MOLECULAR BIOSYSTEMS INC
10-Q, 1997-02-14
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES
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                                    Form 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   (Mark One)

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 1996

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

        For the transition period from............... to ...............

                         Commission file number 1-10546


                           MOLECULAR BIOSYSTEMS, INC.
             (Exact name of registrant as specified in its charter)


                               Delaware 36-3078632
              (State of Incorporation) (I.R.S. Identification No.)


                            10030 Barnes Canyon Road
                           San Diego, California 92121
                                 (619) 452-0681
               (Address, including zip code, and telephone number,
              including area code, of principal executive offices)


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.

                                    X Yes No

         The number of shares outstanding of the issuer's common stock,
          $.01 par value, as of January 1, 1997 was 17,609,962 shares.



<PAGE>





                                                INDEX                     PAGE

PART I - FINANCIAL INFORMATION

        Item 1 - Financial Statements

        1. Consolidated Balance Sheets                                      3

           March 31, 1996 and December 31, 1996

        2. Consolidated Statements of Operations                            4

           Three  Months  Ended  December  31, 1995 and 1996 
           Nine  Months  Ended December 31, 1995 and 1996

        3. Consolidated Statements of Cash Flows                            5

           Nine Months Ended December 30, 1995 and 1996

        4. Notes to Financial Statements                                    6

        Item 2 - Management's Discussion and Analysis of
        Financial Condition and Results of Operations                       8


PART II -OTHER INFORMATION

        