood flow to a particular area of the heart will be
reflected in atypical motion of the heart wall. These tests are
non-invasive and typically cost between $300 and $900. A stress
echocardiogram, however, is often inconclusive and provides no information
on the degree of blockage in the coronary arteries. Nuclear stress
perfusion studies, which measure the flow of blood to cardiac tissue, can
be used either as the critical diagnostic test prior to X-ray angiography
or to confirm the impact on blood flow of an intermediate blockage
identified through X-ray angiography. These tests are non-invasive, use
small quantities of ionizing radiation and typically cost between $600 and
$1,400. A patient is injected with a radiopharmaceutical and then a gamma
camera is used to detect uptake of the agent in the heart muscle. A
deficiency in blood flow to particular regions of the heart is shown on
the resultant images. While the test can identify the effects of coronary
artery disease, it also fails to provide information on degree of blockage
in the coronary arteries. It is estimated that more than 1.6 million
stress echocardiograms and 3.8 million nuclear stress perfusion studies
were conducted in the United States in 1998.

As the foregoing suggests, the diagnosis of cardiovascular disease is
complex, requiring several different imaging modalities. Non-invasive modalities
like nuclear medicine and stress echocardiography can give functional
information about the heart, but often cannot identify the exact cause of heart
dysfunction. X-ray angiography, on the other hand, cannot always determine how
blockages in the arteries affect function, particularly in the heart., and is
itself an invasive procedure. we therefore believe that there is significant
clinical need for a highly accurate non-invasive exam which provides more
comprehensive diagnostic information about the cardiovascular system.

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MAGNETIC RESONANCE IMAGING BACKGROUND

In an MRI exam, images are obtained by placing a portion of the patient's
body in a magnetic field and applying safe, low-energy radio waves. The
different organs and tissues in the body respond uniquely to the electromagnetic
field within the MRI scanner and these responses can be captured and converted
into a three-dimensional image. MRI can provide high contrast, high resolution
images of anatomy deep inside the body.

The use of MRI, which was developed in the 1970s, has grown steadily over
the past decade due to declining costs, increased clinical effectiveness,
reduced exam times and more comprehensive coverage by third-party payors. As an
example, a standard MRI brain exam, which in 1985 required 60 minutes and cost
approximately $1,500, now takes only 30 minutes, costs less than half as much
and can identify tumors that are over 50% smaller than those detectable in 1985.
The installed base of MRI scanners in the United States has grown from fewer
than 400 scanners in 1985 to over 5,000 in 1998, during which year there were
over 11.9 million MRI exams performed.

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

Images obtained in certain applications of MRI can be enhanced through the
use of contrast agents. Contrast agents are injected into a vein in the
patient's arm prior to a scan and are designed to amplify the contrast between
various tissues, organs and anatomic structures. Currently available MRI
contrast agents are primarily non-specific gadolinium compounds which diffuse
very rapidly throughout the body following injection. While they are effective
at enhancing images of certain tissue types, primarily in the brain and spine,
they have demonstrated limited efficacy for most vascular applications. The use
of non-specific contrast agents has grown by more than 60% in the last five
years; it is estimated that these agents are currently used in 35% to 40% of all
MRI exams.

MRI has been established as the imaging modality of choice for a broad range
of applications, including brain tumors, knee injuries and many spinal
disorders. Nevertheless, MRI has been used sparingly as an imaging modality for
the cardiovascular system due to its limited ability to provide sufficient
contrast between blood vessels and the surrounding tissue. Further, MRI exams
using the existing non-specific contrast agents are limited by the rapid
diffusion of these agents out of the vascular system, which reduces the time
during which an image can be acquired. Consequently, many experts believe MRI
contrast agents which remain in the vasculature for extended periods of time
will be necessary to obtain sufficient contrast for widespread clinical use of
MRI to image the vascular system.

OUR APPROACH TO CARDIOVASCULAR MRI

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

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images are intended to provide sufficient anatomical detail for definitive
diagnosis and surgical planning. We estimate that an MRI exam with AngioMARK
will cost approximately between $500 and $1,000.

We believe that AngioMARK-enhanced MR angiography has the potential to
replace a significant portion of the estimated 4.5 million X-ray angiograms
performed each year in the United States. Whereas X-ray angiography is an
invasive, expensive procedure that captures only 2-dimensional data over a
limited vascular region, AngioMARK-enhanced MR angiography is a non-invasive,
relatively inexpensive exam with the ability to capture 3-dimensional images of
the vasculature over the entire body. We believe that the possibility of a
whole-body MR angiography exam with a single injection of AngioMARK is
particularly well suited for the diagnosis of cardiovascular disease, given the
systemic nature of this condition. In addition, we expect that a significant
patient population in whom cardiovascular disease is suspected but for whom
X-ray angiography is contraindicated (e.g., patients with renal impairment who
are at increased risk of renal failure or allergic reactions due to the X-ray
contrast dye) will be likely candidates for AngioMARK-enhanced MR angiography.

We believe the unique properties of AngioMARK will find clinical utility
beyond its angiographic applications. We envision a time, for example, when
AngioMARK, coupled with anticipated advances in software and hardware for MRI
equipment, will enable physicians to use MRI to perform a non-invasive,
integrated cardiac exam for the diagnosis of coronary artery disease. Such a
procedure would be designed to provide information on coronary artery anatomy,
including location of arterial blockages, as well as cardiac perfusion and
cardiac function data, in one sitting early in the diagnostic work-up. Because
the procedure is intended to provide physicians with more comprehensive
diagnostic information at an earlier stage of the diagnostic work-up, physicians
would be able to make a more informed diagnosis, and therefore arrange for
appropriate patient treatment, sooner than would otherwise be possible, thereby
potentially achieving better patient outcomes at a lower cost. Of the
6.75 million patients in the United States who enter the diagnostic pathway for
coronary artery disease each year, we estimate that over half (3.44 million)
would be candidates for such an integrated cardiac exam. Under the current
diagnostic regime, these patients would typically receive stress echocardiograms
and/or nuclear stress perfusion studies; approximately 40% would then receive
diagnostic X-ray angiograms.

In addition to the suspected coronary artery disease patients, we believe
that patients who have undergone an intervention for this condition, either
through a PTCA or a CABG, could benefit from AngioMARK-enhanced MR angiography.
After either a PTCA or a CABG, optimal patient management would include
follow-up exams to determine the re-forming of blockages ("restenosis") as well
as proper functioning of grafts. However, while it is estimated that more than
600,000 PTCAs and 600,000 CABGs are performed each year in the United States,
only a small proportion of the patients undergoing these procedures received
follow-up coronary X-ray angiography ("relooks"). We estimate that there are
currently over 2.1 million patients who have undergone a PTCA and over
2.7 million patients who have undergone a CABG and who are potential candidates
for a periodic relook. Due to the risk, discomfort and expense associated with
coronary X-ray angiography, follow-up imaging currently is limited, which can
lead to increased patient management costs and poorer outcomes due to
undiagnosed restenosis and other complications. We believe that the availability
of AngioMARK may lead to an increase in follow-up exams using MRI. We further
believe that AngioMARK could enable non-invasive cardiologists to visualize the
coronary arteries of the estimated 300,000 patients who are treated with
thrombolytic therapy (streptokinase and Tissue Plasminogen Activator) each year.

Because of its potential for high-resolution imaging of the vasculature,
AngioMARK is being investigated for possible use in several applications
involving microvessels. We believe, for example, that AngioMARK could assist
physicians in diagnosing breast cancer in the estimated 2 million women who have
sub-optimal mammograms each year. Due to our strong signal especially at low
(0.5T and below) magnetic fields, we believe AngioMARK has the potential to
perform high-resolution breast imaging procedures on less expensive, more
patient-friendly low-field MRI scanners. We recently completed enrollment for a
Phase II feasibility study designed to evaluate the safety and efficacy of
AngioMARK-

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enhanced MRI in identifying malignant breast lesions in women with breast
abnormalities. We have also undertaken a Phase II feasibility trial, in
conjunction with Pfizer Inc., to assess the potential utility of
AngioMARK-enhanced MRI in diagnosing female sexual arousal dysfunction by
monitoring pelvic blood volume in women. It is estimated that up to 40% of all
women in the United States suffer from some sort of sexual dysfunction.

TECHNOLOGY

BACKGROUND

Our products under development are based upon our proprietary biophysics
technology platform. Our product candidates are small molecule chelates (soluble
metal-organic complexes) containing a magnetically active metal element which
elicit a strong MRI signal and are designed to be safely excreted from the body.
We have developed significant expertise in the design, synthesis and
characterization of metal-containing complexes for in vivo use. While the
contrast agents primarily used in MRI today are non-targeted in the sense that
they diffuse indiscriminately throughout the tissues of the body, we believe
that our proprietary technology platform will enable us to design contrast
agents capable of targeting specific tissues or organs by binding to particular
proteins. Our proprietary biophysics technology platform consists of two key
elements:

RECEPTOR-INDUCED MAGNETIC ENHANCEMENT

Receptor-induced magnetic enhancement ("RIME") technology, which was
developed by Dr. Randall Lauffer, our founder and Chief Scientific Officer,
while at Massachusetts General Hospital ("MGH"), allows targeting of a contrast
agent to particular tissue and fluid types in the body while simultaneously
multiplying the signal enhancing effect of the agent. We now exclusively license
this technology under patents held by MGH. RIME technology involves the design
of metal complexes that bind to particular proteins and receptor molecules in
the body. This binding causes increased concentration and retention of the
contrast agent in the specific tissues and fluids that contain the targeted
receptor molecules. Moreover, the binding of agent to receptor reduces the rate
at which the agent rotates, or tumbles, in solution. This relaxation in tumbling
rate leads to a complex magnetic effect whereby the agent's signal-enhancing
characteristics are substantially increased, resulting in a stronger signal
during MR scans.

ENZYME SENSING TECHNOLOGY

We developed enzyme sensing technology, an extension of the RIME technology
which potentially allows MRI to probe biological events on the molecular level
for the first time, thereby increasing the sensitivity of MRI. We are developing
small molecule contrast agents that become active in the presence of certain
enzymes. In the presence of these enzymes, such an agent would bind to a target
receptor and express its full RIME signal enhancement capabilities. Because the
presence of elevated levels of particular enzymes occur only in certain
biological situations, enzyme sensing technology would allow MRI to scan for
specific biological events currently undetectable with MRI.

OUR PRODUCT & DEVELOPMENT PROGRAMS

ANGIOMARK

Our lead product candidate, AngioMARK, is a targeted intravascular contrast
agent intended for use with MRI. AngioMARK is a gadolinium-based small molecule
chelate which is engineered with our proprietary RIME technology and designed to
bind to albumin, the most common blood protein. In AngioMARK images using
standard MRI techniques, the blood gives off a strong magnetic signal and
appears bright against the dark background of surrounding tissue. Because of its
affinity for albumin, AngioMARK remains at high concentrations in the
bloodstream throughout the MRI exam and therefore provides the image acquisition
time and signal strength needed to obtain a high contrast, high resolution

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image of the cardiovascular system. Like most currently available non-specific
contrast agents, AngioMARK is designed to be excreted safely through the kidneys
over time.

While AngioMARK is based on our proprietary technology platform, its
chemical composition is similar to several currently available MRI contrast
agents, which have established a strong safety record and are known to cause few
side effects. Due to the increased magnetic signal elicited by AngioMARK, we
expect it to be used at a similar or lower dose than these contrast agents. As a
result of these factors, we believe that AngioMARK will have a safety profile
comparable to currently available MRI contrast agents.

In June 1998, we completed a Phase II clinical trial to test the safety and
preliminary efficacy of AngioMARK for the evaluation of peripheral vascular
disease in the carotid, iliac and femoral arteries. This Phase II trial was
conducted at multiple clinical sites and involved the blinded administration of
AngioMARK at several dosing levels in a total of 81 patients. In the trial,
AngioMARK-enhanced MR angiography was compared to conventional X-ray
angiography, the current reference standard, to determine the location and
degree of stenotic lesions. The results for identification of stenoses,
combining all doses, indicate that AngioMARK demonstrated 82% accuracy, 80%
sensitivity and 82% relative to X-ray angiography. The 95% confidence intervals
for accuracy, sensitivity and specificity were 73-90%, 68-92% and 70-95%,
respectively. The study also demonstrated that the accuracy for determining the
location of stenoses for carotid, iliac and femoral arteries was 100%, 72% and
86%, respectively. In this study, AngioMARK was well tolerated by patients at
all dose levels, with no serious side effects reported. In June 1999, we
initiated a Phase III clinical trial to determine the efficacy of
AngioMARK-enhanced MR angiography for the detection of aortoiliac occlusive
disease. Evaluation for aortoiliac occlusive disease is a critical component of
two common procedures: abdominal aortography, particularly for the
identification of abdominal aortic aneurysm, and leg arteriography, also known
as peripheral run-off, for the detection of atherosclerosis.

In September 1997, we commenced a Phase II feasibility trial to test the
safety and feasibility of AngioMARK for the evaluation of coronary artery
disease. This trial is being conducted at multiple sites and involves the
administration of AngioMARK to approximately 105 patients. As with the Phase II
peripheral vascular disease trial, AngioMARK-enhanced MR angiography is being
compared to X-ray angiography, the current reference standard, to determine the
location and degree of stenotic lesions. Clinical use of MR angiography for
imaging the coronary arteries is particularly difficult at present due to the
problem of cardiac motion--motion resulting from both the beating of the heart
and respiration. We have joined with several leading MRI manufacturers, academic
centers and other research organizations to develop hardware and software
solutions to the problem of cardiac motion.

In January 1998, we commenced a Phase II feasibility trial to test the
safety and preliminary efficacy of AngioMARK-enhanced MRI for detecting
malignant breast lesions in women with breast abnormalities. We believe that,
based on the physical properties of AngioMARK and preclinical studies, AngioMARK
has potential utility as part of a non-invasive imaging procedure that would
assist physicians in identifying breast cancer in patients who are at high risk
or who have had indeterminate mammograms. Another potential application for
AngioMARK-enhanced MRI involves the precise determination of tumor size and
location in cases of malignant breast cancer. Due to its strong signal
especially at low (0.5T and below) magnetic fields, we believe AngioMARK has the
potential to perform high-resolution breast imaging procedures on
less-expensive, more patient-friendly low-field MRI scanners. We completed
enrollment for this trial in March 2000.

OTHER RESEARCH AND DEVELOPMENT PROGRAMS

We are currently developing novel contrast agents for imaging thrombosis,
commonly referred to as "blood clots." These clots can occur in the legs, pelvis
and arms, where they are referred to as deep vein

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thrombosis ("DVT"), and can migrate to the lungs where they are referred to as
pulmonary emboli ("PE"). It is estimated that blood clots are responsible for
over 400,000 deaths each year in the United States. We are seeking to develop a
targeted contrast agent that would enable MRI to illuminate blood clots. We
believe that our proprietary technology platform could also enable MRI to
differentiate old and new clot formation. Such a product could potentially
change the diagnostic work-up for many of the conditions associated with
thromboembolic disease, including PE and DVT. EPIX has entered into a strategic
alliance with Dyax to develop novel contrast imaging agents for the diagnosis of
severe blood clots in the lungs and legs. See "--Strategic Alliances." We
believe that the use of this new approach could lead to better medical outcomes
due to earlier definitive diagnosis. Early diagnosis is especially important for
clots in the thigh, pelvis and vena cava because of their increased likelihood
of migrating to the lungs once inside the pulmonary vasculature. Ultimately,
these clots can be fatal. We believe that such contrast agents could eliminate
the need for the CT, ultrasound and nuclear medicine studies currently used to
identify thrombotic disease, and could potentially provide a non-invasive but
clinically equivalent alternative to pulmonary angiography. In November 1999, we
announced that our prototype clot imaging agent, EP-862, had been shown in
preclinical testing to detect sub-millimeter blood clots.

BUSINESS STRATEGY

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

- Establish the safety and clinical utility of AngioMARK for multiple
vascular imaging indications. In June 1999, EPIX initiated a Phase III
clinical trial to determine the efficacy of AngioMARK-enhanced MR
angiography for the detection of aortoiliac occlusive disease. We continue
to enroll patients in our Phase II feasibility trial to assess the safety
and preliminary efficacy of AngioMARK-enhanced MR angiography for the
evaluation of coronary artery disease. In each of these clinical trials,
we compare AngioMARK-enhanced MR angiography to X-ray angiography, the
current reference standard for these indications. In addition, in
March 2000, we completed enrollment in a Phase II feasibility trial to
test the safety and preliminary efficacy of AngioMARK-enhanced MRI for
detecting breast cancer. We intend to conduct additional clinical trials
for other indications in the future.

- Achieve market acceptance of AngioMARK. EPIX intends to collect
pharmacoeconomic and clinical data that demonstrates that
AngioMARK-enhanced MRI is superior to the traditional diagnostic pathway.
Through its strategic partners' extensive worldwide marketing and sales
networks, we intend to present this data to both physicians and
third-party payors. We believe that third-party payors will promote the
use of AngioMARK because of its potential for substantial clinical
benefits and cost savings. We also intend to further the market acceptance
of AngioMARK-enhanced MRI by coordinating its development efforts with the
development efforts of leaders in the MRI equipment industry. Toward this
end, we have entered into collaboration agreements with General Electric
Medical Systems, Philips Medical Systems, and most recently Siemens
Medical Systems. The primary objective of these collaborations is to
develop technologies and protocols that improve and expand the use of MRI
for cardiovascular imaging.

- Develop new targeted MRI contrast agents. We are currently developing
thrombosis-specific MRI contrast agents based on our proprietary
technology platform. In November 1999, we announced that our prototype
clot imaging agent, EP-862, had been shown in preclinical testing to
detect sub-millimeter blood clots.

- Maximize the value of strategic alliances. At the end of March 2000, we
had established collaborations with Mallinckrodt, Daiichi, Dyax,
NeoGenesis, General Electric Medical Systems, Philips Medical Systems,
Siemens Medical Systems, and Pfizer. We entered into these alliances, and
will

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seek to enter into future strategic alliances with pharmaceutical, imaging
agent and MRI equipment industry leaders, in order to obtain access to
resources and infrastructure to leverage our strengths. See "--Strategic
Alliances."

Strategic Alliances

Our strategy includes entering into alliances with leaders in the
pharmaceutical, diagnostic imaging and MRI equipment industries to facilitate
the development, manufacture, marketing, sale and distribution of its products.
To date, we have formed strategic alliances with Mallinckrodt, Daiichi, Dyax,
NeoGenesis, General Electric Medical Systems, Philips Medical Systems, Siemens
Medical Systems, and Pfizer.

MALLINCKRODT

In August 1996, we entered into a collaboration agreement with Mallinckrodt
pursuant to which we granted Mallinckrodt an exclusive license to develop and
commercialize AngioMARK worldwide, excluding Japan. The agreement also provides
for potential collaboration and cost sharing arrangements in connection with
future MRI vascular agent programs, whether developed by us or Mallinckrodt or
in-licensed by either party. The operations of the collaboration are supervised
by a joint steering committee comprised of an equal number of representatives of
both parties. We have primary responsibility for conducting Phase I and Phase II
clinical trials and for manufacturing AngioMARK for such trials. Mallinckrodt
has assumed primary responsibility for development and manufacturing in
connection with the Phase III clinical trial. Mallinckrodt will also be
responsible for the marketing and distribution of AngioMARK worldwide, excluding
Japan. The agreement imposes certain development due diligence obligations on
both of the parties and certain marketing due diligence obligations on
Mallinckrodt.

We will generally share equally with Mallinckrodt in the worldwide,
excluding Japan, development and manufacturing scale-up and product launch costs
of AngioMARK as well as any future MRI vascular agents which may be covered by
the agreement. The parties' current obligations with respect to AngioMARK
development costs are limited to a specified amount. Under the arrangement, we
and Mallinckrodt will share equally in future operating profits, if any.

The agreement provides that Mallinckrodt may not independently develop,
market or sell any MRI vascular agent worldwide except Japan other than those
that are part of the collaboration without the approval of the joint
EPIX-Mallinckrodt steering committee.

In September 1998, Mallinckrodt agreed to increase its financial commitment
to the original EPIX-Mallinckrodt collaboration. The amended agreement provides
us and Mallinckrodt with the opportunity to broaden the scope of their clinical
program for AngioMARK and commits additional resources for the research and
development of novel MR imaging technologies.

In November 1999, we announced that we had entered into a $9.5 million loan
agreement with Mallinckrodt pursuant to the exercise of a loan provision in our
collaboration agreement. Proceeds from the note are intended to fund our share
of clinical trial and development expenses for AngioMARK. The note bears
interest at Prime Rate, is secured by our intellectual property, and is due upon
certain events as stated in the agreement.

DAIICHI

In March 1996, we entered into a development and license agreement with
Daiichi pursuant to which we granted Daiichi an exclusive license to develop and
commercialize AngioMARK in Japan. Under this arrangement, Daiichi will assume
primary responsibility for clinical development, regulatory approval, marketing
and distribution of AngioMARK in Japan. We retained the right and obligation to
manufacture AngioMARK for development activities and commercial sale under the
agreement. However, Daiichi may,

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under certain circumstances, elect to formulate AngioMARK purchased from us into
a final product. The agreement imposes certain development due diligence
obligations on both parties and marketing due diligence obligations on Daiichi.
The agreement may be terminated by Daiichi upon 30 days prior written notice if
Daiichi determines in its reasonable opinion that AngioMARK lacks clinical
efficacy, presents serious side effects or otherwise exhibits unacceptable
properties. In connection with this strategic alliance, we received an up-front
fee from Daiichi in the amount of $3.0 million and earned a $900,000 milestone
payment in June 1997. Daiichi will be required to make future payments to us up
to an aggregate amount of $2.4 million upon the achievement of certain AngioMARK
development milestones. Daiichi also made a $5.0 million equity investment in us
and will be required to make royalty payments to us on net sales of AngioMARK in
Japan.

DYAX

We formed a strategic alliance with Dyax to develop novel contrast imaging
agents for the diagnosis of severe blood clots in the lungs and legs. Together
with Dyax, we sought to jointly identify and develop compounds that specifically
target PE and DVT for use as IN VIVO MRI and nuclear medicine imaging agents for
the diagnosis of these disorders.

Under the terms of the agreement, we agreed to use Dyax's proprietary phage
display technology to identify peptides that specifically bind to PE and DVT. We
funded the phage display screening program and provided expertise in MRI
contrast technology for development of MR-specific imaging agents. Dyax assumed
primary responsibility for developing agents for use in nuclear medicine. Dyax
will receive royalties on sales of MRI products, and we will receive royalties
on sales of nuclear medicine products resulting from this collaboration. The
discovery phase of this collaboration was formally completed in 1999 with the
identification of several peptide candidates.

NEOGENESIS

In October 1998, we announced the initiation of a collaboration with
NeoGenesis for the discovery of novel compounds for use in diagnostic imaging.
Under the terms of this agreement, we received access to NeoGenesis' proprietary
combinatorial chemistry libraries. By rapidly screening these libraries with
NeoGenesis' mass-coded drug discovery platform, we sought to identify potential
candidates for our drug discovery programs. This collaboration was successfully
completed in 1999.

GENERAL ELECTRIC MEDICAL SYSTEMS

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

PHILIPS MEDICAL SYSTEMS

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

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SIEMENS MEDICAL SYSTEMS

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

PFIZER

In September 1998, we entered into an agreement with Pfizer to explore the
efficacy of AngioMARK-enhanced MRI in the diagnosis and monitoring of female
sexual arousal dysfunction.

COMPETITION

The healthcare industry is characterized by extensive research efforts and
rapid technological change, and there are many companies that are working to
develop products similar to ours. There are currently no FDA-approved targeted
vascular contrast agents for use with MRI. However, there are a number of
non-specific MRI agents approved for marketing in the United States and in
certain foreign markets that are likely to compete with AngioMARK if approved
for MR angiography. Magnevist(R) by Schering-AG, Dotarem(R) by Guerbet, S.A.,
Omniscan(R) by Nycomed Imaging ASA ("Nycomed"), and ProHance(R) by Bracco S.p.A.
are all such products. We are aware of three agents under development, Nycomed's
NC100150 and Schering AG's Gadomer-17 and SHU555C, that are being evaluated for
use in MR angiography. There can be no assurance that our competitors will not
succeed in the future in developing products that are more effective than any
that are being developed by us. We believe that our ability to compete within
the MRI contrast agent market is dependent on a number of factors, including the
success and timeliness with which we complete FDA trials, the breadth of
applications, if any, for which our products receive approval, and the
effectiveness, cost, safety and ease of use of our products in comparison to the
products of our competitors. Our success will also be based on physician
acceptance of MRI as a primary imaging modality for certain cardiovascular and
other applications.

We have many competitors, including pharmaceutical, biotechnology and
chemical companies. A number of competitors, including two of our strategic
partners, are actively developing and marketing products that, if
commercialized, would compete with our product candidates. Many of these
competitors have substantially greater capital and other resources than us and
may represent significant competition for us. Such companies may succeed in
developing technologies and products that are more effective or less costly than
any of those that may be developed by us, and such companies may be more
successful than us in developing, manufacturing and marketing products.
Furthermore, there are several well-established medical imaging modalities that
currently compete, and will continue to compete, with MRI, including X-ray
angiography, CT, nuclear medicine and ultrasound. Other companies are actively
developing the capabilities of the competing modalities to enhance their
effectiveness in cardiovascular system imaging. There can be no assurance that
we will be able to compete successfully in the future or that developments by
others will not render AngioMARK or our future product candidates obsolete or
non-competitive or that our collaborators or customers will not choose to use
competing technologies or products.

PATENTS AND PROPRIETARY RIGHTS

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

We own or have exclusively licensed patents and patent applications on the
critical aspects of our core technology as well as many specific applications of
this technology. We have exclusively licensed two

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patents in the United States broadly covering RIME technology, albumin binding
with metal chelates, and liver targeting metal chelates, have been issued a
patent in Europe similar to those United States patents, and have received
notice of allowance for a similar patent application in Japan. These two United
States patents were involved in an interference proceeding with an application
owned by Mallinckrodt, but the interference was terminated in our favor. Our
Japanese patent application has been opposed by several parties. The sole issue
in these proceedings is whether the Japanese Patent Office should have granted
and/or allowed patents to us. The Japanese Patent Office has issued a final
rejection of the Japanese patent application. A Notice of Appeal was filed in
the Japanese Patent Office on May 9, 1999, but the case has not yet been
assigned to an Examiner.

In addition, third parties have sought, in an Italian court, a declaration
of non-infringement of our European patent. Those third parties seek transborder
application of a non-infringement declaration in those European countries where
our European patent is in force. The third parties also seek to invalidate the
Italian portion of the patent. The complaint was filed on February 23, 1999 in
the Court of Milan, Italy. There is no potential liability, other than court
costs, to us in this suit. This case is in the early pretrial stage. The parties
had previously sued the General Hospital Corporation (hereinafter "the
Hospital"), the assignee of the patent, in Italy seeking to invalidate the
Italian portion of the same patent. The complaint was filed on October 20, 1998
in the Court of Milan, Italy. The sole issue in this case is whether the Italian
portion of the patent is valid. This case was consolidated with the second
Italian action, discussed above. The same parties have also sued the Hospital in
the United Kingdom (Patents Court, London) seeking a declaration of invalidity
of the UK portion of the Hospital's patent. The appeals court in the United
Kingdom has affirmed a stay of the proceedings pending the final outcome of the
Opposition Proceedings in the European Patent Office. There is no potential
liability to us, except court and legal costs in this case. The European Patent
Office has issued a preliminary opinion confirming the validity of the European
patent opposed by three parties in the Opposition Proceedings and has
tentatively scheduled expedited oral arguments for April 27, 2000. In addition,
we and the Hospital have commenced two patent infringement actions in Europe. In
these actions, in France and Germany, we and the Hospital seek to enforce the
European patent against the same parties seeking non-infringement and invalidity
judgments. We, together with the Hospital, seek both injunctive relief and
damages in these actions. In Germany, the case is stayed pending a decision on
jurisdiction in Italy. In France, the case is in the early pretrial stage. These
oppositions, appeals relating thereto and the European proceedings, will likely
take several years to finally resolve.

While we believe that we will prevail in these proceedings, there can be no
assurance as to the scope of the claims that will be maintained, if any, or the
ultimate benefit, if any, of those claims to us in protecting our products.

We have exclusively licensed five additional patents in the United States.
These patents have counterpart patent applications pending in Japan and Europe.
We have also received an additional United States patent covering novel metal
chelates and have a counterpart parent application pending in Japan. Finally, we
have patent applications pending in the United States, Japan and Europe covering
various aspects of our RIME technology. We have received a patent in the United
States covering the process by which AngioMARK is manufactured (U.S. Patent
Number 5,919,967; granted July 6, 1999; expires April 11, 2017). Our patent
protection for AngioMARK currently extends to 2006 in the United States and
Europe. If the currently pending patent applications issue, this protection will
be extended until 2015. Protection for the manufacturing process in the United
States is already extended until 2017, and will be extended until 2016 in Europe
and Japan if the currently pending patent applications issue. In addition,
during 1999 and early 2000 we filed four new patent applications for additional
products and processes involving compounds, compositions, and methods for
imaging.

An issued patent grants to the owner the right to exclude others from
practicing inventions claimed therein. In the United States, a patent filed
before June 8, 1995 is enforceable for 17 years from the date of issuance or
20 years from the deemed date of filing the underlying patent applications,
whichever is longer.

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Patents based on applications filed from June 8, 1995 expire 20 years from the
deemed date. The General Agreement on Tariffs and Trade provides that patents
whose applications were filed on or after June 8, 1995 are effective for
20 years from filing. This new rule is generally regarded as unfavorable to
pharmaceutical companies, where the time period between patent filing and
commercialization of the patented product may be extended many years because of
the lengthy development cycle and regulatory process.

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

There are pending or issued patents, held by parties not affiliated with us,
relating to technologies used by us in the development or use of certain of our
product candidates. In particular, we are aware of certain patents in the United
States, Japan and elsewhere owned by or licensed to one party that relate to MRI
contrast agents and which may cover certain of our MRI product candidates,
including AngioMARK. Mallinckrodt, one of our strategic partners, has rights
from this third party under those patents which we and Mallinckrodt believe will
permit Mallinckrodt to manufacture, market and sell AngioMARK and other products
developed pursuant to the collaboration agreement between us and Mallinckrodt if
AngioMARK and those other products were to be held to fall within the claims of
those third-party patents. If the agreement with Mallinckrodt is terminated by
either party and were AngioMARK and those other products to be held to fall
within the claims of those third-party patents, we would be required to enter
into a strategic alliance with another party having a license from this third
party or obtain a license from this third party directly or from others licensed
by this third party in order to manufacture, market and sell AngioMARK and other
chelate-based MRI contrast agents. However, there can be no assurance that we
would be able to consummate a strategic alliance with a party having this
third-party license or obtain a license from this third party or another third
party on commercially reasonable terms, if at all. One of the Japanese patents
of this third party will expire in 2007. We have filed an appeal in the Japanese
Patent Office requesting that this patent be declared invalid. This appeal will
likely take several years to finally resolve. While we believe that we will
prevail in this proceeding, there can be no assurance as to the scope of the
claims that the third party will maintain. The remaining patent rights of this
third party in Japan will expire in 2002, before such time as we presently
anticipate that Daiichi will have sales of AngioMARK in Japan and, therefore, we
believe that the existence of such patents in Japan is unlikely to have a
material adverse effect on us. However, in the event that we do not prevail in
our appeal to the Japanese Patent Office or Daiichi commercializes AngioMARK in
Japan before 2002, we may be required to obtain an appropriate license or take
other measures to avoid infringement of the third-party patents, including
delaying the commencement of product sales. There can be no assurance that our
current or future activities will not be challenged, that additional patents
will not be issued containing claims materially constraining our proposed
activities, that we will not be required to obtain licenses from third parties,
or that we will not become involved in costly, time-consuming litigation
regarding patents in the

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field of contrast agents, including actions brought to challenge or invalidate
our own patent rights. At the same time, we are aware of certain products under
development and/or on sale by the third party referred to above and others which
we believe may infringe certain of our exclusively licensed patents. We have
commenced and/or expect to commence litigation in various European countries
against other third parties for infringing our European patent. These
litigations will likely take several years to finally resolve. We are pursuing
license or cross-license arrangements with or, if necessary and appropriate, are
continuing infringement proceedings against, these parties. While we believe
that we will prevail in these litigations, there can be no assurance as to the
outcome or the scope of any injunctive or monetary relief we may recover. We
also intend to pursue license or cross-license arrangements with or, if
necessary and appropriate, infringement proceedings against, these parties upon
their seeking final regulatory approval for the marketing and sale of any such
products.

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

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

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

We also rely upon trade secrets, technical know-how, and continuing
technological innovation to develop and maintain our competitive position. We
typically require our employees, consultants, and advisors to execute
confidentiality and assignment of invention agreements in connection with their
employment, consulting or advisory relationships with us. These agreements
require disclosure and assignment to us of ideas, developments, discoveries and
inventions made by employees, consultants and advisors. There can be no
assurance, however, that these agreements will not be breached or that we will
have adequate remedies for any breach. Furthermore, no assurance can be given
that competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain

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access to our proprietary technology, or that we can meaningfully protect our
rights in unpatented proprietary technology.

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

MANUFACTURING

We currently manufacture, as part of our ongoing development efforts, small
non-GMP (good manufacturing practices as promulgated by the FDA) batches of
AngioMARK in our laboratories located in Cambridge, Massachusetts. AngioMARK for
use in preclinical and Phase I and II clinical trials has been manufactured in
accordance with GMP by outside contractors. As part of its strategic alliance
with the Company, Mallinckrodt will serve as primary manufacturer for AngioMARK
thereafter worldwide except for Japan and, possibly, for Japan. If Mallinckrodt
is unable to produce AngioMARK in adequate amounts and at a reasonable cost or
to comply with any applicable regulations, including GMP, it could have a
material adverse effect on the our business, financial condition and results of
operations. Furthermore, should Mallinckrodt fail to fulfill its manufacturing
responsibilities satisfactorily, we could be forced to find an alternative
manufacturer. There can be no assurance that we would be able to find such an
alternative manufacturer. In the event we were forced to develop our own
FDA-approved full-scale manufacturing capability, it would require significant
expenditures of capital and management attention and resources and could require
us to obtain a license from a third party, and would result in a delay in the
approval or commercialization of AngioMARK. There can be no assurance that we
would be able to obtain such a license on commercially reasonable terms, if at
all. We currently procure the raw materials for the various components of
AngioMARK from a broad variety of vendors and, wherever possible, maintain
relationships with multiple vendors for each component. There are a number of
components of AngioMARK for which the largest suppliers may have significant
control over the market price due to controlling market shares. If any one of
our suppliers decided to increase prices significantly or reduce quantities of
any component of AngioMARK available for sale to us, it could have a material
adverse effect on our ability to commercialize AngioMARK and on our business,
financial condition and results of operations. See "--Strategic Alliances."

GOVERNMENT REGULATION

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

In order to undertake clinical trials and market pharmaceutical products for
diagnostic or therapeutic use in humans, the procedures and safety standards
established by the FDA and comparable agencies in foreign countries must be
followed. In the United States, a company seeking approval to market a new
pharmaceutical must obtain FDA approval of a new drug application ("NDA").
Before an NDA may be filed, however, a certain procedure is typically followed.
This includes: (i) performance of preclinical laboratory and animal studies;
(ii) submission to the FDA of an application for an investigational new drug
application ("IND"), which must become effective before human clinical trials
may commence;

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(iii) completion of adequate and well-controlled human clinical trials to
establish the safety and efficacy of the pharmaceutical for its intended use;
(iv) submission to the FDA of an NDA; and (v) approval of the NDA by the FDA
prior to any commercial sale or shipment of the agent. In November 1997, the
Food and Drug Administration Modernization Act of 1997 was passed and signed
into law (the "Act"). The Act, most of which became effective in February 1998,
promises, among other things, to streamline the approval process for drugs and
enable patients with serious diseases to more easily access experimental
products. The effect, if any, of the Act on the Company, AngioMARK and our other
product candidates is not known at this time.

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

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

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

We have completed two Phase I clinical trials to date; the first was
completed in February 1997, and the second in February 1998. No clinically
significant adverse events were reported for these Phase I trials. In
June 1998, we completed a Phase II clinical trial to test the safety and
preliminary efficacy of AngioMARK-enhanced MRA for the evaluation of PVD. In
June 1999, we initiated a Phase III clinical trial to determine the efficacy of
AngioMARK-enhanced MRA for the detection of AIOD.

Phase II trials to assess the safety and feasibility of AngioMARK-enhanced
MR imaging in the diagnosis of CAD and breast cancer, respectively, are
currently ongoing. The process of completing clinical testing and obtaining FDA
approval for a new product is likely to take a number of years. When the study
for a particular indication as described in the IND is complete, and assuming
that the results support the safety and efficacy of the product for that
indication, the Company intends to submit an NDA to the FDA. The NDA approval
process can be expensive, uncertain and lengthy. Although the FDA is supposed to
complete its review of an NDA within 180 days of the date that it is filed, the
review time is often significantly extended by the FDA, which may require more
information or clarification of information already provided in the NDA. During
the review period, an FDA advisory committee likely will be asked to review and
evaluate the application and provide recommendations to the FDA about approval
of the pharmaceutical. In addition, the FDA will inspect the facility at which
the pharmaceutical is manufactured to ensure compliance with GMP and other
applicable regulations. Failure of the third-party manufacturers to comply or
come into compliance with GMP requirements could significantly delay FDA
approval of the NDA. The FDA may grant an unconditional approval of an agent for
a particular indication or may grant

17
<PAGE>
approval conditioned on further post-marketing testing and/or surveillance
programs to monitor the agent's efficacy and side effects. Results of these
post-marketing programs may prevent or limit the further marketing of the agent.
In addition, further studies and a supplement to the initially approved NDA will
be required to gain approval for the use of an approved product in indications
other than those for which the NDA was approved initially.

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

After an NDA is approved, we would continue to be subject to pervasive and
continuing regulation by the FDA, including record keeping requirements,
reporting of adverse experience from the use of the agent and other requirements
imposed by the FDA. FDA regulations also require FDA approval of an NDA
supplement for certain changes if they affect the safety and efficacy of the
pharmaceutical, including, but not limited to, new indications for use, labeling
changes, the use of a different facility to manufacture, process or package the
product, changes in manufacturing methods or quality control systems and changes
in specifications for the product. Failure by us to receive approval of an NDA
supplement could have a material adverse effect on our business, financial
condition and results of operations.

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

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

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

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

18
<PAGE>
REIMBURSEMENT

We expect that sales volumes and prices of our products will be dependent in
large measure on the availability of reimbursement from third-party payors and
that individuals seldom would be willing or able to pay directly for all the
costs associated with procedures which in the future may incorporate the use of
our products. We expect that our products will be purchased by hospitals,
clinics, doctors and other users that bill various third-party payors, such as
Medicare, Medicaid and other government insurance programs, and private payors
including indemnity insurers, Blue Cross Blue Shield plans and managed care
organizations ("MCOs") such as health maintenance organizations. Most of these
third-party payors provide coverage for MRI for some indications when it is
medically necessary, but the amount that a third-party payor will pay for MRI
may not include a separate payment for a contrast imaging agent that is used
with MRI. Reimbursement rates vary depending on the procedure performed, the
third-party payor, the type of insurance plan and other factors. For example,
Medicare pays hospitals a prospectively determined amount for an in-patient stay
based on a Medicare beneficiary's discharge diagnosis related group ("DRG").
This payment includes payment for any procedure, including MRI that is performed
while a beneficiary is in the hospital. No additional payment is made for
contrast agents used during the procedure. Other third-party payors may pay a
hospital an additional amount for an MRI procedure performed on an in-patient
according to another methodology such as a fee schedule or a percentage of
charge. Such payment may or may not include a payment for a contrast imaging
agent. In the outpatient setting, Medicare and other third-party payors may pay
for all, some portion of, or none of the cost of contrast agents used with MRI.

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

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

We believe that reimbursement in the future will be subject to increased
restrictions such as those described above, both in the United States and in
foreign markets. We believe that the overall escalating cost of medical products
and services has led to, and will continue to lead to, increased pressures on
the health care industry, both foreign and domestic, to reduce the cost of
products and services, including products offered by the Company. There can be
no assurance, in either the United States or foreign

19
<PAGE>
markets, that third party reimbursement and coverage will be available or
adequate, that current reimbursement amounts will not be decreased in the future
or that future legislation, regulation, or reimbursement policies of third-party
payors will not otherwise adversely affect the demand for our product candidates
or our ability to sell our product candidates on a profitable basis,
particularly if MRI exams enhanced with our contrast agents are more expensive
than competing vascular imaging techniques that are equally effective. The
unavailability or inadequacy of third-party payor coverage or reimbursement
could have a material adverse effect on our business, financial condition and
results of operations.

PRODUCT LIABILITY INSURANCE

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

EMPLOYEES

As of December 31, 1999 we employed 81 persons on a full-time basis, of
which 65 were involved in research and development and 16 in administration and
general management. Twenty-seven of our employees hold Ph.D. or M.D. degrees. We
believe that our relations are good with all of our employees. None of our
employees are a party to a collective bargaining agreement.

RESEARCH AND DEVELOPMENT

During the years ended December 31, 1999, 1998, and 1997, we incurred
research and development expenses of $14,667,370, $13,349,337 and $8,899,197,
respectively.

ITEM 2. PROPERTIES

We lease a total of 17,050 square feet of space at 71 Rogers Street and
adjacent locations, and 13,310 square feet at 161 First Street, all in
Cambridge, Massachusetts. The current lease at 71 Rogers Street and adjacent
locations runs until December 31, 2002, and we have an option to extend the
lease for an additional three or five years. During 1999, we extended our lease
at 161 First Street through December 31, 2002. We believe that our current
facilities and currently available space are adequate to meet our requirements
for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings that would have a
negative impact on the financial statements.

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

None.

20
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding the executive
officers and key employees of the Company as of December 31, 1999:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Michael D. Webb............. 41 Chief Executive Officer and Secretary

Stephen C. Knight, M.D...... 39 President and Chief Operating Officer

James E. Smith, Ph.D........ 56 Executive Vice President, Research & Development

Randall B. Lauffer, Ph.D.... 42 Chief Scientific Officer

E. Kent Yucel, M.D.......... 43 Senior Vice President and Chief Medical Officer

Susan M. Flint.............. 48 Vice President, Regulatory Affairs and Clinical
Operations

Pamela E. Carey............. 41 Director of Finance and Treasurer
</TABLE>

Michael D. Webb joined us in December 1994 from Ciba-Corning
Diagnostics, Inc., where he was most recently Senior Vice President, Worldwide
Marketing and Strategic Planning. During his tenure at Ciba from April 1989 to
December 1994, Mr. Webb's achievements included the development and
commercialization of the ACS:180\R immunodiagnostics system. From 1984 to 1989,
Mr. Webb was a senior consultant at Booz, Allen & Hamilton, Inc., specializing
in healthcare and life sciences. Mr. Webb holds a MM in marketing and finance
from the J.L. Kellogg Graduate School of Management at Northwestern University.

Dr. Stephen C. Knight joined us in July 1996 and most recently served as
Chief Financial Officer and Senior Vice President, Finance and Business
Development, before being promoted to President and Chief Operating Officer in
November 1999. From April 1991 to June 1996, Dr. Knight was a senior consultant
with Arthur D. Little specializing in biotechnology, pharmaceuticals and
valuation. Dr. Knight was also a consultant at APM, Inc., a consulting company.
Prior to 1990, Dr. Knight performed research at AT&T Bell Laboratories, the
National Institute of Neurological and Communicative Diseases and Stroke, and
Yale University. He serves on the board of directors of Pharmos, Inc.
Dr. Knight holds an M.D. from the Yale University School of Medicine and a MPPM
from the Yale School of Organization and Management.

Dr. James E. Smith has over 20 years experience in the in vivo diagnostics
industry. Prior to joining EPIX in February 1996, Dr. Smith worked for 16 years
at Du Pont Merck Pharmaceutical Company, where his experience included research
and development, regulatory, QA/QC and manufacturing for the radio-
pharmaceutical division, most recently as Senior Director of Radiopharmaceutical
Research and Development. Dr. Smith has published and lectured on
radio-pharmaceutical research and development. Dr. Smith received his Ph.D. in
inorganic chemistry from the University of Washington.

Dr. Randall B. Lauffer founded EPIX Medical, Inc. in November 1988 and
served as Chief Executive Officer until December 1994 and as Chairman until
October 1996. From November 1983 to March 1992, Dr. Lauffer was a member of the
faculty of Harvard Medical School, serving most recently as Assistant Professor
of Radiology from 1987 to 1992. During this time he was also Director of the NMR
Contrast Media Laboratory at MGH as well as an NIH Postdoctoral Fellow and an
NIH New Investigator. Dr. Lauffer is the primary inventor of our core technology
and is the originator of several types of MRI technology, including
hepatobiliary (liver-enhancing) agents, vascular agents, tissue blood flow
agents, and strategies to increase the magnetic efficiency of MRI agents in the
body. He has written over 50 scientific publications and two books, and has been
named on several U.S. patents. Dr. Lauffer holds a Ph.D. in inorganic chemistry
from Cornell University.

21
<PAGE>
Dr. E. Kent Yucel joined us in June 1996. From March 1993 to July 1996, he
was Chief of Vascular and Interventional Radiology and Director of MRI at Boston
Medical Center and Professor of Radiology at Boston University Medical School.
From July 1988 to February 1993 he served as Assistant Professor of Radiology at
MGH and Harvard Medical School. Dr. Yucel was Principal Investigator for a Phase
III vascular imaging trial of ProHance(R), the nonspecific MRI agent now sold by
Bracco. Dr. Yucel is the editor and co-author of Magnetic Resonance Angiography
(McGraw-Hill, 1995). Dr. Yucel received his M.D. from Harvard Medical School.

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

Ms. Pamela E. Carey joined us in June 1998 from private practice where she
served as a consultant to several life science and technology companies. From
July 1992 to March 1994, she was Director of Finance at Intellution, Inc. and
from February 1989 to June 1992, she was Corporate Controller at Genetics
Institute, Inc. Ms. Carey also served as Corporate Controller of ISI
Systems, Inc. from June 1987 to January 1989 and as Audit Manager at Arthur
Young & Company from 1980 to 1987. Ms. Carey is a certified public accountant
and holds a B.S. degree in accounting from Canisius College.

22
<PAGE>
PART II

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

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

<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998
First Quarter............................................... $15.00 $11.88
Second Quarter.............................................. 13.44 9.50
Third Quarter............................................... 11.00 4.88
Fourth Quarter.............................................. 10.38 6.13
1999
First Quarter............................................... $11.44 $ 8.00
Second Quarter.............................................. 8.87 5.00
Third Quarter............................................... 7.37 4.12
Fourth Quarter.............................................. 11.50 6.12
2000
First Quarter (through March 14, 2000)...................... $26.75 $ 8.87
</TABLE>

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

On March 14, 2000 the last reported bid for the Common Stock was $17.50 per
share. As of March 14, 2000 there were approximately 96 holders of record of our
Common Stock and approximately 1,000 beneficial holders. To date we have neither
declared nor paid any cash dividends on shares of our Common Stock and do not
anticipate doing so for the foreseeable future.

23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data are derived from our audited financial
statements and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Financial
Statements, related Notes and other financial information included herein.

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
--------------------------------------------------------- ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995 (1)
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Revenues........................ $ 1,144 $ 1,781 $ 4,228 $10,010 $ 900
Operating income (loss)......... (17,935) (15,825) (7,462) 269 (4,770)
Net income (loss)............... (16,983) (13,998) (6,112) 268 (4,893)

Earnings (loss) per share:
Basic........................... $ (1.47) $ (1.23) $ (0.73) $ 0.12 $ (3.27)
Diluted......................... $ (1.47) $ (1.23) $ (0.73) $ 0.03 $ (3.27)

Weighted average common shares
outstanding:
Basic........................... 11,556 11,354 8,333 1,561 1,498
Diluted......................... 11,556 11,354 8,333 7,732 1,498
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................. $14,140 $29,101 $42,813 $10,664 $ 150
Working capital (deficit)...................... 10,514 25,593 39,673 8,299 (1,327)
Total assets................................... 17,886 32,903 44,775 12,575 1,211
Long-term liabilities.......................... 2,281 1,374 279 176 342
Redeemable convertible preferred stock......... 17,204 3,956
Total stockholders' equity (deficit)........... 10,764 27,503 41,046 (7,240) (7,336)
</TABLE>

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

(1) In 1995, we changed our fiscal year end from March 31 to December 31.

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

OVERVIEW

Since commencing operations in 1992, we have been engaged principally in the
research and development of our product candidates as well as seeking various
regulatory clearances and patent protection. We have had no revenues from
product sales and have incurred losses since inception through December 31, 1999
aggregating approximately $45.4 million. We have received revenues in connection
with various licensing and collaboration agreements. In August 1996, we entered
into a strategic alliance with Mallinckrodt pursuant to which we received
$6.0 million in up-front license fees. The agreement provided for an additional
$2.0 million milestone payment, which was received in July 1997. In March 1996,
we entered into a strategic alliance with Daiichi. Under this agreement, we
received $3.0 million in license fees and $5.0 million from the sale of shares
of our preferred stock, and were entitled to receive up to $3.3 million in
future payments based upon our achievement of certain product development
milestones. We received $900,000 of such milestone payments in July 1997.

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

24
<PAGE>
Our initial product candidate, AngioMARK, is currently our only product
candidate undergoing human clinical trials. We filed an IND application for
AngioMARK in July 1996. We initiated a Phase I clinical trial in 1996 and a
Phase I dose escalation study in 1997, both of which have been completed. We
completed a Phase II clinical trial in June 1998 to test the safety and
preliminary efficacy of AngioMARK-enhanced MRA for the evaluation of PVD and are
currently conducting a Phase II feasibility trial to test the safety and
feasibility of AngioMARK-enhanced MRA for the evaluation of CAD. In addition, in
January 1998, we initiated a Phase II clinical trial to test the safety and
feasibility of AngioMARK for detecting breast cancer. Enrollment in this trial
was completed in March 2000. In June 1999, we initiated a Phase III clinical
trial to determine the efficacy of AngioMARK-enhanced MRA for the detection of
AIOD.

We anticipate fluctuation in our quarterly results of operations due to
several factors, including: the timing of fees and milestone payments received
from strategic partners; the formation of new strategic alliances by us; the
timing of expenditures in connection with research and development activities;
the timing of product introductions and associated launch, marketing and sales
activities; and the timing and extent of product acceptance for different
indications and geographical areas of the world.

RESULTS OF OPERATIONS

COMPARISON OF YEAR ENDED DECEMBER 31, 1999 AND YEAR ENDED DECEMBER 31, 1998

Revenues

Revenues for the year ended December 31, 1999 and 1998 totaled $1.1 million
and $1.8 million, respectively, and were derived from work performed in
connection with product development contracts. The decrease in revenues was due
to the timing of cost-sharing reimbursements, based on development costs
incurred by us and our partners.

Research and Development Expenses

Research and development expenses for the year ended December 31, 1999 were
$14.7 million as compared to $13.3 million for 1998. The increased expenses
resulted from higher manufacturing costs of material to be provided to our
Japanese partner, Daiichi, and increased personnel and related costs associated
with advancing AngioMARK through clinical trials.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 1999
were $4.4 million as compared to $4.3 million for 1998. The slight increase was
due to higher legal costs associated with ongoing patent activities and was
partially offset by lower compensation expense and recruiting costs.

Interest Income and Expense

Interest income for the year ended December 31, 1999 was $1.2 million as
compared to $1.9 million for 1998. The $700,000 decrease was primarily due to
lower average levels of invested cash, cash equivalents and marketable
securities during 1999. Interest expense for the year ended December 31, 1999
was $222,000 as compared to $61,000 in 1998. The increase in interest expense
was attributable to a higher average note payable balance outstanding during
1999.

COMPARISON OF YEAR ENDED DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31, 1997

Revenues

For the year ended December 31, 1998, revenues totaled $1.8 million and were
derived from work performed in connection with product development contracts.
Revenues for the year ended December 31, 1997 totaled $4.2 million and included
milestone payments of $2.0 million received from Mallinckrodt and

25
<PAGE>
$900,000 received from Daiichi pursuant to collaboration agreements covering our
lead product, AngioMARK. Revenues in 1997 also included $1.3 million for work
performed in connection with product development contracts.

Research and Development Expenses

Research and development expenses for the year ended December 31, 1998 were
$13.3 million as compared to $8.9 million for 1997. The increase resulted from
higher costs associated with advancing AngioMARK through clinical trials and the
addition of personnel and resources to support research in the area of thrombus
imaging and further development of our core technology.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 1998
were $4.3 million as compared to $2.8 million for 1997. The increase was
partially due to additional marketing activities, which included the hiring of
personnel and development of marketing communication programs. Also contributing
to the increase were higher legal costs related to ongoing patent activities and
the hiring of additional support personnel.

Interest Income and Expense

Interest income for the year ended December 31, 1998 was $1.9 million as
compared to $1.4 million for 1997. The $500,000 increase was primarily due to
higher average levels of invested cash during 1998. Interest expense for the
year ended December 31, 1998 was $61,000 as compared to $62,000 in 1997.
Interest expense was unchanged due to the timing of the note payable proceeds,
which were received in December 1998.

Year 2000

In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We expensed approximately
$25,000 during 1999 in connection with remediating our systems. We are not aware
of any material problems resulting from Year 2000 issues, either with our
products or services of third parties. We will continue to monitor our mission
critical computer applications and those of our suppliers and vendors throughout
the Year 2000 to ensure that any latent Year 2000 matters that arise are
addressed promptly.

Liquidity and Capital Resources

We have financed our operations from inception through December 31, 1999
primarily with $14.3 million in net proceeds from our initial public offering
completed in February 1997, $22.9 million from a follow-on public offering of
common stock in November 1997, $18.4 million from private sales of equity
securities, $18.0 million received from third parties in connection with
collaboration and license arrangements, $2.6 million of equipment lease
financing and $5.0 million in interest income. From inception through
December 31, 1999, we have incurred $70.6 million of costs attributable to
operating activities, including $52.2 million related to the research and
development of technology and new product candidates, including AngioMARK.

Our principal sources of liquidity consist of cash, cash equivalents and
marketable securities, which totaled $14.1 million at December 31, 1999, as
compared to $29.1 million at December 31, 1998.

In October 1999, we entered into a Non-Negotiable Promissory Note and
Security Agreement (the "Loan") with Mallinckrodt pursuant to which we are
eligible to borrow up to $9.5 million from Mallinckrodt, on a quarterly basis,
to cover our share of AngioMARK development costs. The Loan bears interest,
adjustable on a quarterly basis, at the Prime Rate published in the Wall Street
Journal. The Loan

26
<PAGE>
is repayable in full on the earliest to occur of (i) October 1, 2002,
(ii) thirty days after the date of the First Commercial Sale of Licensed Product
in the Territory (as such terms are defined in our Strategic Collaboration
Agreement with Mallinckrodt dated August 30, 1996, as amended (the "Strategic
Collaboration Agreement")) and (iii) thirty days after the first date upon which
we could reasonably repay all outstanding principal and interest on the Loan
without creating any reasonably foreseeable risk that we would be otherwise
entitled to receive a loan from Mallinckrodt under the existing terms of the
Strategic Collaboration Agreement within six months of the date of any such
repayment. The Loan is secured by a first priority security interest in all of
our intellectual property. Although the possibility exists that the loan will
become repayable within the next twelve months pursuant to repayment provision
(iii) above, the conditions required to be met by such provision require our
speculation concerning both the probability and success of certain future
financial transactions. Due to our current uncertainty that such future
transactions will occur or will occur such as to cause repayment provision
(iii) above to apply, we have classified the Loan as a long-term obligation. We
received $1,583,557 pursuant to the Loan during November 1999 to cover our share
of third quarter 1999 AngioMARK development costs.

We are eligible to receive additional payments of $2.4 million from Daiichi
upon the attainment of certain future AngioMARK development milestones. Daiichi
is responsible for funding development of AngioMARK in Japan. Under our
agreement with Mallinckrodt, we and Mallinckrodt generally will share equally in
future development costs of AngioMARK up to a specified maximum amount.

During the year ended December 31, 1999, we used approximately
$15.7 million of cash for operating activities, exclusive of license fee
revenues. We expect that our cash needs for operations will increase
significantly in future periods due to planned clinical trials and other
expenses associated with the development of AngioMARK and new research and
development programs.

We estimate that existing cash, cash equivalents and marketable securities,
and the Loan from Mallinckrodt will be sufficient to fund our operations through
the first quarter of 2001. We believe that we will need to raise additional
funds for research, development and other expenses, through equity or debt
financing, strategic alliances or otherwise, prior to commercialization of any
of our product candidates. There can be no assurance that additional financing
will be available on terms acceptable to us, or at all. Our future liquidity and
capital requirements will depend on numerous factors, including the following:
the progress and scope of clinical trials; the timing and costs of filing future
regulatory submissions; the timing and costs required to receive both United
States and foreign governmental approvals; the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights;
the extent to which our products gain market acceptance; the timing and costs of
product introductions; the extent of our ongoing research and development
programs; the costs of training physicians to become proficient with the use of
our products; and, if necessary, once regulatory approvals are received, the
costs of developing marketing and distribution capabilities.

Because of anticipated spending to support development of AngioMARK and new
research programs, we do not expect positive cash flow from operating activities
for any future quarterly or annual period prior to commercialization of
AngioMARK. We anticipate continued investments in fixed assets, including
equipment and facilities expansion to support new and continuing research and
development programs. We have in place a lease agreement that will enable us to
utilize our current principal scientific facilities through December 31, 2002,
and we have an option to extend the lease for an additional three or five years.
We also have a lease for nearby office space, which expires in December 2002.

We have incurred tax losses to date and therefore have not paid significant
federal or state income taxes since inception. At December 31, 1999, we had loss
carryforwards of approximately $42.7 million available to offset future taxable
income. These amounts expire at various times through 2014. As a result of
ownership changes resulting from sales of equity securities, our ability to use
the loss carryforwards is subject to limitations as defined in Sections 382 and
383 of the Internal Revenue Code of 1986, as amended (the "Code"). We currently
estimate that the annual limitation on our use of net operating losses

27
<PAGE>
through May 31, 1996 will be approximately $900,000. Pursuant to Sections 382
and 383 of the Code, the change in ownership resulting from public equity
offerings in 1997 and any other future ownership changes may further limit
utilization of losses and credits in any one year. We also are eligible for
research and development tax credits that can be carried forward to offset
federal taxable income. The annual limitation and the timing of attaining
profitability may result in the expiration of net operating loss and tax credit
carryforwards before utilization.

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

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

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), as amended
by SFAS No. 137, which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. We are presently analyzing the impact, if any, that the
adoption of SFAS No. 133 will have on our financial condition or results of
operations.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
The SAB formalizes positions the staff has expressed in speeches and comment
letters. SAB 101 is effective no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999. While we are presently analyzing
the effect on our financial condition or results of operations, we do not
anticipate SAB 101 will have a material impact.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATES. We invest our cash in a variety of financial instruments,
including bank time deposits, and taxable and tax-advantaged variable rate and
fixed rate obligations of corporations, municipalities, and local, state and
national governmental entities and agencies. These investments are denominated
in U.S. dollars.

Interest income on our investments is recorded as "Interest income." We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS"). All of the cash equivalents and short-term
investments are treated as available-for-sale under SFAS 115.

Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates or we may suffer losses
in principal if forced to sell securities that have seen a decline in market
value due to changes in interest rates. A hypothetical 10% increase or decrease
in interest rates, however, would not have a material adverse effect on our
financial condition. Our investment securities are held for purposes other than
trading. While certain of the investment securities had maturities in excess of
one year, we may liquidate such securities within one year. The weighted-average
interest rate on investment

28
<PAGE>
securities at December 31, 1999 was 6.3%. The fair market value of securities
held at December 31, 1999 was $13,709,980.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements and supplementary data appear at pages F-1 through F-24
of this report on Form 10-K.

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

None.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(A) DIRECTORS. The information required under this item is incorporated
herein by reference to the section entitled "Election of Directors" in our
definitive Proxy Statement for our 2000 Annual Meeting of Stockholders (the
"2000 Proxy Statement") to be filed with the Commission not later than
April 30, 2000.

(B) EXECUTIVE OFFICERS. See Item 4A. of Part I above.

ITEM 11. EXECUTIVE COMPENSATION

The information required under this item is incorporated herein by reference
to the section entitled "Executive Compensation" in the 2000 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required under this item is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners And
Management" in the 2000 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required under this item is incorporated herein by reference
to the section entitled "Certain Transactions" in the 2000 Proxy Statement.

29
<PAGE>
PART IV

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

a. Documents filed as part of this Report:

1. Financial Statements:

<TABLE>
<S> <C>
Index to Financial Statements: F-1
Report of Independent Auditors............................ F-2
Financial Statements:
Balance Sheets.......................................... F-3
Statements of Operations................................ F-4
Statements of Redeemable, Convertible
Preferred Stock and Stockholders' Equity.............. F-5
Statements of Cash Flows................................ F-9
Notes to Financial Statements........................... F-10
</TABLE>

2. Financial Statement Schedules

All schedules are omitted because they are not applicable or the

required information is shown in the financial statements or notes

thereto.

b. Reports on Form 8-K filed in the fourth quarter of 1999:

Form 8-K filed October 28, 1999:

Item 5. Other Events--Issuance of Non-negotiable Promissory Note and
Security Agreement to Mallinckrodt, Inc.

Form 8-K filed November 3, 1999:

Item 5. Other Events--Promotion of Stephen C. Knight, M.D. to President
and Chief Operating Officer

c. Exhibits

<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of the Company. Filed
as Exhibit 4.1 to the Company's Registration Statement on
Form S-8 (File No. 333-30531) and incorporated herein by
reference.
3.2 Form of Amended and Restated By-Laws of the Company. Filed
as Exhibit 4.2 to the Company's Registration Statement on
Form S-8 (File No. >333-30531) and incorporated herein by
reference.
4.1 Specimen certificate for shares of Common Stock of the
Company. Filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated
herein by reference.
10.1+ Agency Agreement between the Company and Sumitomo
Corporation dated March 13, 1992. Filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.2+ Amendment to the Agency Agreement between the Company and
Sumitomo Corporation dated June 26, 1992. Filed as
Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
</TABLE>

30
<PAGE>
<TABLE>
<S> <C>
10.3 Short Form Lease from Trustees of the Cambridge East Trust
to the Company dated July 1, 1992. Filed as Exhibit 10.3 to
the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.4 Form of Warrant to Purchase Shares of Series A Convertible
Preferred Stock dated December 21, 1992. Filed as
Exhibit 10.4 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.5 Dominion Ventures Master Lease Agreement No. 8050 dated
December 21, 1992. Filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.6 First Amendment to Master Lease Agreement No. 8050 dated
May 14, 1993. Filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.7 Second Amendment to Master Lease Agreement No. 8050 dated
August 5, 1993. Filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.8 First Amendment Lease From Trustees of the Cambridge Trust
to the Company dated October 20, 1993. Filed as
Exhibit 10.8 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.9 Warrant to Purchase Shares of Series B Convertible Preferred
Stock dated June 6, 1994. Filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.10 Second Amendment to Master Lease Agreement No. 8050 dated
June 6, 1994. Filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.11+ Amendment Agreement to the Agency Agreement between the
Company and Sumitomo Corporation dated September 15, 1994.
Filed as Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated
herein by reference.
10.12 Second Amendment Lease From Trustees of the Cambridge East
Trust to the Company dated September 17, 1994. Filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.13 Convertible Promissory Note Purchase Agreement by and among
the Company and certain purchasers named therein dated
May 26, 1995. Filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.14+ Amended and Restated License Agreement between the Company
and The General Hospital Corporation dated July 10, 1995.
Filed as Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated
herein by reference.
10.15 Warrant to Purchase Shares of Series C Convertible Preferred
Stock dated August 2, 1995. Filed as Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.16 Third Amendment to the Master Lease Agreement No. 8050 dated
August 2, 1995. Filed as Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.17 Amendment No. 1 to Convertible Promissory Note Purchase
Agreement by and among the Company and certain purchasers
named therein dated January 19, 1996. Filed as
Exhibit 10.17 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
</TABLE>

31
<PAGE>
<TABLE>
<S> <C>
10.18+ Extension Agreement to Agency Agreement between the Company
and Sumitomo Corporation dated March 5, 1996. Filed as
Exhibit 10.18 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.19+ Development and License Agreement dated March 29, 1996 by
and among the Company and Daiichi Radioisotope
Laboratories, Ltd. Filed as Exhibit 10.19 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.20 Third Amendment Lease From Trustees of the Cambridge East
Trust to the Company dated May 1, 1996. Filed as
Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.21 Series D Convertible Preferred Stock Purchase Agreement by
and among the Company and certain purchasers named therein
dated May 29, 1996. Filed as Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.22 Third Amended and Restated Stockholders' Rights Agreement by
and among the Company and certain of its stockholders named
therein dated May 29, 1996. Filed as Exhibit 10.22 to the
Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.23 Form of Warrant to Purchase Shares of Series D Preferred
Stock dated May 29, 1996. Filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.24 Amendment No. 1 to Third Amended and Restated Stockholders'
Rights Agreement dated May 31, 1996. Filed as Exhibit 10.24
to the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.25 Series E Convertible Preferred Stock Purchase Agreement
dated May 31, 1996 between the Company and Daiichi
Radioisotope Laboratories, Ltd. Filed as Exhibit 10.25 to
the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.26+ Strategic Collaboration Agreement between the Company and
Mallinckrodt Medical, Inc. and Mallinckrodt Group Inc. dated
August 30, 1996. Filed as Exhibit 10.26 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.27 Amendment No. 2 to Third Amended and Restated Stockholders'
Rights Agreement dated December 6, 1996. Filed as
Exhibit 10.27 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.28# Amended and Restated 1992 Equity Incentive Plan. Filed as
Exhibit 99.1 to the Company's Registration Statement on
Form S-8 (File No. 333-30531) and incorporated herein by
reference.
10.29# Form of Incentive Stock Option Certificate. Filed as
Exhibit 10.29 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.30 Form of Nonstatutory Stock Option Certificate. Filed as
Exhibit 10.30 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.31# 1996 Director Stock Option Plan. Filed as Exhibit 10.31 to
the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.32# 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.32 to
the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
</TABLE>

32
<PAGE>
<TABLE>
<S> <C>
10.33 Form of Consulting and Confidentiality Agreement between the
Company and certain consultants of the Company. Filed as
Exhibit 10.33 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.34 Form of Invention and Non-Disclosure Agreement between the
Company and certain employees of the Company. Filed as
Exhibit 10.34 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.35 Form of Non-Competition and Non-Solicitation Agreement
between the Company and certain employees of the Company.
Filed as Exhibit 10.35 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated
herein by reference.
10.36 Form of Common Stock Purchase Agreement. Filed as
Exhibit 10.36 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.37 Form of Stock Purchase and Right of First Refusal Agreement.
Filed as Exhibit 10.37 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated
herein by reference.
10.38 Collaboration Agreement effective as of June 20, 1997
between Dyax Corp. and the Company. Filed as Exhibit 10.1 to
the Company's quarterly report on Form 10-Q for the period
ended September 30, 1997 (File No. 000-21863) and
incorporated herein by reference.
10.39 Short Form Lease from Trustees of the Cambridge Trust to the
Company with a commencement date of January 1, 1998. Filed
as Exhibit 10.39 to the Company's Registration Statement on
Form S-1 (File No. 333-38399) and incorporated herein by
reference.
10.40 Sublease dated as of October 31, 1997 between the Company
and SatCon Technology Corporation. Filed as Exhibit 10.40 to
the Company's annual report on Form 10-K for the period
ended December 31, 1998 (File No. 000-21863) and
incorporated herein by reference.
10.41 First Amendment to Sublease dated as of July 15, 1998
between the Company and SatCon Technology Corporation. Filed
as Exhibit 10.41 to the Company's annual report on
Form 10-K for the period ended December 31, 1998 (File
No. 000-21863) and incorporated herein by reference.
10.42++ Amendment No. 1 dated as of September 10, 1998 to the
Strategic Collaboration Agreement between the Company and
Mallinckrodt Medical, Inc. and Mallinckrodt Group Inc. dated
August 30, 1996. Filed as Exhibit 10.42 to the Company's
annual report on Form 10-K for the period ended
December 31, 1998 (File No. 000-21863) and incorporated
herein by reference.
10.43 Promissory Note dated December 21, 1998 between the Company
and Finova Technology Finance, Inc. Filed as Exhibit 10.43
to the Company's annual report on Form 10-K for the period
ended December 31, 1998 (File No. 000-21863) and
incorporated herein by reference.
10.44 First Amendment dated February 8, 1999 to the Short Form
Lease dated as of July 7, 1998 with a commencement date as
of January 1, 1998 between the Company and the Trustees of
The Cambridge East Trust. Filed as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the period ended
March 31, 1999 (File No. 000-21863) and incorporated herein
by reference.
10.45 Sublease extension election for an additional three years,
beginning January 1, 2000 and ending December 31, 2002
pursuant to Article 5 of the First Amendment to Sublease
dated as of July 15, 1998 between the Company and SatCon
Technology Corporation. Filed as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the period ended
June 30, 1999 (File No. 000-21863) and incorporated herein
by reference.
</TABLE>

33
<PAGE>
<TABLE>
<S> <C>
10.46++ Amendment No. 2 dated as of July 9, 1999 to the Strategic
Collaboration Agreement between the Company and Mallinckrodt
Medical, Inc. and Mallinckrodt Group, Inc. dated August 30,
1996 and amended pursuant to Amendment No. 1 as of
September 10, 1998. Filed herewith.
10.47 Non-Negotiable Promissory Note dated October 8, 1999 between
the Company and Mallinckrodt Inc. Filed herewith.
10.48 Security Agreement dated October 8, 1999 between the Company
and Mallinckrodt Inc. Filed herewith.
23.1 Consent of Ernst & Young LLP. Filed herewith.
24.1 Power of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements.
Filed herewith.
</TABLE>

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

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

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

++ Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

34
<PAGE>
EPIX MEDICAL, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Financial Statements........................................
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Redeemable, Convertible Preferred Stock and
Stockholders' Equity...................................... F-5
Statements of Cash Flows.................................... F-9
Notes to Financial Statements............................... F-10
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders EPIX Medical, Inc.

We have audited the accompanying balance sheets of EPIX Medical, Inc. as of
December 31, 1999 and 1998, and the related statements of operations,
redeemable, convertible preferred stock and stockholders' equity, and cash flows
for each of the three years in the period ended December 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EPIX Medical, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Boston, Massachusetts
February 5, 2000

F-2
<PAGE>
EPIX MEDICAL, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................... $ 430,124 $ 369,454
Available-for-sale marketable securities.................... 13,709,980 28,731,747
Prepaid expenses and other current assets................... 1,214,929 517,701
----------- -----------
Total current assets........................................ 15,355,033 29,618,902
Property and equipment, net................................. 2,058,282 2,861,277
Notes receivable from officer............................... 356,159 335,888
Other assets................................................ 116,109 87,152
----------- -----------
Total assets................................................ $17,885,583 $32,903,219
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses....................... $ 3,753,836 $ 2,681,137
Contract advances........................................... 308,955 611,038
Current portion of capital lease obligations................ 379,911 384,976
Current portion of note payable............................. 397,864 349,009
----------- -----------
Total current liabilities................................... 4,840,566 4,026,160
Capital lease obligations, less current portion............. 323,748 602,407
Note payable, less current portion.......................... 373,783 771,647
Loan payable to strategic partner........................... 1,583,557 --
Stockholders' equity:
Common stock, $.01 par value, 15,000,000 shares authorized;
11,680,315 and 11,458,401 shares issued and outstanding at
December 31, 1999 and 1998, respectively.................. 116,803 114,584
Additional paid-in capital.................................. 56,520,680 55,839,411
Loans to stock option holders............................... (387,430) (123,119)
Accumulated deficit......................................... (45,398,477) (28,415,324)
Other comprehensive income (loss)........................... (87,647) 87,453
----------- -----------
Total stockholders' equity.................................. 10,763,929 27,503,005
----------- -----------
Total liabilities and stockholders' equity.................. $17,885,583 $32,903,219
=========== ===========
</TABLE>

See accompanying notes.

F-3
<PAGE>
EPIX MEDICAL, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Revenues............................................. $ 1,144,056 $ 1,780,985 $ 4,227,526
Operating expenses:
Research and development........................... 14,667,370 13,349,337 8,899,197
General and administrative......................... 4,411,194 4,256,557 2,790,222
------------ ------------ -----------
Total operating expenses............................. 19,078,564 17,605,894 11,689,419
------------ ------------ -----------
Operating loss....................................... (17,934,508) (15,824,909) (7,461,893)
Interest income...................................... 1,173,136 1,887,812 1,411,803
Interest expense..................................... (221,781) (61,132) (62,003)
------------ ------------ -----------
Net loss............................................. $(16,983,153) $(13,998,229) $(6,112,093)
============ ============ ===========
Weighted average shares:
Basic and Diluted.................................. 11,555,964 11,354,200 8,333,294
============ ============ ===========
Loss per common share:
Basic and Diluted.................................. $ (1.47) $ (1.23) $ (0.73)
============ ============ ===========
</TABLE>

See accompanying notes.

F-4
<PAGE>
EPIX MEDICAL, INC.

STATEMENTS OF REDEEMABLE, CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>

REDEEMABLE,
CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED COMMON ADDITIONAL
STOCK STOCK STOCK PAID IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ------------ ----------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996.................. 6,644,385 $ 17,203,807 93,691 $ 1,037,664 1,564,451 $ 15,644 $ 112,960
Issuance of common stock
Upon exercise of
Options............... 99,394 994 65,753
Issuance of common stock
Upon Initial Public
Offering, net of
Offering costs of
$1,831,436 in February
1997.................. 2,300,000 23,000 14,245,564
Conversion of preferred
Stock to common Stock
upon initial Public
offering in February
1997.................. (6,644,385) (17,203,807) (93,691) (1,037,664) 4,750,278 47,503 18,092,909
Issuance of compensatory
Stock option grants... 3,393
Issuance of common stock
Upon Follow-on Public
Offering, net Of
offering costs of
$1,819,447 in November
1997.................. 2,467,500 24,675 22,830,879
Issuance of common stock
Upon Conversion of
Warrants.............. 36,641 367 (367)
Net loss................
---------- ------------ ---------- ----------- ---------- -------- -----------

Balance at December 31,
1997.................. 0 0 0 0 11,218,264 112,183 55,351,091
Issuance of common stock
upon exercise of
Options............... 221,793 2,218 249,922
Issuance of common stock
under employee stock
purchase plan......... 18,344 183 151,992
Issuance of compensatory
stock option loan.....
Compensatory stock
option loan expense... 86,406
Net loss................
Available-for-sale
Marketable securities
unrealized gain.....

Comprehensive loss......
---------- ------------ ---------- ----------- ---------- -------- -----------

Balance at December 31,
1998.................. 0 $ 0 0 $ 0 11,458,401 $114,584 $55,839,411

<CAPTION>
ACCRETION OF
DIVIDENDS
ON
REDEEMABLE
CONVERTIBLE
PREFERRED
STOCK
------------
<S> <C>
Balance at December 31,
1996.................. $(101,059)
Issuance of common stock
Upon exercise of
Options...............
Issuance of common stock
Upon Initial Public
Offering, net of
Offering costs of
$1,831,436 in February
1997..................
Conversion of preferred
Stock to common Stock
upon initial Public
offering in February
1997.................. 101,059
Issuance of compensatory
Stock option grants...
Issuance of common stock
Upon Follow-on Public
Offering, net Of
offering costs of
$1,819,447 in November
1997..................
Issuance of common stock
Upon Conversion of
Warrants..............
Net loss................
---------
Balance at December 31,
1997.................. 0
Issuance of common stock
upon exercise of
Options...............
Issuance of common stock
under employee stock
purchase plan.........
Issuance of compensatory
stock option loan.....
Compensatory stock
option loan expense...
Net loss................
Available-for-sale
Marketable securities
unrealized gain.....
Comprehensive loss......
---------
Balance at December 31,
1998.................. $ 0
</TABLE>

F-5
<PAGE>
EPIX MEDICAL, INC.

STATEMENTS OF REDEEMABLE, CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
ACCUMULATED
LOANS TO OTHER TOTAL
STOCK COMPREHENSIVE STOCKHOLDERS'
OPTION INCOME DEFICIT EQUITY
HOLDERS (LOSS) ACCUMULATED (DEFICIT)
--------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.............................. $(8,305,002) $ (7,239,793)
Issuance of common stock Upon exercise of options......... 66,747
Issuance of common stock upon Initial Public Offering, net
of offering Costs of $1,831,436 In February 1997........ 14,268,564
Conversion of preferred stock to common stock Upon initial
public Offering in February 1997........................ 17,203,807
Issuance of compensatory stock option grants.............. 3,393
Issuance of common stock upon Follow-on Public Offering,
net of offering costs of $1,819,447 in November 1997.... 22,855,554
Issuance of common stock upon Conversion of warrants......
Net loss.................................................. (6,112,093) (6,112,093)
------------ ------------
Balance at December 31, 1997.............................. (14,417,095) 41,046,179

Issuance of common stock upon exercise of options......... 252,140
Issuance of common stock under employee stock purchase
plan.................................................... 152,175
Issuance of compensatory stock option loan................ (123,119) (123,119)
Compensatory stock option loan expense.................... 86,406
Net loss.................................................. (13,998,229) (13,998,229)
Available-for-sale marketable securities unrealized
gain.................................................... 87,453 87,453
------------

Comprehensive loss........................................ (13,910,776)
--------- ------- ------------ ------------

Balance at December 31, 1998.............................. $(123,119) $87,453 $(28,415,324) $ 27,503,005
</TABLE>

See accompanying notes.

F-6
<PAGE>
EPIX MEDICAL, INC.

STATEMENTS OF REDEEMABLE, CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>

REDEEMABLE
CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED ADDITIONAL
STOCK STOCK COMMON STOCK PAID IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- -------- ----------- -------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
upon exercise of
options................... 142,037 1,420 119,388
Issuance of common stock
under employee stock
purchase plan............. 24,323 243 116,659
Issuance of compensatory
stock option plan......... 55,554 556 249,438
Issuance of compensatory
stock option loan.........
Compensatory stock option
loan expense.............. 98,956
Disqualifying disposal of
compensatory stock
option.................... 96,828
Interest income on
compensatory stock option
loans.....................

Net loss....................

Available-for-sale
marketable securities
unrealized loss...........
Comprehensive loss..........
-- -- -- -- ---------- -------- -----------
Balance at December 31,
1999...................... 0 $0 0 $0 11,680,315 $116,803 $56,520,680
== == == == ========== ======== ===========

<CAPTION>
ACCRETION OF
DIVIDENDS
ON
REDEEMABLE
CONVERTIBLE
PREFERRED
STOCK
------------
<S> <C>
Issuance of common stock
upon exercise of
options...................
Issuance of common stock
under employee stock
purchase plan.............
Issuance of compensatory
stock option plan.........
Issuance of compensatory
stock option loan.........
Compensatory stock option
loan expense..............
Disqualifying disposal of
compensatory stock
option....................
Interest income on
compensatory stock option
loans.....................
Net loss....................
Available-for-sale
marketable securities
unrealized loss...........
Comprehensive loss..........
--
Balance at December 31,
1999...................... $0
==
</TABLE>

F-7
<PAGE>
EPIX MEDICAL, INC.

STATEMENTS OF REDEEMABLE, CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
ACCUMULATED
LOANS TO OTHER TOTAL
STOCK COMPREHENSIVE STOCKHOLDERS'
OPTION INCOME ACCUMULATED EQUITY
HOLDERS (LOSS) DEFICIT (DEFICIT)
--------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Issuance of common stock upon exercise of options......... 120,808
Issuance of common stock under employee stock purchase
plan.................................................... 116,902
Issuance of compensatory stock option plan................ 249,994
Issuance of compensatory stock option loan................ $(249,994) (249,994)
Compensatory stock option loan expense.................... 98,956
Disqualifying disposal of compensatory stock option....... 96,828
Interest income on compensatory stock option loans........ (14,317) (14,317)

Net loss.................................................. (16,983,153) (16,983,153)

Available-for-sale marketable securities unrealized
loss.................................................... (175,100) (175,100)
--------- --------- ------------ ------------
Comprehensive loss........................................ (17,158,253)
------------
Balance at December 31, 1999.............................. $(387,430) $ (87,647) $(45,398,477) $ 10,763,929
========= ========= ============ ============
</TABLE>

F-8
<PAGE>
EPIX MEDICAL, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Operating activities:
Net loss........................................... $(16,983,153) $(13,998,229) $ (6,112,093)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization...................... 996,461 778,221 580,852
Stock compensation expense......................... 195,784 86,406 --
Loss on sale of fixed assets....................... 18,071 -- --
Changes in operating assets and liabilities:
Prepaid expenses, other current assets, note
receivable from officer and other assets......... (746,456) (232,249) 207,818
Accounts payable and accrued expenses.............. 1,072,699 345,002 110,422
Contract advances.................................. (302,083) (183,308) 794,346
------------ ------------ -------------
Net cash used in operating activities.............. (15,748,677) (13,204,157) (4,418,655)

Investing activities:
Purchases of fixed assets.......................... (101,778) (1,568,473) (388,760)
Proceeds from sale of fixed assets................. 45,000 -- --
Purchases of marketable securities................. (164,384,194) (410,500,904) (359,397,388)
Sales or redemptions of marketable securities...... 179,230,860 423,213,550 326,036,634
------------ ------------ -------------
Net cash provided by (used in) investing
activities....................................... 14,789,888 11,144,173 (33,749,514)
------------ ------------ -------------

Financing activities:
Repayment of capital lease obligations............. (438,483) (428,068) (238,323)
Issuance of note payable........................... -- 1,120,656 --
Issuance of loan payable to strategic partner...... 1,583,557 -- --
Repayment of note payable.......................... (349,009) -- --
Proceeds from Employee Stock Purchase Plan......... 116,902 152,175 --
Proceeds from sale of common stock, net............ -- -- 37,124,118
Proceeds from stock options and warrants........... 106,492 129,018 70,139
------------ ------------ -------------
Net cash provided by financing activities.......... 1,019,459 973,781 36,955,934
------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents...................................... 60,670 (1,086,203) (1,212,235)
Cash and cash equivalents at beginning of period... 369,454 1,455,657 2,667,892
------------ ------------ -------------
Cash and cash equivalents at end of period......... $ 430,124 $ 369,454 $ 1,455,657
============ ============ =============
Supplemental disclosure of noncash investing and
financing activities:

Capital lease obligations incurred in connection
with acquisition of fixed assets................. $ 154,759 $ 816,740 $ 452,193
============ ============ =============
Issuance of stock option loan for exercise of stock
options and related interest..................... $ 264,311 $ 123,119 --
============ ============ =============
Supplemental cash flow information:
Cash paid for interest............................. $ 221,781 $ 61,131 $ 37,984
============ ============ =============
</TABLE>

See accompanying notes.

F-9
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1999

1. BUSINESS

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

The Company completed a Phase II clinical trial in June 1998 to test the
safety and preliminary efficacy of AngioMARK-enhanced MR angiography ("MRA") for
the evaluation of PVD and is currently conducting a Phase II feasibility trial
to test the safety and feasibility of AngioMARK-enhanced MRA for the evaluation
of CAD. The Company began an additional Phase II clinical trial to test the
safety and feasibility of AngioMARK for detecting breast cancer in
January 1998. Enrollment for this clinical trial was completed in March 2000.

In June 1999, the Company initiated a Phase III clinical trial to determine
the efficacy of AngioMARK-enhanced MRA for the detection of Aortoiliac Occlusive
Disease ("AIOD"), a sub-category of PVD. The Company considers this event as an
important milestone and believes that the progression from Phase II to Phase III
for PVD during 1999 warrants the transition from a development stage enterprise,
as defined by Financial Standards No. 7, "Accounting and Reporting by
Development Stage Enterprises" ("SFAS 7") issued by the Financial Accounting
Standard Board ("FASB"), to an established operating enterprise. Consequently,
cumulative amounts and other additional disclosures required by SFAS 7 have not
been provided.

SIGNIFICANT REVENUES

For the year ended December 31, 1999, one source represented 100% of
revenues. For the year ended December 31, 1998, one source represented 80% of
revenues and one source represented 20% of revenues. For the year ended
December 31, 1997, one source represented 73% of revenues and one source
represented 27% of revenues.

2. SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

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

PROPERTY AND EQUIPMENT

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

F-10
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITAL LEASE OBLIGATIONS

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

INCOME TAXES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

At December 31, 1999 and 1998, the Company's financial instruments consist
of cash and cash equivalents, available-for-sale marketable securities, notes
receivable from an officer, accounts payable and accrued expenses and two notes
payable.

The fair value of cash and cash equivalents and accounts payable and accrued
expenses approximate cost due to their short-term maturities. The fair value of
the available-for-sale marketable securities, notes receivable, note payable,
loan payable and capital lease obligation are discussed in Notes 3, 13, 6, 7,
and 8 respectively.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of available-for-sale marketable securities.
The Company restricts investments of available-for-sale marketable securities to
the United States Federal Government and financial institutions with investment
grade credit ratings.

REVENUE RECOGNITION

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

USE OF ESTIMATES

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

F-11
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TECHNOLOGY, LICENSE AND PATENT COSTS

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

STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") in accounting for
its stock-based compensation plans, rather than the alternative fair value
accounting method provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company has provided the required disclosures
pursuant to SFAS 123.

EARNINGS (LOSS) PER SHARE

The Company computes net income (loss) per share in accordance with the
provisions of SFAS No. 128, "Earnings per Share." Net income per share is based
upon the weighted-average number of common shares outstanding and excludes the
effect of dilutive potential common stock issuable upon exercise of stock
options. Net income per share, assuming dilution, includes the effect of
dilutive potential common stock issuable upon exercise of stock options using
the treasury stock method.

COMPREHENSIVE INCOME

The Company reports and presents comprehensive income and its components in
accordance with the provisions of SFAS No. 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements for periods
beginning after December 15, 1997. Comprehensive income, as defined, includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income which are excluded from
net income include cumulative translations adjustments resulting from
consolidation of foreign subsidiaries' financial statements and unrealized gains
and losses on available-for-sale securities. Reclassifications of financial
statements for earlier periods for comparative purposes is required. The Company
adopted SFAS 130 in 1998 and reported unrealized gains (losses) on
available-for-sale marketable securities in other comprehensive income at
December 31, 1999 and 1998, of ($87,647) and $87,453, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by
SFAS 137, requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting.
SFAS 133 is effective beginning June 15, 2000. The adoption of SFAS 133 is not
expected to have a material impact on the financial position or results of
operations of the Company.

F-12
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fiscal year beginning after December 15, 1999. We are presently analyzing the
impact, if any, that the adherence of SAB 101 will have on our financial
condition or results of operations.

3. AVAILABLE-FOR-SALE MARKETABLE SECURITIES

The estimated fair value of these financial instruments is determined based
on broker quotes or quoted market prices or rates for the same or similar
instruments, and the related carrying amounts are as follows:

<TABLE>
<CAPTION>
FAIR VALUE COST
------------------------- -------------------------
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Federal agency obligations................ $ 4,791,456 $12,011,729 $ 4,829,189 $11,985,231
U.S. Treasury obligations................. 2,955,288 2,045,322 2,984,960 2,030,630
Bank obligations.......................... -- 6,082,364 -- 6,081,140
Corporate Obligations..................... 5,963,236 8,592,332 5,983,478 8,547,294
----------- ----------- ----------- -----------
$13,709,980 $28,731,747 $13,797,627 $28,644,295
=========== =========== =========== ===========
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Marketable securities available-for-sale:
Due within one year................................ $ 5,727,824 $19,424,490
Due after one year through two years............... 7,982,156 9,307,257
----------- -----------
$13,709,980 $28,731,747
=========== ===========
</TABLE>

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Laboratory equipment................................. $1,766,075 $2,766,857
Leasehold improvements............................... 2,045,702 2,094,027
Furniture, fixtures and other equipment.............. 656,995 871,783
---------- ----------
4,468,772 5,732,667
Less accumulated depreciation and amortization....... (2,410,490) (2,871,390)
---------- ----------
$2,058,282 $2,861,277
========== ==========
</TABLE>

F-13
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Accounts payable..................................... $1,773,212 $ 779,678
Accrued development expenses......................... 635,890 827,733
Accrued legal expense................................ 181,337 158,603
Accrued compensation................................. 595,437 602,402
Other accrued expenses............................... 567,960 312,721
---------- ----------
$3,753,836 $2,681,137
========== ==========
</TABLE>

6. NOTE PAYABLE

In December 1998, the Company borrowed $1,120,656 in the form of a 34-month
note payable that bears annual interest at 13.17% and is due in 2001. The
proceeds from this note payable were used to finance certain leasehold
improvements at both of the Company's facilities.

Maturities for the two years succeeding December 31, 1999 are $397,864 in
2000 and $373,783 in 2001.

7. LOAN PAYABLE TO STRATEGIC PARTNER

In October 1999, the Company entered into a Non-Negotiable Promissory Note
and Security Agreement (the "Loan") with Mallinckrodt, Inc. ("Mallinckrodt"),
pursuant to which the Company is eligible to borrow up to $9.5 million from
Mallinckrodt, on a quarterly basis, to cover EPIX's share of AngioMARK
development costs. The Loan bears interest, adjustable on a quarterly basis, at
the Prime Rate published in the Wall Street Journal. The Loan is repayable in
full on the earliest to occur of (i) October 1, 2002, (ii) thirty days after the
date of the First Commercial Sale of Licensed Product in the Territory (as such
terms are defined in the Company's Strategic Collaboration Agreement with
Mallinckrodt dated August 30, 1996, as amended (the "Strategic Collaboration
Agreement")) and (iii) thirty days after the first date upon which the Company
could reasonably repay all outstanding principal and interest on the Loan
without creating any reasonably foreseeable risk that the Company would be
otherwise entitled to receive a loan from Mallinckrodt under the existing terms
of the Strategic Collaboration Agreement within six months of the date of any
such repayment. The Loan is secured by a first priority security interest in all
of the Company's intellectual property. Although the possibility exists that the
loan will become repayable within the next twelve months pursuant to repayment
provision (iii) above, the conditions required to be met by such provision
require our speculation concerning both the probability and success of certain
future financial transactions. Due to our current uncertainty that such future
transactions will occur or will occur such as to cause repayment provision
(iii) above to apply, we have classified the Loan as a long-term obligation. The
Company received $1,583,557 pursuant to the Loan during November 1999 to cover
EPIX's share of third quarter 1999 AngioMARK development costs.

8. LEASES

The Company has entered into a number of capital leases for equipment,
including sale and leaseback transactions involving certain equipment. Assets
under capital leases, the majority of which are laboratory

F-14
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

8. LEASES (CONTINUED)
equipment, totaled $1,375,691 and $2,651,715 at December 31, 1999 and 1998,
respectively. During the years ended December 31, 1999, 1998, and 1997, the
Company incurred amortization expense relating to assets under capital leases of
$427,740, $433,548 and $261,010, respectively. Accumulated amortization relating
to assets under capital leases was $710,020 and $1,687,995 at December 31, 1999
and 1998, respectively.

In addition, the Company leases office space under operating lease
arrangements. The leases for the two principal facilities expire in
December 2002.

Future minimum commitments under leases with non-cancelable terms of one or
more years are as follows at December 31, 1999:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
2000.................................................. $ 422,802 $ 837,493
2001.................................................. 275,763 854,545
2002.................................................. 66,166 845,161
2003.................................................. -- 40,951
2004.................................................. -- 11,162
--------- ----------
Total minimum lease payments.......................... 764,731 $2,589,312
==========
Less amounts representing interest.................... 61,072
---------
Present value minimum lease payments.................. 703,659
Less amounts due within one year...................... (379,911)
---------
$ 323,748
=========
</TABLE>

Rent expense amounted to approximately $598,694, $546,866 and $266,644 for
1999, 1998, and 1997, respectively.

9. STOCKHOLDERS' EQUITY

CAPITAL STOCK

During 1997, the Company completed an initial public offering of 2,300,000
shares of its Common Stock at a price of $7.00 per share and a follow-on public
offering of 2,467,500 shares of Common Stock at a price of $10.00 per share. The
net proceeds, after underwriter discounts and offering expenses, aggregated
approximately $37.1 million, which the Company is using for research and
development and funding of clinical trials in support of regulatory approvals
and for general corporate purposes.

In February 1997, pursuant to the completion of its initial public offering,
all of the Preferred Stock issued and outstanding as of that date converted into
4,750,278 shares of Common Stock. Each share of Series A Preferred Stock
converted into 3.4 shares of Common Stock. All other shares of Preferred Stock
converted into .67 shares of Common Stock. The former holders of the Preferred
Stock had certain voting and redemption rights and liquidation preferences,
which were relinquished upon conversion. Immediately following conversion, all
currently outstanding shares of Preferred Stock were canceled, retired and

F-15
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

9. STOCKHOLDERS' EQUITY (CONTINUED)
eliminated from the Company's authorized shares of capital stock and the number
of authorized shares of Preferred Stock was decreased to 1,000,000 shares.

WARRANTS

In connection with a lease agreement, the Company issued warrants to
purchase shares of Series A, Series B and Series C Preferred Stock. In
October 1997, the holders of the Series A, B and C Warrants (the Warrants)
elected to surrender the Warrants and receive Common Stock equivalent to the
difference between the deemed fair market value of the Common Stock (ranging
from $11.81-$12.15/share) and the exercise price of the Warrants (ranging from
$2.27 to $6.81/share) multiplied by the outstanding Warrants (53,031). The
resulting difference converted into 36,641 shares of Common Stock, which were
issued in exchange for the Warrants.

In connection with the issuance of Bridge Notes and the sale of Series D
preferred stock, the Company issued warrants to purchase 40,000 shares of
Series D preferred stock. Effective with the initial public offering and the
conversion of Series D preferred stock into Common Stock, the holders of the
warrants are entitled to convert the warrants to an aggregate of 26,665 shares
of common stock at a cost equal to $4.50 per common share. These warrants, which
expire in May 2006, were still outstanding as of December 31, 1999.

EQUITY PLANS

EQUITY INCENTIVE PLAN

The Company has in place the 1992 Equity Incentive Plan, which provides
stock awards to purchase shares of Common Stock to be granted to employees and
consultants under incentive and non-statutory stock option agreements. In
September 1999, the Board of Directors voted, subject to shareholder approval,
to amend the 1992 Equity Incentive Plan (as amended, "the Equity Plan") to
increase the aggregate number of shares of Common Stock available thereunder by
an additional 550,000 shares. Additionally, in June 1999, May 1998, June 1997
and December 1996, the Company amended the Equity Plan to, among other things,
increase the number of shares reserved for issuance pursuant to future grants.
The Equity Plan provides for the grant of stock options (incentive and
non-statutory), stock appreciation rights, performance shares, restricted stock
or stock units for the purchase of an aggregate of 3,149,901 shares of Common
Stock, subject to adjustment for stock-splits and similar capital changes.
Awards under the Equity Plan can be granted to officers, employees and other
individuals as determined by the committee of the Board of Directors, which
administers the Equity Plan. The Compensation Committee selects the participants
and establishes the terms and conditions of each option or other equity right
granted under the Equity Plan, including the exercise price, the number of
shares subject to options or

F-16
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

9. STOCKHOLDERS' EQUITY (CONTINUED)
other equity rights and the time at which such options become exercisable. Stock
option information relating to the Equity Incentive Plan is as follows:

<TABLE>
<CAPTION>
EXERCISABLE
-------------------
WEIGHTED WEIGHTED
OPTION PRICE AVERAGE AVAILABLE NUMBER AVERAGE
OPTIONS RANGE PER EXERCISE FOR OF EXERCISE
OUTSTANDING SHARE PRICE GRANT OPTIONS PRICE
----------- -------------------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997................... 1,666,714 $0.42--$13.50 $4.33 161,219 562,704 $2.04
Granted............................. 328,344 $5.38--$13.88 $9.68
Exercised........................... (221,793) $0.42--$ 8.75 $1.14
Canceled............................ (35,673) $0.45--$13.88 $9.87
---------

December 31, 1998................... 1,737,592 $0.42--$13.88 $5.64 118,548 559,631 $3.04
Granted............................. 881,322 $4.50--$11.125 $5.84
Exercised........................... (197,591) $0.42--$ 9.94 $1.88
Canceled............................ (41,361) $4.50--$13.88 $8.81
---------

December 31, 1999................... 2,379,962 $0.42--$13.88 $5.97 78,587 703,485 $4.28
=========
</TABLE>

1996 DIRECTORS STOCK OPTION PLAN

In December 1996, the Board of Directors and stockholders of the Company
adopted the Company's 1996 Director Stock Option Plan (the "Director Plan"). In
May 1998, the Company amended the Director Plan to increase the number of shares
for issuance pursuant to grants and to increase the number of shares granted
upon election or reelection. All of the directors who are not employees of the
Company (the "Eligible Directors") are currently eligible to participate in the
Director Plan. At December 31, 1999, there are 100,000 shares of Common Stock
reserved for issuance under the Director Plan. Upon the election or reelection
of an Eligible Director, such director is automatically granted an option to
purchase 15,000 shares of Common Stock (the "Option"). Each Option becomes
exercisable with respect to 5,000 shares on each anniversary date of grant for a
period of three years, provided that the option holder is still a director of
the Company at the opening of business on such date. The Options have a term of
ten years. The exercise price for the Options is equal to fair value at the date
of grant. The exercise price may be paid in

F-17
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

9. STOCKHOLDERS' EQUITY (CONTINUED)
cash or shares of Common Stock or combination of both. Stock option information
relating to the Director Plan is as follows:

<TABLE>
<CAPTION>
WEIGHTED
OPTION PRICE AVERAGE AVAILABLE EXERCISABLE WEIGHTED
OPTIONS RANGE PER EXERCISE FOR NUMBER OF AVERAGE
OUTSTANDING SHARE PRICE GRANT OPTIONS EXERCISE PRICE
----------- ------------------- ---------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997............. 6,666 $8.50 $ 8.50 60,000
Granted....................... 38,334 $8.50--$13.25 $12.40
Exercised.....................
Canceled......................
------
December 31, 1998............. 45,000 $8.50--$13.25 $11.80 55,000 15,000 $12.83
Granted....................... 15,000 $7.00 $ 7.00
Exercised.....................
Canceled......................
------
December 31, 1999............. 60,000 $7.00--$13.25 $10.60 40,000 28,666 $12.42
======
</TABLE>

COMBINED OPTION PLAN

The following table summarizes information about options outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------------------------- EXERCISABLE
WEIGHTED -------------------------
OPTIONS AVERAGE OPTIONS WEIGHTED
OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT AVERAGE
RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, EXERCISE
PRICES 1999 LIFE EXERCISE PRICE 1999 PRICE
- --------------------- -------------- ----------- -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.42--$0.83 306,371 5.13 $ 0.62 255,408 $ 0.59
$2.25--$4.50 299,556 6.44 $ 4.31 209,352 $ 4.39
$4.88--$8.50 1,092,954 9.04 $ 5.50 115,023 $ 6.06
$8.75--$8.75 358,261 7.62 $ 8.75 46,982 $ 8.75
$8.88--$13.88 382,820 8.41 $11.01 105,386 $11.28
--------- --------
$0.42--$13.88 2,439,962 7.92 $ 6.08 732,151 $ 4.60
========= ========
</TABLE>

1996 EMPLOYEE STOCK PURCHASE PLAN

In December 1996, the Company adopted the Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") under which employees may purchase shares of
Common Stock at a discount from fair market value at specified dates. Employees
first purchased shares under the Purchase Plan in 1998. There are 66,666 shares
of Common Stock reserved for issuance under the Purchase Plan. Employees
purchased 24,323 shares in 1999 at an average price of $4.81 and 18,344 shares
in 1998 for an average price of $8.30. At December 31, 1999, 23,999 common
shares remained available for issuance under the Purchase Plan. The Purchase
Plan is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the code. Rights to purchase Common Stock under the
Purchase Plan are granted at the discretion of the Compensation Committee, which
determines the frequency and duration of individual

F-18
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

9. STOCKHOLDERS' EQUITY (CONTINUED)
offerings under the Purchase Plan and the dates when stock may be purchased.
Eligible employees participate voluntarily and may withdraw from any offering at
any time before stock is purchased. Participation terminates automatically upon
termination of employment. The purchase price per share of Common Stock in an
offering is 85% of the lesser of its fair market value at the beginning of the
offering period or on the applicable exercise date and are paid through payroll
deductions. The Purchase Plan terminates in December 2006.

FAS 123 PRO FORMA INFORMATION

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

<TABLE>
<CAPTION>
OPTIONS YEAR ENDED ESPP
----------------------------------------------------
------------------------------ -------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average life (Years)........... 4.96 4.75 3.75 0.50 0.50 --
Weighted-average contractual life
(Years)............................... 7.92 7.83 8.27 -- -- --
Expected stock price volatility......... 0.81 0.74 0.60 0.81 0.74 --
Risk-free interest rate................. 5.50% 6.00% 6.00% 5.50% 6.00% --
</TABLE>

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

<TABLE>
<CAPTION>
WEIGHTED AVERAGE GRANT DATE
VALUE
--------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Stock option plans................................ $3.70 $5.73 $3.83
ESPP.............................................. $2.80 $4.06 --
</TABLE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Pro forma net income (loss).......... $(18,386,545) $(15,160,591) $(6,684,788)
Pro forma diluted earnings per
share.............................. $ (1.59) $ (1.34) $ (0.80)
</TABLE>

The effects on pro forma disclosures of applying FAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because FAS 123 is applicable only to options granted subsequent to April 1,
1995, the pro forma effect will not be fully reflected until 2000.

F-19
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

10. EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted earnings
(loss) per share:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Numerator:
Net loss............................. $(16,983,153) $(13,998,229) $(6,112,093)

Denominator:
Weighted average shares.............. 11,555,964 11,354,200 8,333,294

Basic loss per share................. $ (1.47) $ (1.23) $ (0.73)
Diluted loss per share............... $ (1.47) $ (1.23) $ (0.73)
</TABLE>

11. INCOME TAXES

The Company has reported losses since inception and, due to the degree of
uncertainty related to the ultimate use of the loss carryforwards, fully
reserved this tax benefit. The Company has the following total deferred tax
assets as of December 31, 1999 and 1998:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 17,045,000 $ 10,519,000
Research and development tax credits............. 2,260,000 725,000
Book over tax depreciation and amortization...... 941,000 750,000
Other............................................ 154,000 148,000
------------ ------------
Total deferred tax assets........................ 20,400,000 12,142,000
Valuation allowances............................. (20,400,000) (12,142,000)
------------ ------------
Deferred income taxes, net....................... $ 0 $ 0
============ ============
</TABLE>

As of December 31, 1999, the Company has net operating loss carryforwards
for income tax purposes of approximately $42.7 million, which expire through the
year 2019 and 2004, for Federal and State, respectively. The valuation allowance
increased by $8,258,000 during the twelve months ended December 31, 1999, due
primarily to the additional allowance for the net operating losses and research
and development tax credits incurred. The tax net operating loss carryforwards
differ from the accumulated deficit principally due to temporary differences in
the recognition of certain revenue and expense items for financial and tax
reporting purposes.

As a result of ownership changes resulting from sales of equity securities,
the Company's ability to use the loss carryforwards is subject to limitations as
defined in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Company currently estimates that the annual limitation on its
use of net operating losses through May 31, 1996 will be approximately $900,000.
Pursuant to Sections 382 and 383 of the Code, the change in ownership resulting
from public equity offerings in 1997 and any other future ownership changes may
further limit utilization of losses and credits in any one year. The Company is
also eligible for research and development tax credits which can be carried
forward to offset

F-20
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

11. INCOME TAXES (CONTINUED)
federal taxable income. The annual limitation and the timing of attaining
profitability may result in the expiration of net operating loss and tax credit
carryforwards before utilization.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 YEARS ENDED DECEMBER 31
------------------------- -------------------------
1998 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Tax at U.S. statutory rate..................... $(5,774,000) $(4,760,000) (34.00)% (34.00)%
State taxes, net of federal benefit............ (1,020,000) (840,000) (6.00)% (6.00)%
Non-deductible items........................... 55,000 20,000 0.03% 0.02%
Tax credits.................................... (1,519,000) (407,000) (8.90)% (2.90)%
Change in Valuation Allowance.................. 8,258,000 5,987,000 48.87% 42.88%
----------- ----------- ------ ------
$ 0 $ 0 0.00% 0.00%
=========== =========== ====== ======
</TABLE>

12. DEFINED CONTRIBUTION PLAN

The Company offers a defined contribution 401(k) plan which covers
substantially all employees. The plan permits participants to make contributions
from 1% to 15% of their compensation. The Company matches up to 3% of employees'
contributions. During 1999, the Company's match amounted to $134,355.

13. RELATED-PARTY TRANSACTIONS

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

<TABLE>
<CAPTION>
SHARES OF COMPANY COMMON
INTEREST STOCK PROVIDED AS
DATE OF NOTE TERM AMOUNT RATE COLLATERAL
- ------------ -------- -------- -------- ------------------------
<S> <C> <C> <C> <C>
June 26, 1995............. 10 years $ 50,000 7.31% 14,814
April 5, 1996............. 10 years 50,000 6.51 14,814
May 31, 1996.............. 10 years 180,000 6.83 44,444
</TABLE>

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

During 1998, the Company received a promissory note from an employee
pursuant to an employee stock option financing program available to all
employees. The proceeds from this loan were used to exercise certain stock
options by the employee. The difference between the exercise price and the fair
market value of the stock was recorded as stock compensation expense during
1998. The loan amount plus

F-21
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

13. RELATED-PARTY TRANSACTIONS (CONTINUED)
accrued interest was recorded as a loan to stock option holder in the financial
statements. This transaction is summarized below:

<TABLE>
<CAPTION>
SHARES OF COMPANY COMMON
INTEREST STOCK PROVIDED AS
DATE OF NOTE TERM AMOUNT RATE COLLATERAL
- ------------ ---------- -------- -------- ------------------------
<S> <C> <C> <C> <C>
April 2, 1998........... 21 months $118,068 5.70% 17,402
</TABLE>

The note is subject to certain acceleration clauses. Subsequent to
December 31, 1999, the note receivable plus accrued interest was repaid in full.

During June 1999, the Company received a promissory note with 25% recourse
from an executive officer of the Company pursuant to an employee stock option
financing program available to all employees of the Company. The promissory note
is secured by shares of common stock of the Company equal in value, at the time
of the transaction, to approximately 150% of the amount of the promissory note.
The proceeds from the loan were used to exercise stock options held by the
executive officer. The difference between the exercise price and the fair market
value of the stock, less 25% related to the recourse stipulation, was recorded
as stock compensation expense during the second quarter of 1999. The loan amount
plus accrued interest was recorded as a loan to stock option holders in the
financial statements. This transaction is summarized below:

<TABLE>
<CAPTION>
SHARES OF COMPANY COMMON
INTEREST STOCK PROVIDED AS
DATE OF NOTE TERM AMOUNT RATE COLLATERAL
- ------------ ---------- -------- -------- ------------------------
<S> <C> <C> <C> <C>
June 3, 1999............ 60 months $249,993 5.25% 55,554
</TABLE>

The cost of the three notes receivable approximates fair market value.

14. SIGNIFICANT AGREEMENTS

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

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

In October 1998, the Company and NeoGenesis Pharmaceuticals, Inc.
("NeoGenesis") announced the initiation of collaboration for the discovery of
novel compounds for use in diagnostic imaging. Under the terms of this
agreement, the Company received access to NeoGenesis' proprietary combinatorial
chemistry libraries. By rapidly screening these libraries with NeoGenesis'
mass-coded drug discovery

F-22
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

14. SIGNIFICANT AGREEMENTS (CONTINUED)
platform, the Company sought to identify potential candidates for its drug
discovery programs. This collaboration was successfully completed in 1999.

In September 1998, the Company and Pfizer, Inc. ("Pfizer") entered into an
agreement to explore the efficacy of AngioMARK-enhanced MRI in the diagnosis and
monitoring of female sexual arousal dysfunction.

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

In June 1997, the Company and Dyax Corp. ("Dyax") formed a strategic
alliance to develop novel contrast imaging agents for the diagnosis of severe
blood clots in the lungs and legs. The companies jointly sought to identify and
develop compounds that specifically target PE and DVT for use as IN VIVO MRI and
nuclear medicine imaging agents for the diagnosis of these disorders. The
Company partially funded the program and provided expertise in MRI contrast
technology for development of MRI-specific imaging agents. Dyax assumed primary
responsibility for developing agents for use in nuclear medicine. Dyax will
receive royalties on sales of MRI products, and the Company will receive
royalties on sales of nuclear medicine products resulting from this
collaboration. The discovery phase of this collaboration was formally completed
in 1999 with the identification of several peptide candidates.

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

In August 1996, the Company entered into a strategic collaboration agreement
with Mallinckrodt Inc. ("Mallinckrodt"), a U.S. pharmaceutical company,
involving research, development and marketing of AngioMARK and future MRI
vascular contrast agents developed or in-licensed by either party. Under the
terms of the agreement, each party is obligated to fund a portion of the
development cost of AngioMARK up to a specified maximum amount. Mallinckrodt
will have the right to manufacture AngioMARK and to market the product worldwide
except Japan. During 1996, the Company received a $6.0 million license fee
payment upon execution of the agreement and in 1997 received a $2.0 million
milestone payment. Under the agreement, the Company will share in future
operating profits from the sale of products covered under the agreement. In
September 1998, Mallinckrodt exercised its option to expand the original
EPIX-Mallinckrodt collaboration. The new agreement provides the Company and
Mallinckrodt with the opportunity to broaden the scope of their clinical program
for AngioMARK and commits additional resources for the research and development
of novel MR imaging technologies. In October 1999, the Company entered into a
Non-Negotiable Promissory Note and Security Agreement (the "Loan") with

F-23
<PAGE>
EPIX MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

14. SIGNIFICANT AGREEMENTS (CONTINUED)
Mallinckrodt pursuant to which the Company is eligible to borrow up to
$9.5 million from Mallinckrodt, on a quarterly basis, to cover EPIX's share of
AngioMARK development costs. The Loan bears interest, adjustable on a quarterly
basis, at the Prime Rate published in the Wall Street Journal. The Loan shall be
repayable in full upon the earliest occurrence of one of three events--See
Note 7 for a description of the three events.

In March 1996, the Company entered into marketing, development and license
agreements with Daiichi Radioisotope Laboratories Ltd., a Japanese
pharmaceutical company ("Daiichi") covering the Company's vascular MRI contrast
agent. During 1996, the Company received a license fee of $3.0 million (net of
withholding tax) upon execution of the agreement and proceeds from the issuance
of 868,329 shares of Series E Preferred Stock at price of $5.76 per share. A
further $900,000 was received from Daiichi in 1997. In addition, the Company is
entitled to receive future milestone payments of up to $2.4 million (net of
withholding tax) The agreements also provide for the Company to supply product
to Daiichi and to receive royalties for sales made by Daiichi in Japan.

In March 1992, the Company entered into a $3.5 million development and
license agreement with a Japanese manufacturer and distributor ("Japanese
Manufacturer and Distributor") of medical products. Under the terms of the
agreement, the Company received funding for research and development through the
sale of Preferred Stock and license rights to the Company's liver MRI contrast
agent product candidate. In March of 1992, the Japanese Manufacturer and
Distributor purchased an equity interest in the Company in accordance with the
agreement by acquiring 26,768 shares of Series A Preferred Stock for $11.21 per
share. As of December 31, 1999, the Company had received an aggregate of
$2.7 million in revenues (net of withholding tax) under this agreement.

Also in March 1992, the Company entered into an Agency Agreement with
Sumitomo Corp. ("Sumitomo") to assist the Company in entering into collaboration
and licensing arrangements with other companies in Japan for the development,
manufacture, distribution and sale of the Company's future products. At that
time, Sumitomo purchased 66,923 shares of the Company's Series A Preferred
Stock, $.01 par value, for $11.21 per share. In October 1995, Sumitomo assigned
the Agency Agreement and its shares to Summit Pharmaceutical International
Corporation ("Agent"). Under the terms of the amended Agency Agreement, which
expired in March 1997, the Company is required to pay the Agent certain
commissions and fees, based on a stipulated percentage of amounts received by
the Company as license fees, milestone payments or capital investments under
arrangements made pursuant to the Agency Agreement.

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

F-24
<PAGE>
SIGNATURES

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

<TABLE>
<S> <C> <C>
EPIX MEDICAL, INC.

By: /s/ MICHAEL D. WEBB
-----------------------------------------
Michael D. Webb
CHIEF EXECUTIVE OFFICER
</TABLE>

We the undersigned officer and directors of EPIX Medical, Inc., hereby
severally constitute Michael D. Webb, Pamela E. Carey, and William T. Whelan,
and each of them singly, our true and lawful attorneys, with full power to them
and each of them to sign for use, in our names and in the capacity indicated
below, any and all amendments to this annual report on this Form 10-K for the
fiscal year ended December 31, 1999, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorneys-in-fact
may cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MICHAEL D. WEBB Chief Executive Officer and
------------------------------------------- Director (Principal March 17, 2000
Michael D. Webb Executive Officer)

Director of Finance and
/s/ PAMELA E. CAREY Treasurer (Principal
------------------------------------------- Financial and Accounting March 17, 2000
Pamela E. Carey Officer)

/s/ CHRISTOPHER F. O. GABRIELI
------------------------------------------- Chairman of the Board and March 17, 2000
Christopher F. O. Gabrieli Director

/s/ STANLEY T. CROOKE, M.D., PH.D.
------------------------------------------- Director March 17, 2000
Stanley T. Crooke, M.D., Ph.D.

/s/ LUKE B. EVNIN, PH.D.
------------------------------------------- Director March 17, 2000
Luke B. Evnin, Ph.D.

/s/ RANDALL B. LAUFFER, PH.D.
------------------------------------------- Director March 17, 2000
Randall B. Lauffer, Ph.D.
</TABLE>
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company. Filed
as Exhibit 4.1 to the Company's Registration Statement on
Form S-8 (File No. 333-30531) and incorporated herein by
reference.
3.2 Form of Amended and Restated By-Laws of the Company. Filed
as Exhibit 4.2 to the Company's Registration Statement on
Form S-8 (File No. 333-30531) and incorporated herein by
reference.
4.1 Specimen certificate for shares of Common Stock of the
Company. Filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated
herein by reference.
10.1+ Agency Agreement between the Company and Sumitomo
Corporation dated March 13, 1992. Filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.2+ Amendment to the Agency Agreement between the Company and
Sumitomo Corporation dated June 26, 1992. Filed as
Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.3 Short Form Lease from Trustees of the Cambridge East Trust
to the Company dated July 1, 1992. Filed as Exhibit 10.3 to
the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.4 Form of Warrant to Purchase Shares of Series A Convertible
Preferred Stock dated December 21, 1992. Filed as
Exhibit 10.4 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.5 Dominion Ventures Master Lease Agreement No. 8050 dated
December 21, 1992. Filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.6 First Amendment to Master Lease Agreement No. 8050 dated
May 14, 1993. Filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.7 Second Amendment to Master Lease Agreement No. 8050 dated
August 5, 1993. Filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.8 First Amendment Lease From Trustees of the Cambridge Trust
to the Company dated October 20, 1993. Filed as
Exhibit 10.8 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.9 Warrant to Purchase Shares of Series B Convertible Preferred
Stock dated June 6, 1994. Filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.10 Second Amendment to Master Lease Agreement No. 8050 dated
June 6, 1994. Filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.11+ Amendment Agreement to the Agency Agreement between the
Company and Sumitomo Corporation dated September 15, 1994.
Filed as Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated
herein by reference.
10.12 Second Amendment Lease From Trustees of the Cambridge East
Trust to the Company dated September 17, 1994. Filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.13 Convertible Promissory Note Purchase Agreement by and among
the Company and certain purchasers named therein dated
May 26, 1995. Filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.14+ Amended and Restated License Agreement between the Company
and The General Hospital Corporation dated July 10, 1995.
Filed as Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated
herein by reference.
10.15 Warrant to Purchase Shares of Series C Convertible Preferred
Stock dated August 2, 1995. Filed as Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.16 Third Amendment to the Master Lease Agreement No. 8050 dated
August 2, 1995. Filed as Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.17 Amendment No. 1 to Convertible Promissory Note Purchase
Agreement by and among the Company and certain purchasers
named therein dated January 19, 1996. Filed as
Exhibit 10.17 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.18+ Extension Agreement to Agency Agreement between the Company
and Sumitomo Corporation dated March 5, 1996. Filed as
Exhibit 10.18 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.19+ Development and License Agreement dated March 29, 1996 by
and among the Company and Daiichi Radioisotope
Laboratories, Ltd. Filed as Exhibit 10.19 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.20 Third Amendment Lease From Trustees of the Cambridge East
Trust to the Company dated May 1, 1996. Filed as
Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.21 Series D Convertible Preferred Stock Purchase Agreement by
and among the Company and certain purchasers named therein
dated May 29, 1996. Filed as Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.22 Third Amended and Restated Stockholders' Rights Agreement by
and among the Company and certain of its stockholders named
therein dated May 29, 1996. Filed as Exhibit 10.22 to the
Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.23 Form of Warrant to Purchase Shares of Series D Preferred
Stock dated May 29, 1996. Filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.24 Amendment No. 1 to Third Amended and Restated Stockholders'
Rights Agreement dated May 31, 1996. Filed as Exhibit 10.24
to the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.25 Series E Convertible Preferred Stock Purchase Agreement
dated May 31, 1996 between the Company and Daiichi
Radioisotope Laboratories, Ltd. Filed as Exhibit 10.25 to
the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.26+ Strategic Collaboration Agreement between the Company and
Mallinckrodt Medical, Inc. and Mallinckrodt Group Inc. dated
August 30, 1996. Filed as Exhibit 10.26 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.27 Amendment No. 2 to Third Amended and Restated Stockholders'
Rights Agreement dated December 6, 1996. Filed as
Exhibit 10.27 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.28# Amended and Restated 1992 Equity Incentive Plan. Filed as
Exhibit 99.1 to the Company's Registration Statement on
Form S-8 (File No. 333-30531) and incorporated herein by
reference.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.29# Form of Incentive Stock Option Certificate. Filed as
Exhibit 10.29 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.30 Form of Nonstatutory Stock Option Certificate. Filed as
Exhibit 10.30 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.31# 1996 Director Stock Option Plan. Filed as Exhibit 10.31 to
the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.32# 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.32 to
the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
10.33 Form of Consulting and Confidentiality Agreement between the
Company and certain consultants of the Company. Filed as
Exhibit 10.33 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.34 Form of Invention and Non-Disclosure Agreement between the
Company and certain employees of the Company. Filed as
Exhibit 10.34 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.35 Form of Non-Competition and Non-Solicitation Agreement
between the Company and certain employees of the Company.
Filed as Exhibit 10.35 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated
herein by reference.
10.36 Form of Common Stock Purchase Agreement. Filed as
Exhibit 10.36 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.37 Form of Stock Purchase and Right of First Refusal Agreement.
Filed as Exhibit 10.37 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated
herein by reference.
10.38 Collaboration Agreement effective as of June 20, 1997
between Dyax Corp. and the Company. Filed as Exhibit 10.1 to
the Company's quarterly report on Form 10-Q for the period
ended September 30, 1997 (File No. 000-21863) and
incorporated herein by reference.
10.39 Short Form Lease from Trustees of the Cambridge Trust to the
Company with a commencement date of January 1, 1998. Filed
as Exhibit 10.39 to the Company's Registration Statement on
Form S-1 (File No. 333-38399) and incorporated herein by
reference.
10.40 Sublease dated as of October 31, 1997 between the Company
and SatCon Technology Corporation. Filed as Exhibit 10.40 to
the Company's annual report on Form 10-K for the period
ended December 31, 1998 (File No. 000-21863) and
incorporated herein by reference.
10.41 First Amendment to Sublease dated as of July 15, 1998
between the Company and SatCon Technology Corporation. Filed
as Exhibit 10.41 to the Company's annual report on
Form 10-K for the period ended December 31, 1998 (File
No. 000-21863) and incorporated herein by reference.
10.42++ Amendment No. 1 dated as of September 10, 1998 to the
Strategic Collaboration Agreement between the Company and
Mallinckrodt Medical, Inc. and Mallinckrodt Group Inc. dated
August 30, 1996. Filed as Exhibit 10.42 to the Company's
annual report on Form 10-K for the period ended
December 31, 1998 (File No. 000-21863) and incorporated
herein by reference.
10.43 Promissory Note dated December 21, 1998 between the Company
and Finova Technology Finance, Inc. Filed as Exhibit 10.43
to the Company's annual report on Form 10-K for the period
ended December 31, 1998 (File No. 000-21863) and
incorporated herein by reference.
10.44 First Amendment dated February 8, 1999 to the Short Form
Lease dated as of July 7, 1998 with a commencement date as
of January 1, 1998 between the Company and the Trustees of
The Cambridge East Trust. Filed as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the period ended
March 31, 1999 (File No. 000-21863) and incorporated herein
by reference.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.45 Sublease extension election for an additional three years,
beginning January 1, 2000 and ending December 31, 2002
pursuant to Article 5 of the First Amendment to Sublease
dated as of July 15, 1998 between the Company and SatCon
Technology Corporation. Filed as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the period ended
June 30, 1999 (File No. 000-21863) and incorporated herein
by reference.
10.46++ Amendment No. 2 dated as of July 9, 1999 to the Strategic
Collaboration Agreement between the Company and Mallinckrodt
Medical, Inc. and Mallinckrodt Group, Inc. dated August 30,
1996 and amended pursuant to Amendment No. 1 as of
September 10, 1998. Filed herewith.
10.47 Non-Negotiable Promissory Note dated October 8, 1999 between
the Company and Mallinckrodt Inc. Filed herewith.
10.48 Security Agreement dated October 8, 1999 between the Company
and Mallinckrodt Inc. Filed herewith.
23.1 Consent of Ernst & Young LLP. Filed herewith.
24.1 Power of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements.
Filed herewith.
</TABLE>

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

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

<PAGE>
Exhibit 10.46

AMENDMENT NO. 2

This Amendment No. 2 dated as of July 9, 1999, is made by and among
EPIX MEDICAL, INC., a Delaware corporation having its principal place of
business at 71 Rogers Street, Cambridge, Massachusetts 02142-1118 U.S.A.
("Epix"), MALLINCKRODT MEDICAL, INC., a Delaware corporation having its
principal place of business at 675 McDonnell Boulevard, St. Louis, Missouri
63134, and MALLINCKRODT INC. (under its prior corporate name MALLINCKRODT
GROUP INC.), a New York corporation having its principal place of business at
7733 Forsyth Boulevard, St. Louis, Missouri 63105, by and through its
unincorporated Mallinckrodt Imaging Group (together with Mallinckrodt
Medical, Inc., "MKG").

RECITALS

WHEREAS, Epix (under its prior corporate name Metasyn, Inc.) and MKG
are parties to a Strategic Collaboration Agreement dated as of August 30,
1996 and amended pursuant to Amendment No. 1 as of September 10, 1998 (the
"Collaboration Agreement"); and

WHEREAS, Epix and MKG desire to further amend the Collaboration
Agreement, as set forth herein.

NOW THEREFORE, in consideration of the premises Epix and MKG mutually
agree as follows:

ARTICLE I. AMENDMENT

Epix and MKG hereby agree to amend Section 2.2 of the Collaboration
Agreement so that Section 2.2, as amended and restated, reads in its entirety
as follows:

2.2 [ * ]. In the event that during the term of this Agreement Epix
[ * ]. In such event, Epix shall [ * ]. Epix shall [ * ],

[ * ] Omitted portions filed separately with the Securities and Exchange
Commission.

<PAGE>

Epix and MKG shall [ * ]. If, [ * ], Epix and MKG [ * ], then, unless
the Parties [ * ], Epix shall [ * ].

ARTICLE 2. MISCELLANEOUS

Except as expressly amended by this Amendment No. 2, the Collaboration
Agreement shall remain unmodified and in full force and effect. This
Amendment No. 2 may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument. This Amendment No. 2 shall be governed and construed
in accordance with the laws of the State of New York without giving effect to
the choice of law provisions thereof.

IN WITNESS WHEREOF, the Parties have executed this Amendment No. 2 as
of the date set forth above.

EPIX MEDICAL, INC. MALLINCKRODT MEDICAL, INC.

By: /s/ Michael D. Webb By: /s/ Bradley J. Fercho
----------------------- ------------------------
Name: Michael D. Webb Name: Bradley J. Fercho
Title: President and Chief Title: President, Mallinckrodt
Executive Officer Imaging Group

[ * ] Omitted portions filed separately with the Securities and Exchange
Commission.

<PAGE>

Exhibit 10.47
NON-NEGOTIABLE PROMSSORY NOTE

Maximum Principal Balance St. Louis, Missouri
of $9,500,000 October 8, 1999

EPIX MEDICAL, INC., a Delaware corporation (hereinafter called
"EPIX"), for value received, hereby promises to pay to MALLINCKRODT INC., a
Delaware corporation (hereinafter called "MALLINCKRODT") the principal sum
outstanding hereunder from time to time, plus accrued interest thereon, in
accordance with the terms and conditions and at the times specified herein
below.

All payments of principal and interest made pursuant to this
Non-Negotiable Promissory Note ("Note") shall be in such coin or currency of the
United States of America as at the time of payment shall be legal tender for
payment of public and private debts, and shall be made by EPIX to MALLINCKRODT
at its offices at 675 McDonnell Boulevard, P. 0. Box 5840, St. Louis, Missouri
63134, or by wire transfer to MALLINCKRODT in immediately available funds to
such account as MALLINCKRODT may designate in writing to EPIX in advance of any
such payment.

All capitalized terms used herein, unless otherwise specifically
defined, shall have the meaning ascribed to such terms in the Strategic
Collaboration Agreement among Epix Medical, Inc. (formerly known as Metasyn,
Inc.), Mallinckrodt Inc. (a Delaware corporation and formerly known as
Mallinckrodt Medical, Inc.) and Mallinckrodt Inc. (a New York corporation and
formerly known as Mallinckrodt Group Inc.), dated August 30, 1996, as thereafter
amended from time to time, hereinafter referred as the "Strategic Collaboration
Agreement".

1. Disbursement of Funds. MALLINCKRODT hereby agrees to loan to
EPIX, on a quarterly basis and in accordance with and subject to the limitations
and procedures set forth herein, such portion of EPIX share of Development Costs
under the Strategic Collaboration Agreement as EPIX shall request from
MALLINCKRODT.

2. Procedures for Disbursement of Funds. On or about the twentieth
(20th) day of the month following the end of any calendar quarter, beginning
with the calendar quarter commencing on July 1, 1999 and ending on September 30,
1999, EPIX will submit to MALLINCKRODT a written request for a loan of funds for
an amount not to exceed expenditures by EPIX and its subcontractors comprising
EPIX, one-half share of Development Costs for the immediately preceding calendar
quarter, which request shall be accompanied by supporting documentation clearly
demonstrating the amount of Development Costs incurred by EPIX and its
subcontractors in such prior calendar quarter. Supporting documentation in the
form and format of the attached forecast shall be deemed adequate for purposes
hereof. Not later than the fifteenth (15th) day of the month following each
quarter MALLINCKRODT shall submit to EPIX data and supporting documentation
indicating the amount of Development Costs incurred by MALLINCKRODT and its
subcontractors in such prior calendar quarter, such data and

1
<PAGE>

documentation to be in sufficient detail so as to enable EPIX to make the loan
request referred to herein. Supporting documentation in the form and format of
the attached MS325 budget/forecast shall be deemed adequate for purposes hereof.
MALLINCKRODT shall, subject to any applicable limitations set forth herein,
disburse the funds requested by EPIX on the later of (i) the last day of the
month following the end of any calendar quarter for which a loan of funds is
requested and (ii) ten (10) days after the receipt by MALLINCKRODT of a request
for funds meeting the requirements of this Section. Upon disbursement to EPIX by
MALLINCKRODT of any funds, MALLINCKRODT, at its option, may require EPIX to
execute and deliver (at the expense of EPIX), a new Note adjusting the principal
amount then outstanding, or may present this Note to EPIX for notation hereon of
any additional principal amount outstanding as a consequence of the disbursement
of funds by MALLINCKRODT.

3. Interest. Any principal amount outstanding hereunder shall bear
interest during any calendar quarter at the prime rate of interest as published
in the Wall Street Journal on the first business day of each calendar quarter,
beginning with the calendar quarter commencing on October 1, 1999, and shall be
calculated with respect to any portion of the principal balance hereunder only
to the extent such portion was outstanding during any quarter, which will be
determined by dividing the number of days during the quarter in which any such
portion of the principal is outstanding by the total number of days in such
quarter. The interest applicable to the outstanding principal amount hereunder
shall be adjusted quarterly in the preceding fashion for so long as any amounts
remain outstanding hereunder.

4. Limitations on Loan of Funds. Notwithstanding any other provision
hereof, in no event will MALLINCKRODT be required to loan funds to EPIX in
response to any specific request for a loan in an amount that, when added to the
principal amount already outstanding hereunder, would exceed the principal
amount of Nine Million Five Hundred Thousand Dollars ($9,500,000) in the
aggregate. Further, in no event will MALLINCKRODT be required to loan EPIX any
amounts with respect to any given calendar quarter that are in excess of the
lesser of (i) the amount of Development Costs actually incurred by EPIX during
that calendar quarter and (ii) one-half of the aggregate Development Costs
incurred by MALLINCKRODT and EPIX during any such calendar quarter, regardless
of whether or not the amount of Development Costs incurred by MALLINCKRODT
during any such calendar quarter are more or less than the Development Costs
incurred by EPIX during that same calendar quarter. However if, with respect to
any calendar quarter, EPIX has incurred more Development Costs than MALLINCKRODT
then, in accordance with the requirements and intent of the Strategic
Collaboration Agreement and not as a loan or advance of funds hereunder, it is
understood that MALLINCKRODT will reimburse EPIX for one-half (1/2) of the
difference in this amount on the same date on which any loan of funds is made by
MALLINCKRODT to EPIX hereunder to cover the Development Costs incurred by EPIX
for such calendar quarter.

5. Repayment of Loaned Amounts.

2
<PAGE>

(a) The principal hereunder and all unpaid interest accrued thereon
shall be due and payable in full on the earliest to occur of (i) October 1,
2002, (ii) thirty (30) days after the date of the First Commercial Sale of the
Licensed Product in the Territory and (iii) thirty (30) days after the first
date upon which EPIX could reasonably repay all outstanding principal and
interest hereunder without creating any reasonably foreseeable risk that EPIX
will be entitled to receive a loan from MALLINCKRODT pursuant to Section 8.5 of
the Strategic Collaboration Agreement within six (6) months after the date of
any such repayment. If the outstanding principal and accrued interest under this
Note are not repaid in full by EPIX, without demand, presentment or notice by
MALLINCKRODT of any kind (all of which are expressly waived by EPIX to the
extent permitted by applicable law), as and when due in accordance with the
immediately preceding sentence, then, in addition to any other rights or
remedies MALLINCKRODT may have in accordance with the terms hereof, MALLINCKRODT
shall have the right, effective upon written notice to EPIX, to withhold and
retain up to fifty percent (50%) of the Operating Margin for any given calendar
quarter otherwise payable to EPIX in accordance with Section 8.6 of the
Strategic Collaboration Agreement until such time as all outstanding amounts of
principal and interest hereunder are completely paid.

(b) Notwithstanding the immediately preceding subsection (a), for so
long as there is any principal amount outstanding hereunder, EPIX will repay to
MALLINCKRODT twice per year, on or before July 15 and January 15, all interest
accrued during the previous six month period.

6. Security for Repayment. Repayment of this Note shall be secured
by an interest in all of the intellectual property assets of EPIX ("Secured
Assets"), including (without limitation) all patents, applications for patents,
trademarks, trademark applications, trade secrets and confidential or
proprietary scientific and technical information and data, whether owned by EPIX
or which EPIX has the right to employ by way of license or other grant (and, in
such case, as permitted by and subject to the terms and conditions of, such
license or grant), and as more fully described in and in accordance with the
terms of that certain Security Agreement between MALLINCKRODT and EPIX attached
hereto as Exhibit I and expressly made a part hereof (the "Security Agreement").
EPIX affirms that (i) the security interest granted in this Note and in the
Security Agreement is and shall remain a right of first priority senior to the
interests of all other creditors of EPIX with respect to the Secured Assets
until such time as it is released by MALLINCKRODT or as a consequence of payment
of all amounts secured hereunder, (ii) that such security interest is not
secondary or subordinate in any respect to the rights of any creditor or any
other party and (iii) that no other party has any security interest, collateral
interest or lien in, on or with respect to the Secured Assets.

7. Loss, Theft, Destruction or Mutilation of Note. Upon receipt of
evidence reasonably satisfactory to EPIX of the loss, theft, destruction or
mutilation of this Note, and, in the case of any such loss, theft or
destruction, upon receipt of an affidavit of loss and indemnity from
MALLINCKRODT reasonably satisfactory to EPIX, or, in the case of any such
mutilation, upon surrender and cancellation of this Note, EPIX will make and
deliver, in lieu of this Note, a new Note of like tenor and unpaid principal
amount and

3
<PAGE>

dated as of the original date hereof.

8. Prepayment. Upon notice given to MALLINCKRODT, EPIX may, at its
option and without penalty of any kind, prepay the Note, in whole or in part,
together with interest accrued thereon to the date of such prepayment. Upon any
prepayment of a portion of the principal amount of this Note, MALLINCKRODT, at
its option, may require EPIX to execute and deliver (at the expense of EPIX), a
new Note for the principal amount of this Note then remaining unpaid, or may
present this Note to EPIX for notation hereon of the payment of the portion of
the principal amount and any interest so prepaid.

9. Covenants. EPIX covenants and agrees that, so long as the Note or
any replacement therefor shall be outstanding;

(a) EPIX will promptly pay and discharge or cause to be paid and
discharged, before the same shall become in default, all lawful taxes and
assessments imposed by any state, local or federal governmental authority upon
EPIX or any subsidiary or upon the income and profits of EPIX or any subsidiary,
or upon any property, real, personal or mixed, belonging to EPIX or any
subsidiary, or upon any part thereof, as well as all lawful claims for labor,
materials and supplies which, if unpaid, might become a lien or charge upon the
Secured Assets; provided, however, that neither EPIX nor any subsidiary shall be
required to pay and discharge or to cause to be paid and discharged any such
tax, assessment, charge, levy or claim so long as EPIX or its subsidiary (as
appropriate) shall be contesting the validity thereof in good faith by
appropriate proceedings or EPIX shall, in its good faith judgment, deem the
validity thereof to be substantially in question.

(b) EPIX will at all times maintain and keep, or cause to be
maintained and kept, in good status and condition all significant properties and
rights of EPIX and its subsidiaries which are included in the Secured Assets
(including maintenance of fees for filing or registration due and payable with
respect to all registrable intellectual property rights included in the Secured
Assets); provided, however, that nothing in this paragraph (b) shall prevent the
abandonment or termination of any rights (including, but not limited to, the
abandonment of any claims under any existing or future patent applications
included in the Secured Assets) if such abandonment or termination is, in the
good faith business judgment of EPIX, in the best interest of EPIX and does not
prejudice MALLINCKRODT in any material respect.

(c) EPIX will deliver to MALLINCKRODT on a regular basis, but no
less often than quarterly, an accurate copy of its financial statements. EPIX's
EDGAR filing of its reports on Form 10-K and Form 10-Q with the Securities and
Exchange Commission shall be deemed to constitute compliance by EPIX with its
obligations under this Section 9(c).

(d) EPIX will at all times keep, and cause each of its subsidiaries
to keep, proper books of record and account in which proper entries will be made
of its transactions in accordance with generally accepted accounting principles
consistently

4
<PAGE>

applied.

(e) EPIX will do or cause to be done all things necessary and lawful
to preserve and keep in full force and effect its corporate existence, rights
and franchises and the corporate existence, rights and franchises of each of its
subsidiaries; provided, however, that nothing in this paragraph (e) shall
prevent (i) a consolidation or merger of, or a sale, transfer or disposition of
all or any substantial part of the property and assets of EPIX not prohibited by
the provisions of paragraph (f) set forth immediately below, or (ii) the
abandonment or termination of any rights or franchises of EPIX, or the
liquidation or dissolution of, or a sale, transfer or disposition (whether
through merger, consolidation, sale or otherwise) of all or any substantial part
of the property and assets of any subsidiary or the abandonment or termination
of the corporate existence, rights and franchises of any subsidiary if such
abandonment, termination, liquidation, dissolution, sale, transfer or
disposition is, in the good faith business judgment of EPIX, in the best
interests of EPIX and does not prejudice MALLINCKRODT in any material respect.

(f) EPIX will not consolidate or merge with or into, or sell or
otherwise dispose of all or substantially all of its property to, any other
corporation or other entity, unless:

(i) the surviving corporation or other entity (if other than EPIX)
shall expressly and effectively assume in writing the due and punctual
payment of the principal of and interest on the Note, and the due and
punctual performance and observance of all the terms, covenants,
agreements and conditions of this Note and the Security Agreement to be
performed or observed by EPIX to the same extent as if such surviving
corporation had been the original maker of the Note,

(ii) EPIX or such other corporation or other entity shall not
otherwise be in default in the performance or observance of any material
covenant, agreement or condition of the Note or of the Security Agreement,
and

(iii) MALLINCKRODT shall have received, in connection therewith and
immediately prior to the closing of such transaction, an opinion of
counsel for EPIX (or other counsel satisfactory to MALLINCKRODT), in form
and substance satisfactory to MALLINCKRODT, to the effect that any such
consolidation, merger, sale or conveyance and any such assumption complies
with the provisions of clause (i) of this paragraph (f).

10. Events of Default. If any one or more of the following events,
herein called "Events of Default," shall occur, for any reason whatsoever, and
whether such occurrence shall, on the part of EPIX or any subsidiary, be
voluntary or involuntary or come about or be effected by operation of law or
pursuant to or in compliance with any judgment, decree or order of a court of
competent jurisdiction or any order, rule or regulation of any administrative or
other governmental authority:

5
<PAGE>

(a) default shall be made in the payment of the principal or
interest of this Note when and as the same shall become due and payable in
accordance with the terms provided herein, or

(b) default shall be made in the due observance or performance of
any other covenant, representation, warranty, condition or agreement on the part
of EPIX to be observed or performed pursuant to the terms hereof or pursuant to
the Security Agreement and such default shall continue for thirty (30) days
after receipt of written notice thereof from MALLINCKRODT, specifying such
default and requesting that the same be remedied, or

(c) the entry of a decree or order for relief by a court having
jurisdiction in respect of EPIX or any subsidiary in any involuntary case under
the federal bankruptcy laws, as now constituted or hereafter amended, or any
other applicable federal or state bankruptcy, insolvency or other similar laws,
or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of EPIX or any subsidiary or for any substantial part of
any of their property, or for all or any portion of the Secured Assets, or
ordering the winding-up or liquidation of any of their affairs and the
continuance of any such decree or order unstayed and in effect for a period of
sixty (60) days, or

(d) the commencement by EPIX or any subsidiary of a voluntary case
under the federal bankruptcy laws, as now constituted or hereafter amended, or
any other applicable federal or state bankruptcy, insolvency or other similar
laws, or the consent by any of them to the appointment of or taking possession
by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other
similar official) of EPIX or any subsidiary or for any substantial part of their
property, or for all or any portion of the Secured Assets, or the making by any
of them of any assignment for the benefit of creditors, or

(e) any default, as defined in any instrument evidencing or under
which EPIX or any subsidiary has outstanding at the time any indebtedness for
money borrowed in excess of $75,000 in aggregate principal amount, shall occur,

then, MALLINCKRODT may, at its option, by notice to EPIX, declare this Note to
be, and all principal outstanding under this Note shall thereupon be and become,
forthwith due and payable in full, together with interest accrued thereon,
without presentment, demand, protest or further notice of any kind, all of which
are expressly waived by EPIX to the extent permitted by law.

11. Suits for Enforcement. In case any one or more of the Events of
Default specified in Section 10 of this Note shall occur and be continuing,
MALLINCKRODT may proceed to protect and enforce its rights by suit in equity,
action at law and/or by other appropriate proceeding, whether for the specific
performance of any covenant or agreement contained in this Note or in aid of the
exercise of any power granted in this Note, or may proceed to enforce the
payment of this Note or to enforce

6
<PAGE>

any other legal or equitable right hereunder. In case of any default under this
Note, EPIX will pay to MALLINCKRODT such amounts as shall be sufficient to cover
the costs and expenses of MALLINCKRODT directly attributable to said default,
including, without limitation, collection costs and reasonable attorneys' fees,
to the extent actually incurred.

12. Remedies Cumulative. No remedy herein conferred upon
MALLINCKRODT is intended to be exclusive of any other remedy and each and every
such remedy shall be cumulative and shall be in addition to every other remedy
provided hereunder or now or hereafter existing at law or in equity.

13. No Waiver. No course of dealing between EPIX and MALLINCKRODT or
any delay on the part of MALLINCKRODT in exercising any rights hereunder on any
occasion shall operate as a waiver of its rights hereunder to insist on strict
compliance with the terms hereof or to exercise any available remedy on any
future occasion.

14. Governing Law. This Note shall be construed to be a contract
made under and pursuant to the laws of New York and all of the terms, covenants
and conditions contained herein shall be governed by and construed in accordance
with such laws without giving effect to the conflict of laws principles
contained in such laws.

15. Miscellaneous.

(a) The headings of the sections and paragraphs of this Note are
inserted for convenience only and do not constitute a part of this Note.

(b) This Note, and all supplements, amendments or notations with
respect thereto, shall inure to the benefit of and be binding upon EPIX and its
successors and assigns, but this Note may not be assigned, transferred, pledged
or hypothecated by EPIX without the advance written consent of MALLINCKRODT, and
this Note may not be assigned, transferred, pledged or hypothecated by
MALLINCKRODT (other than to an affiliate) without the advance written consent of
EPIX.

(c) The invalidity or unenforceability of any term or condition
hereof shall not affect the validity or enforceability of any other term or
condition hereof or of this Note as a whole.

(d) In the event of any conflict or inconsistency between the terms
of this Note and those of the Security Agreement, the former shall prevail.

16. Validity. The execution and delivery of this Note and the
Security Agreement and the performance by EPIX of its obligations hereunder and
thereunder have been duly authorized by all requisite corporate action by EPIX
and will not violate any provisions of law, any of the corporate governing
documents of EPIX or any provisions of any indenture, agreement or other
instrument to which COMPANY or any of its assets is bound. This Note has been
duly executed and delivered by EPIX and constitutes the legal, valid and binding
obligation of EPIX, enforceable against EPIX in

7
<PAGE>

accordance with its terms. The execution and delivery of this Note and the
performance by EPIX of its obligations hereunder and under the Security
Agreement does not and will not violate any judicial decree or order applicable
to EPIX.

IN WITNESS WHEREOF, EPIX MEDICAL, INC. has caused this Note to be
signed in its corporate name by one of its officers thereunto duly authorized
and to be dated as of the date and year first above written.

EPIX MEDICAL, INC.

By: /s/ Michael D. Webb
---------------------
Michael D. Webb, President

<PAGE>
Exhibit 10.48

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (the "Security Agreement") is entered into
as of October 8, 1999, between Epix Medical, Inc., a Delaware corporation, with
its principal executive offices in Cambridge, Massachusetts (the "Debtor"), and
Mallinckrodt Inc., a Delaware corporation, with its principal offices in St.
Louis, Missouri (the "Secured Party ").

WHEREAS, on and as of the date hereof, the Debtor has executed and
delivered to Secured Party a certain Non-Negotiable Promissory Note ("Note")
with a maximum principal amount of Nine Million Five Hundred Thousand Dollars
($9,500,000) (such promissory note, and any and all amendments, modifications,
extensions, restatements, renewals, refinancings and/or replacements thereof
from time to time being herein referred to as the "Note");

WHEREAS, the indebtedness evidenced by the Note will be secured as
provided in Section 6 thereof and as consistently hereinafter provided; and

WHEREAS, Debtor, in consideration of and in order to induce Secured
Party, from time to time and in accordance with the procedures and limitations
set forth in the Note, to make advances aggregating to a maximum of Nine Million
Dollars ($9,500,000), has determined that it is in the best interest of Debtor
to execute, deliver and perform this Security Agreement;

NOW, THEREFORE, for valuable consideration, the sufficiency and
receipt of which are hereby acknowledged, the Debtor and the Secured Party
hereby agree as follows:

1. Definitions. As used in this Security Agreement, and in addition
to terms defined elsewhere in this Security Agreement, the term "Secured Assets"
shall mean and include all of Debtor's intellectual property, and Debtor's
interests therein of every kind and description, wherever located, now owned or
hereafter acquired by the Debtor, and whether now existing or hereafter arising,
including, without limitation, all patents and applications for patents (among
them being those patents and applications for patents set forth on Schedule 1
attached hereto), trademarks, trademark applications, trade secrets and
confidential and proprietary scientific and technical data and information.

2. Definitions Incorporated. Ail capitalized terms used herein,
unless otherwise specifically defined, shall have the meaning ascribed to such
terms in the Note or in the Strategic Collaboration Agreement, as appropriate.
In the event that the Note is from time to time amended or modified or any
instrument is substituted in replacement thereof, such amendment, modification
or substitution shall, from and after the date thereof, be included within the
definition of the "Note" as used herein.

1
<PAGE>

3. Security Interest. The Debtor hereby gives and grants to the
Secured Party a security interest in all the Secured Assets and all of their
right, title and interest therein, whether now owned or existing or hereafter
acquired or arising, together with all proceeds therefrom to secure (i) the
payment of all principal of and interest heretofore or hereafter owing or
outstanding on the Note (including any notes substituted therefor), (ii) the
payment by the Debtor of all costs and expenses (including reasonable attorney's
fees) incurred by the Secured Party in the collection of amounts due under the
Note or in enforcing its rights under the Note or this Security Agreement and
(iii) the performance by the Debtor of all its obligations under the Note or
this Security Agreement.

4. Debtor Remains Liable. Anything herein to the contrary
notwithstanding, (i) Debtor shall remain liable under all contracts and
agreements included in the Secured Assets to the extent set forth therein to
perform all of its duties and obligations thereunder to the same extent as if
this Security Agreement had not been executed, (ii) the exercise by the Secured
Party of any of its rights hereunder shall not release Debtor from any of its
duties or obligations under the contracts and agreements included in the Secured
Assets, and (iii) the Secured Party shall not have any obligation or liability
under the contracts and agreements included in the Secured Assets or be
obligated to perform any of the obligations or duties of Debtor thereunder or to
take any action to collect or enforce any claim for payment assigned hereunder.

5. Records. Debtor will at all times keep accurate and complete
records of all items included in the Secured Assets, and the Secured Party shall
have the right at all reasonable times, without disruption to the business of
the Debtor, to examine and inspect the same and to make copies thereof.

6. Representations, Warranties and Covenants of the Debtor. With
respect to the Secured Assets, Debtor hereby represents, warrants and covenants
to the Secured Party as follows:

(i) During the term of this Security Agreement, Debtor will have
such rights of ownership or other rights to each item of the Secured
Assets as Debtor has on and as of the date hereof; the same will be used
solely in connection with the Debtor's business; all of the Secured Assets
are free and clear of all liens and encumbrances whatsoever, including any
security interests or collateral interests of any other party.

(ii) Debtor will execute all financing statements and amendments and
supplements thereto, if any, and will attend to the filing of any and all
continuation statements, as may be reasonably requested by the Secured
Party in order to continue the validity of the security interests of the
Secured Party hereunder.

(iii) Debtor shall, from time to time as requested by the Secured
Party, take

2
<PAGE>

such action and execute and deliver to the Secured Party all such
instruments, supplements, further assurances and security or other
agreements as may be reasonably required or reasonably requested by the
Secured Party in order to perfect and continue the Secured Party's
security interest in the Secured Assets hereunder.

(iv) Debtor agrees to pay, and to save the Secured Party harmless
from, any and all liabilities, costs and expenses (including, without
limitation, reasonable legal fees and expenses) except those caused by
wilful misconduct or gross negligence of the Secured Party (1) with
respect to, or resulting from, any delay in paying, any and all excise,
sales or other taxes which may be payable or determined to be payable with
respect to any of the Secured Assets, and (2) in connection with any of
the transactions contemplated by this Security Agreement.

(v) Debtor will not create, incur or permit to exist, and it will
defend the Secured Assets against, and it will take such other action as
is necessary to remove, any lien or claim on or to the Secured Assets,
other than the liens created hereby, and, subject to the terms of any
agreements relating to licensed Secured Assets, it will defend the right,
title and interest of the Secured Party in and to any of the Secured
Assets against the claims and demands of all persons whomsoever.

(vi) Debtor will not sell, transfer, lease, license or otherwise
dispose of any of the Secured Assets, except upon the advance written
consent of the Secured Party.

(vii) Debtor has the power to execute and deliver this Security
Agreement and to perform its obligations hereunder and has taken all
necessary action and has received all required consents (private and
governmental) to authorize such execution, delivery and performance, and
therefore this Security Agreement constitutes the legal, valid and binding
obligation of the Debtor, enforceable against it and the Secured Assets in
accordance with its terms. Furthermore, this Security Agreement does not
and will not violate any judicial decree or order, or any rules or
regulations of any federal, state or local government, or any branch,
agency or instrumentality of same.

(viii) The execution, performance and delivery of this Security
Agreement does not violate or conflict with the terms or provisions of, or
the Debtor's performance under, any agreement, document or instrument by
which the Debtor is bound.

Notwithstanding anything to the contrary contained herein,
including, without limitation, the provisions of clauses (i), (v) and (vi) of
this Section 6, Debtor may, prior to the occurrence of an Event of Default,
without the consent of the

3
<PAGE>

Secured Party, grant licenses to or under such of the Secured Assets as do not
relate to EPIX s AngioMARK product, and any payments received by EPIX in
connection with the grant of any such license (whether in the form of license
fees, upfront payments, milestone payments, royalties or otherwise) shall not be
considered proceeds covered by the security interest granted to the Secured
Party hereunder; provided that, all proceeds from the grant of any such license
that are received by the Debtor or which the Debtor is entitled to receive
subsequent to the occurrence of an Event of Default shall be considered proceeds
covered by the security interest granted to the Secured Party hereunder.

7. Secured Party's Duties. The powers conferred on the Secured
Party hereunder are solely to protect its interest in the Secured Assets and
shall not impose any duty upon it to exercise any such powers. Secured Party
shall have no obligation to preserve rights against prior parties.

8. Default Remedies.

(a) Except as expressly and unambiguously set forth herein,
this Security Agreement shall be deemed absolute and without conditions, and
upon an Event of Default the Secured Party may enforce its rights with respect
to the Secured Assets without first being required to attempt collection of any
sums due from the Debtor. If an Event of Default shall occur and remain uncured
(if it is curable by the express terms of the Note) for sixty (60) days after
receipt of notice thereof by Debtor from the Secured Party, the Secured Party
shall have the following rights:

(i) to perform any defaulted covenant or agreement of this Security
Agreement to such extent as the Secured Party shall reasonably determine
and advance such moneys as it shall deem reasonably advisable for the
aforesaid purpose and all moneys so advanced, together with interest
thereon from the date advanced until paid at a rate per annum equal to the
rate then in effect on the Note, shall be secured hereby and shall be
repaid promptly after notice of the amount due without demand, provided,
however, that nothing herein contained shall be construed to require the
Secured Party to advance money for any of the aforesaid purposes;

(ii) to notify all account debtors, to the extent permitted by
applicable law or regulations, to pay directly to the Secured Party or
otherwise as the Secured Party may specify all amounts they owe then or
thereafter to Debtor until such time as the Secured Party has received all
amounts to which it is entitled under the Note and this Security
Agreement;

(iii) to take control of any and all proceeds to which the Secured
Party may be entitled under this Security Agreement, the Note, or under
any applicable laws;

4
<PAGE>

(iv) to take immediate possession of the Secured Assets and, with or
without taking possession of the Secured Assets, to sell, lease or
otherwise dispose of any or all of the Secured Assets, either at public or
private sale, upon commercially reasonable terms, and the Secured Party
may become the purchaser thereof at public sale; provided that, any sale
may be adjourned at any time and from time to time to a reasonably
specified time and place by announcement at the time and place of sale or
by publication or otherwise of the time and place of such adjourned sale;
provided further that, the proceeds of any sale shall be applied (1) first
to the expenses of taking, holding and preparing for sale or disposition,
and sale or disposition and the like (including reasonable attorneys'
fees), (2) next to the principal and interest due under the Note and the
other amounts secured under clauses (i) and (ii) of Section 3 hereof, (3)
next to amounts secured under clause (iii) of Section 3 hereof, (4) next
to the holder of any subordinate security interest therein if written
notification of demand therefor is received and verified by the Debtor
before distribution of the proceeds and (5) lastly, any surplus to Debtor
and Debtor shall remain liable for any deficiency; and provided finally
that, any such sale, public or private, may be made on credit at the
option of the Secured Party;

(v) to take immediate possession of the Secured Assets and to use or
operate the Secured Assets in order to preserve the same or their value,
and collect, receive and use all of the net profits from such use or
operation to pay indebtedness secured by such Secured Assets; provided
that, any continuing royalties or other similar amounts derived from the
commercial sale of any products developed from the Secured Assets (as
opposed to the sale of any products deriving from intellectual property
that may be developed by the Secured Party after the termination hereof or
after such time as there shall be the occurrence of an Event of Default
hereunder, whichever occurs first) shall be deemed to be Operating Margin
for purposes of Section 8.6 of the Strategic Collaboration Agreement;
provided further that, any sale or license by the Secured Party of any
intellectual property included in the Secured Assets to any third party
shall be deemed to be solely for the account of the Secured Party and not
in any manner or portion for the account of Debtor or distributable to
Debtor under and pursuant to the terms of the Strategic Collaboration
Agreement;

(vi) to require Debtor, to the extent practicable, to assemble the
Secured Assets and make them available to the Secured Party at such
locations as the Secured Party shall reasonably designate;

(vii) to enter all of the Debtor's facilities to remove the Secured
Assets therefrom and take possession of the appropriate portions of the
Debtor's books and records and computer hardware and software, and to use
all of the same in a manner the Secured Party deems appropriate in order
to preserve and sell or otherwise dispose of the Secured Assets;

<PAGE>

(viii) to (without assuming any obligations or liability
thereunder), at any time and from time to time, enforce against any
licensee or sublicensee all rights and remedies of the Debtor in, to and
under any patent licenses or trademark licenses included in the Secured
Assets and, in the exercise of commercial reasonableness, take or refrain
from taking any action under any such licenses, and the Debtor hereby
releases the Secured Party free and harmless from and against any claims
arising out of, any lawful action so taken or omitted to be taken under
applicable law with respect thereto;

(ix) to proceed to protect and enforce its rights under the Note and
this Security Agreement by a suit or suits in equity or at law, whether
for specific performance or observance of any terms, provisions, covenants
or conditions herein or therein contained in aid of the execution of any
power therein or herein granted, for any foreclosure hereunder or
thereunder, or for the enforcement of any other proper legal or equitable
remedy;

(x) to exercise any such additional and/or different rights or
remedies as are provided for in the Note; and

(xi) to act as true and lawful attorney-in-fact of the Debtor, with
full power of substitution, with full irrevocable power and authority in
the place and stead of the Debtor, in the name of the Debtor, or in its
own name, for the purpose of carrying out the terms of this Security
Agreement, to take any and all appropriate action and to execute any and
all documents and instruments which may be reasonably necessary or
desirable to accomplish the purposes of this Security Agreement.

(b) The Secured Party shall have any and all other rights and
remedies provided by law or equity, including, without limitation, the rights
and remedies of a secured party. All of the Secured Party's rights and remedies
will be cumulative, and no waiver of any default will affect any other
subsequent default. The rights and remedies provided in this Security Agreement
are cumulative, may be exercised concurrently or separately, may be exercised
from time to time and in such order, without any marshalling, as the Secured
Party shall determine. Nothing herein contained shall be construed as preventing
the Secured Party from taking all reasonable and lawful actions to protect its
interest in the event that liquidation, insolvency, bankruptcy, reorganization
or foreclosure proceedings of any nature whatsoever affecting the property or
assets of Debtor should be instituted. The Secured Party's sole duty with
respect to the custody, safekeeping and physical preservation of the Secured
Assets in its possession, shall be to deal with it in the same manner as the
Secured Party deals with similar property for its own account. Neither the
Secured Party, nor any of its respective directors, officers, employees or
agents shall be liable for failure to demand, collect or realize upon all or any
part of the Secured Assets or for any delay in doing so or shall be under any
obligation to sell or otherwise dispose of any Secured Assets upon

6
<PAGE>

the request of the Debtor or otherwise.

9. General Provisions. (a) This Security Agreement and the security
interests of the Secured Party in the Secured Assets created hereby shall cease
and terminate only upon repayment in full of the principal and any accrued
interest under and pursuant to the Note.

(b) Debtor hereby waives all demands, notices, presentments, claims,
defenses and protests of any kind, except as expressly and unambiguously
provided herein and unless not permitted by applicable law, which might in any
manner adversely affect the rights of Secured Party herein.

(c) This Security Agreement shall be construed to be a contract made
under and pursuant to the laws of New York, and all of the terms, covenants and
conditions contained herein shall be governed by and construed in accordance
with such laws, without giving effect to the conflict of laws principles
contained in such laws.

(d) This Security Agreement, all supplements hereto and all
amendments hereof, shall inure to the benefit of and be binding upon the Debtor,
the Secured Party, and their respective successors and assigns, but this
Security Agreement may not be assigned by Debtor or the Secured Party without
the advance written consent of the other party.

(e) No course of dealing between the Debtor and the Secured Party or
any delay on the part of the Secured Party in exercising any rights hereunder
shall affect the rights of the Secured Party, on any future occasion, to insist
on strict compliance with the terms hereof or to exercise any available remedy.
No waiver by either party of any term, provision, covenant or condition
contained in this Security Agreement, or of any breach of any such term,
provision, covenant or condition, shall constitute a waiver by that party of any
subsequent breach or justify or authorize the non-observance by the other party
on any other occasion of such term, provision, covenant or condition contained
in this Security Agreement.

(f) The invalidity or unenforceability of any term or condition
hereof shall not affect the validity or enforceability of any other term or
condition hereof or of this Security Agreement as a whole.

(g) In the event of any conflict or inconsistency between the terms
of the Note and those of this Security Agreement, the former shall prevail.

(h) No remedy herein conferred upon the Secured Party is intended to
be exclusive of any other remedy and each and every such remedy shall be
cumulative and shall be in addition to every other remedy provided hereunder or
now or hereafter existing at law or in equity.

7
<PAGE>

IN WITNESS WHEREOF, the parties have caused this Security Agreement
to be executed in St. Louis, Missouri at the time first above written by their
officers thereunto duly authorized.

MALLINCKRODT INC.
("SECURED PARTY")

By : /s/ Richard T. Haggons
--------------------------

EPIX MEDICAL, INC.
("DEBTOR")

By : /s/ Michael D. Webb
--------------------------
Michael D. Webb, President

<PAGE>

EXHIBIT-23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statements
(Form S-8 registration numbers 333-94345, 333-41477 and 333-57879) pertaining to
the Amended and Restated 1992 Equity Incentive Plan, the 1996 Employee Stock
Purchase Plan, and the 1996 Directors Stock Option Plan, respectively, of EPIX
Medical, Inc. of our report dated February 5, 2000, with respect to the
financial statements of EPIX Medical, Inc. included in the Annual Report (Form
10-K) for the year ended December 31, 1999.

/s/ Ernst & Young LLP

Boston, Massachusetts
March 14, 2000

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF EPIX MEDICAL, INC. AS OF DECEMBER 31, 1999 AND FOR THE TWELVE MONTH
PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001027702
<NAME> EPIX MEDICAL, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 430,124
<SECURITIES> 13,709,980
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,355,033
<PP&E> 4,468,771
<DEPRECIATION> (2,410,490)
<TOTAL-ASSETS> 17,885,583
<CURRENT-LIABILITIES> 4,840,566
<BONDS> 1,957,340
0
0
<COMMON> 116,803
<OTHER-SE> 10,647,126
<TOTAL-LIABILITY-AND-EQUITY> 17,885,583
<SALES> 0
<TOTAL-REVENUES> 1,144,056
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,078,564
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221,781
<INCOME-PRETAX> (16,983,153)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,983,153)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,983,153)
<EPS-BASIC> (1.47)
<EPS-DILUTED> (1.47)

</TABLE>

<PAGE>

EXHIBIT 99.1

Important Factors Regarding Forward Looking Statements

From time to time, we may make forward looking statements, such as statements
concerning then expected future revenues or earnings or concerning projected
plans, performance, product development and commercialization, as well as other
estimates relating to future operations. There are certain key factors that
could cause future results to differ materially from those anticipated by
management including, but not limited to, the following:

Early Stage of Development; No Product Sales to Date. We commenced operations in
1992. We currently have no products for sale nor is there any guarantee that we
will ever have marketable products. All of our product candidates are in
research or development, and no revenues have been generated from product sales.
To date, we have financed our operations through public stock offerings, private
sales of equity securities, equipment lease financings and license payments from
our strategic partners. To achieve profitable operations, we, alone or with
others, must successfully develop, obtain regulatory approval for, introduce,
market and sell products. We do not expect to receive revenue from the sale of
any of our product candidates for the next several years. There can be no
assurance that our product development efforts will be successfully completed,
that required regulatory approvals will be obtained in a timely manner, if at
all, that our product candidates can be manufactured at an acceptable cost and
with acceptable quality or that any approved products can be successfully
marketed.

Dependence on AngioMARK. AngioMARK is currently our only product candidate in
human clinical trials, and there is no guarantee that any of our other
development projects will yield a product candidate suitable for entry into
clinical trials. The failure of AngioMARK to achieve regulatory approval and
market acceptance would have a material adverse effect on our business,
financial condition and results of operations.

Dependence on MRI Advancements for Cardiac Applications. Existing MRI scanners
do not have the capability to perform coronary angiography without improvements
in current MRI hardware and software. The success of cardiac applications of
AngioMARK is therefore dependent on advancements in MRI hardware and software.
Although several leading MRI manufacturers, academic centers and others are
developing advanced hardware and software, there can be no assurance when, or
if, these techniques will enable AngioMARK to provide clinically relevant images
in cardiac indications currently being pursued.

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

<PAGE>

effectiveness and the rate of adoption of up-to-date MRI technology. Market
acceptance will also depend on our ability and the ability of our strategic
partners to educate the medical community and third-party payors about the
benefits of diagnostic imaging with MRI enhanced with our product candidates
compared to imaging with other modalities. Our MRI contrast agents represent a
new approach to imaging the cardiovascular system ("CVS"), and market acceptance
both of MRI as an appropriate imaging technique for the CVS and of our product
candidates is critical to our success. There can be no assurance that our
product candidates will gain market acceptance. Failure to achieve market
acceptance would have a material adverse effect on our business, financial
condition and results of operations.

Intense Competition and Risk of Technological Obsolescence. Medical technology
is subject to intense competition and rapid technological change. We have many
competitors, including pharmaceutical, biotechnology and chemical companies, a
number of which, including both of our strategic partners, are actively
developing and marketing products that could compete with our product
candidates. Many of these competitors have substantially greater capital and
other resources than us and may represent significant competition for us. Such
companies may succeed in developing technologies and products that are more
effective or less costly than any of those that we may develop, and such
companies may be more successful than us in developing, manufacturing and
marketing products. Furthermore, there are several well-established medical
imaging modalities that currently compete, and will continue to compete, with
MRI including X-ray angiography, computer assisted tomography ("CT"), nuclear
medicine and ultrasound. Other companies are actively developing the
capabilities of the competing modalities to enhance their effectiveness in CVS
imaging. There can be no assurance that we will be able to compete successfully
in the future or that developments by others will not render AngioMARK or our
future product candidates obsolete or non-competitive or that our strategic
partners or customers will not choose to use competing technologies or products.

Dependence on Licensed Technology. We and Massachusetts General Hospital ("MGH")
have entered into a license agreement referred to herein as the MGH License,
pursuant to which we are the exclusive licensee to certain technology, including
certain patents and patent applications, which relates to our product
candidates, including AngioMARK. The MGH License imposes various
commercialization, sub-licensing, royalty and other obligations on us. Our
failure to comply with these and other requirements could result in the
conversion of the license from being exclusive to non-exclusive in nature or
termination of the license agreement itself. Any such event would have a
material adverse effect on our business, financial condition and results of
operations.

Dependence on Strategic Partners. We are dependent on strategic partners for
support in product development and the regulatory approval process as well as a
variety of activities including manufacturing, marketing and distribution of our
products in the United States and abroad, when and if our product candidates are
approved for marketing by the FDA and corresponding foreign agencies. To date,
we have entered into several strategic alliances, including a collaboration
agreement with Mallinckrodt Group Inc. ("Mallinckrodt") to develop and
commercialize AngioMARK and other MRI vascular agents worldwide, excluding
Japan, and a development and license agreement with Daiichi Radioisotope
Laboratories, Ltd. ("Daiichi") for the development and commercialization of
AngioMARK in Japan. We may not receive milestone payments from these alliances
should AngioMARK fail to meet certain performance

<PAGE>

targets in clinical trials. Further, our receipt of revenues from strategic
alliances is affected by the level of efforts of our partners. There can be no
assurance that our partners will devote the resources necessary to complete
development, and commence marketing, of AngioMARK in their respective
territories, or that they will successfully market AngioMARK. Both Mallinckrodt
and Daiichi currently manufacture imaging agents for other modalities that will
compete against AngioMARK. We, together with Mallinckrodt, will share
responsibility for setting the price of the product worldwide, except Japan, and
Daiichi will be responsible for setting the product price in Japan. There can be
no assurance that either Mallinckrodt or Daiichi will do so in a manner that
maximizes revenues for us. In addition, Daiichi has the right to terminate our
agreement on short notice under certain circumstances, and there is no guarantee
that it will not exercise this right. Our failure to receive milestone payments,
a reduction or discontinuance of efforts by our partners or the termination of
these alliances would have a material adverse effect on our business, financial
condition and results of operations.

There can be no assurance that we will be successful in entering into additional
strategic alliances for the development and commercialization of future product
candidates, nor that these alliances, if entered into, will be on terms
favorable to us or will be successful. If we were unable to enter into future
strategic alliances with capable partners on commercially reasonable terms, the
development and commercialization of future product candidates would be delayed
and possibly postponed indefinitely.

Unproven Safety and Effectiveness of Product Candidates; Uncertainties Related
to Clinical Trials. Our product candidates are in research and development and
will require additional research and development, extensive clinical testing and
regulatory approval prior to any commercial sales. We cannot predict if or when
any of our products under development will be commercialized. We currently have
only one product candidate, AngioMARK, in clinical trials. We will be required
to successfully complete clinical trials in the United States to demonstrate the
safety and efficacy of AngioMARK, currently in Phase III clinical trials, prior
to obtaining FDA approval. There can be no assurance that clinical trials will
be successful, or that they will be completed in a timely manner. Although no
clinically significant adverse effects from AngioMARK in Phase I and Phase II
clinical trials have been reported to date, results are based on preliminary
data only, and there can be no assurance that serious side effects will not be
reported as the clinical trial proceeds. The results from early clinical trials
may not be predictive of results that will be obtained in large scale clinical
trials, as a number of companies have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier trials. There can be no
assurance that additional Phase II or Phase III clinical trials for AngioMARK
will be conducted or that such trials, if begun, will demonstrate any efficacy
or will be completed successfully in a timely manner, if at all. The rate of
completion of our clinical trials is dependent upon, among other things, the
rate of patient enrollment. Patient enrollment is a function of many factors,
including the size of the patient population, the nature of the clinical
protocol under which AngioMARK will be studied, the proximity of the patient to
a clinical site and the eligibility criteria for the study. Delays in planned
patient enrollment may result in increased costs, regulatory filing delays, or
both. Furthermore, we, the FDA or other regulatory authorities may suspend or
terminate clinical trials at any time. Failure to complete successfully any of
our clinical trials on a timely basis or at all would have a material adverse
effect on our business, financial condition and results of operations.

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Uncertainty Regarding Patents and Proprietary Rights. We consider the
protection of our proprietary technologies to be material to our business
prospects. We pursue a comprehensive patent program for our product
candidates in the United States and in other countries where we believe that
significant market opportunities exist. We own or have an exclusive license
to patents and patent applications on the critical aspects of our core
technology as well as many specific applications of this technology. However,
the patent positions of pharmaceutical and biopharmaceutical firms, including
ours, generally include complex legal and factual questions. There can be no
assurance that the issued patents owned or licensed to us, or any patents
that may be issued in the future, will effectively protect our technology or
provide a competitive advantage. There can be no assurance that any of the
patents or patent applications owned or licensed by us will not be
challenged, invalidated or circumvented in the future.

Our commercial success will also depend on our ability to operate without
infringing upon the patents of others in the United States and abroad. If any
third-party patents are upheld as valid and enforceable in any judicial or
administrative proceeding, we could be prevented from practicing the subject
matter claimed in such patents, or would be required to obtain licenses from the
owners of each such patent, or to redesign our products or processes to avoid
infringement. There are pending or issued patents, held by parties not
affiliated with us, relating to technologies used by us in the development or
use of certain of our contrast agents. In particular, we are aware of certain
patents in the United States, Japan and elsewhere owned by or licensed to one
party that relate to MRI contrast agents and which may cover certain of our MRI
contrast agents, including AngioMARK. Mallinckrodt, one of our strategic
partners, has rights from this third party under those patents, which we and
Mallinckrodt believe will permit Mallinckrodt to manufacture, market and sell
AngioMARK and other products developed pursuant to the collaboration agreement
between us and Mallinckrodt, were AngioMARK and those other products to be held
to fall within the claims of those third-party patents. If the agreement with
Mallinckrodt is terminated by either party, we would likely be required to enter
into a strategic alliance with another party having a license from this third
party or obtain a license from this third party directly or from others licensed
by this third party in order to manufacture, market and sell AngioMARK and other
chelate-based MRI contrast agents. However, there can be no assurance that we
would be able to consummate a strategic alliance with a party having this
third-party license or obtain licenses from third parties on commercially
reasonable terms, if at all. One of the Japanese patents of this third party
will expire in 2007. We have filed an appeal in the Japanese Patents Office
requesting that this patent be declared invalid. This appeal will likely take
several years to finally resolve. While we believe that we will prevail in this
proceeding, there can be no assurance as to the scope of the claims that the
third party will maintain. The remaining patent rights of this third party in
Japan will expire in 2002, before such time as we presently anticipate that
Daiichi will have material sales of AngioMARK in Japan and, therefore, we
believe that the existence of such patents in Japan is unlikely to have a
material adverse effect on us. However, in the event that we do not prevail in
our appeal to the Japanese Patent Office or Daiichi commercializes AngioMARK in
Japan before 2002, we may be required to obtain an appropriate license from this
third party or from others licensed by this third party, or take other measures
to avoid infringement of third-party patents, including delaying the
commencement of product sales. There can be no assurance that our current or
future activities will not be challenged in the future, that additional patents
will not be issued containing claims materially constraining our proposed
activities, that we will not be required to obtain licenses from third parties,
or that we will not become involved in costly, time-consuming litigation
regarding patents in the field of contrast agents, including actions brought to
challenge

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or invalidate our own patent rights.

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

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

We also rely upon trade secrets, technical know-how and continuing technological
innovation to develop and maintain our competitive position. We typically
require our employees, consultants and advisors to execute confidentiality and
assignment of inventions agreements in connection with their employment,
consulting or advisory relationships with us. There can be no assurance,
however, that these agreements will not be breached or that we will have
adequate remedies for any breach. Furthermore, there can be no assurance that
competitors will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our proprietary
technology, or that we can meaningfully protect our rights in unpatented
proprietary technology. Several of our management and scientific personnel were
formerly associated with other pharmaceutical and biotechnology companies and
academic institutions. In some cases, these individuals are conducting research
in similar areas with which they were involved prior to joining us. As a result,
we, as well as these individuals, could be subject to claims of violation of
trade secrets and similar claims.

We intend to vigorously protect and defend our intellectual property. It may be
necessary for us to bring costly and time-consuming litigation to enforce
patents issued to us, to protect trade secrets or know-how we own, or to
determine the enforceability, scope and validity of the proprietary rights of
others.

Extensive Government Regulation; No Assurance of Regulatory Approval. We are
subject to extensive governmental regulatory requirements and a lengthy approval
process for our product candidates. The development and commercial use of our
product candidates will be regulated by numerous federal, state and local
governmental authorities in the United States, including the FDA and comparable
foreign regulatory agencies abroad. The nature of our research and development
and manufacturing processes requires

<PAGE>

the use of hazardous substances and testing on certain laboratory animals.
Accordingly, we are subject to extensive federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials and
wastes, as well as the use of and care for laboratory animals. Although we
believe we are in compliance with all such laws and maintain policies and
procedures to ensure that we remain in compliance, there can be no assurance
that accidents will not happen that would expose us to legal risk and/or
financial loss. Furthermore, there can be no assurance that current laws will
not be changed or that new laws will not be passed that force us to change our
policies and procedures, an event which could impose significant costs on us.

The regulatory approval process for new MRI contrast agents, including required
preclinical studies and clinical trials, is lengthy and expensive. Although
certain of our employees have experience in obtaining regulatory approvals, we
have only limited experience in filing or pursuing applications necessary to
gain regulatory approvals. Preclinical testing of our product development
candidates is subject to Good Laboratory Practices ("GLP") as prescribed by the
FDA and the manufacture of any products developed by us will be subject to Good
Manufacturing Practices ("GMP") as prescribed by the FDA. There can be no
assurance that the necessary FDA clearances and subsequent approvals will be
obtained in a timely manner, if at all. There can be no assurance as to the
length of the clinical trial period or the number of patients that will be
required to be tested in the clinical trials in order to establish the safety
and efficacy of AngioMARK or any future product candidates of ours. We may
encounter unanticipated delays or significant costs in our efforts to secure
necessary approvals. There can be no assurance, even after the performance of
clinical trials and the passage of time and the expenditure of such resources,
that regulatory approval will be obtained for AngioMARK or any other product
candidates that we may develop. Our analysis of data obtained from preclinical
and clinical activities is subject to confirmation and interpretation by
regulatory authorities, which could delay, limit or prevent FDA regulatory
approval. Future United States legislative or administrative actions also could
prevent or delay regulatory approval of our product candidates. Even if
regulatory approvals are obtained, they may include significant limitations on
the indicated uses for which a product may be marketed. A marketed product also
is subject to continual FDA and other regulatory agency review and regulation.
Later discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market, as well as possible
civil or criminal sanctions. Further, many academic institutions and companies
conducting research and clinical trials in the MRI contrast agent field are
using a variety of approaches and technologies. Any adverse results obtained by
such researchers in preclinical studies or clinical trials could adversely
affect the regulatory environment for MRI contrast agents generally. In
addition, if marketing approval is obtained, the FDA may require post-marketing
testing and surveillance programs to monitor the product's efficacy and side
effects. Results of these post-marketing programs may prevent or limit the
further marketing of the monitored product.

We and our strategic partners are also subject to numerous and varying foreign
regulatory requirements governing the design and conduct of clinical trials and
the manufacturing and marketing of our products. The foreign regulatory approval
process may include all of the risks associated with obtaining FDA approval set
forth above, and there can be no assurance that foreign regulatory approvals
will be obtained on a timely basis, if at all.

History of Operating Losses and Accumulated Deficit; Uncertainty of Future
Profitability. Our future financial results are uncertain. We

<PAGE>

have experienced significant losses since we commenced operations in 1992. As of
December 31, 1999, we had accumulated net losses of approximately $45.4 million.
These losses have resulted primarily from expenses associated with our research
and development activities, including preclinical and clinical trials, and
general and administrative expenses. We anticipate that our research and
development expenses will increase significantly in the future and we expect to
incur substantial losses over at least the next several years. There can be no
assurance that we will ever be able to generate revenues from the sale of
products. Moreover, even if we generate product revenues, there can be no
assurance that we will be able to achieve or sustain profitability. Our results
of operations have varied and will continue to vary significantly from quarter
to quarter and depend on, among other factors: the timing of fees and milestone
payments received from strategic partners; our formation of new strategic
alliances; the timing of expenditures in connection with research and
development activities, including clinical trials; the timing of product
introductions and associated launch, marketing and sales activities; and the
timing and extent of product acceptance for different indications and
geographical areas of the world.

Future Capital Needs; Uncertainty of Additional Funding. Since inception, we
have funded our operations primarily through our public offerings of Common
Stock, private sales of equity securities, equipment lease financings and
license payments from our strategic partners. We believe that existing cash and
cash equivalents as well as the proceeds we receive under our Non-Negotiable
Promissory Note from Mallinckrodt will be sufficient to fund our operations
through the first quarter of 2001. We believe that we will need to raise
substantial additional funds for research, development and other expenses,
through equity or debt financings, strategic alliances or otherwise, prior to
commercialization of any of our product candidates. Our future liquidity and
capital requirements will depend upon numerous factors, including the following:
the progress and scope of clinical trials; the timing and costs of filing future
regulatory submissions; the timing and costs required to receive both United
States and foreign governmental approvals; the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights;
the extent to which our products gain market acceptance; the timing and costs of
product introductions; the extent of our ongoing research and development
programs; the costs of training physicians to become proficient with the use of
our products; and, if necessary once regulatory approvals are received, the
costs of developing marketing and distribution capabilities. There can be no
assurance that additional financing will be available on terms acceptable to us,
or at all. Our inability to fund our capital requirements would have a material
adverse effect on our business, financial condition and results of operations.
If adequate funds are not available, we may be required to curtail operations
significantly or to obtain funds by entering into arrangements with strategic
partners or others that may require us to relinquish rights to certain of our
technologies, product candidates, products or potential markets. To the extent
that additional capital is raised through the sale of equity or securities
convertible into equity, the issuance of such securities could result in
dilution to our existing stockholders.

Limited Manufacturing Capability. We do not have, nor do we currently have plans
to develop, full-scale manufacturing capability for AngioMARK. While we do
manufacture small amounts of AngioMARK for research and development efforts, we
intend to rely on Mallinckrodt as the primary manufacturer of AngioMARK for
Phase III clinical trials as well as for any future human clinical trials and
commercial use. If Mallinckrodt is unable to produce AngioMARK in adequate
amounts and at a reasonable cost or to comply with

<PAGE>

any applicable regulations, including GMP, it could have a material adverse
effect on our business, financial condition and results of operations.
Furthermore, should Mallinckrodt fail to fulfill its manufacturing
responsibilities satisfactorily, we could be forced to find an alternative
manufacturer. There can be no assurance that we would be able to find such an
alternative manufacturer. In the event we were forced to develop our own
FDA-approved full-scale manufacturing capability, it would require significant
expenditures of capital and management attention and resources and could require
us to obtain a license from a third party, and would result in a delay in the
approval or commercialization of AngioMARK. There can be no assurance that we
would be able to obtain such a license on commercially reasonable terms, if at
all.

Dependence on Suppliers. We currently procure the raw materials for the various
components of AngioMARK from a broad variety of vendors and, wherever possible,
maintain relationships with multiple vendors for each component. There are a
number of components of AngioMARK for which the largest suppliers may have
significant control over the market price due to controlling market shares. If
any one of our suppliers decided to increase prices significantly or reduce
quantities of components of AngioMARK available for sale to us, it could have a
material adverse effect on our ability to commercialize AngioMARK and on our
business, financial condition and results of operations.

Potential Product Liability Exposure and Insurance. The clinical testing,
manufacturing and marketing of our product candidates may expose us to product
liability claims, and there can be no assurance that we will not experience
material product liability losses in the future. We currently have limited
product liability insurance for the use of our product candidates in clinical
research, but there can be no assurance that such coverage will continue to be
available on terms acceptable to us or that such coverage will be adequate for
liabilities actually incurred. We do not have product liability insurance
coverage for the commercial sale of our products but intend to obtain such
coverage if and when our product candidates are commercialized. However, there
can be no assurance that we will be able to obtain adequate additional product
liability insurance coverage on acceptable terms, if at all. A successful claim
brought against us in excess of available insurance coverage, or any claim or
product recall that results in significant adverse publicity against us, may
have a material adverse effect on our business, financial condition and results
of operations.

Uncertainty of Adequate Reimbursement. We could be adversely affected by changes
in reimbursement policies of governmental or private healthcare payors,
particularly to the extent any such changes affect reimbursement for procedures
in which our product candidates would be used. Failure by physicians, hospitals
and other users of our products to obtain sufficient reimbursement from
third-party payors for the procedures in which our product candidates would be
used, or adverse changes in governmental and private third-party payors'
policies toward reimbursement for such procedures would have a material adverse
effect on our business, financial condition and results of operations. If we
obtain the necessary foreign regulatory approvals, market acceptance of our
product candidates in international markets would be dependent, in part, upon
the availability of reimbursement within prevailing healthcare payment systems.
Reimbursement and healthcare payment systems in international markets vary
significantly by country, and include both government sponsored health care and
private insurance. We intend to seek international reimbursement approvals,
although there can be no assurance that any such approvals will be obtained in a
timely manner, if at all, and failure to receive international reimbursement
approvals could have an adverse effect on market acceptance of our products in
the international markets in which such approvals are

<PAGE>

sought.

Dependence Upon Key Personnel. Our future business and operating results depend
in significant part upon the continued contributions of our key technical and
senior management personnel, many of whom would be difficult to replace and
certain of whom perform important functions for us beyond those functions
suggested by their respective job title or description. Our future business and
operating results also depend in significant part upon our ability to attract
and retain qualified management, operational and technical personnel.
Competition for such personnel is intense, and there can be no assurance that we
will be successful in attracting or retaining such personnel. Although we
maintain key life insurance on the lives of certain officers, the loss of any
key employee, the failure of any key employee to perform in his or her current
position, or our inability to attract and retain skilled employees, as needed,
could have a material adverse effect on our business, financial condition and
results of operations.

Possible Volatility of Share Price. The market prices of the capital stock of
medical technology companies have historically been very volatile, and the
market price of the shares of our common stock may be highly volatile. The
market price of the shares of our common stock may be significantly affected by
factors such as actual or anticipated fluctuations in our operating results,
announcements of technological innovations, new products or new contracts by us
or our competitors, developments with respect to patents or proprietary rights,
conditions and trends in the pharmaceutical and other technology industries,
adoption of new accounting standards affecting such industries, changes in
financial estimates by securities analysts, general market conditions and other
factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stock of development stage companies. These broad
market fluctuations may adversely affect the market price of our common stock.
In the past, following periods of volatility in the market price of a particular
company's securities, class action securities litigation has often been brought
against that company. Such litigation, if brought against us, could result in
substantial costs and a diversion of management's attention and resources.

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

<PAGE>

Absence of Dividends. To date, we have neither declared nor paid any cash
dividends on shares of our common stock and do not anticipate paying any cash
dividends in the foreseeable future.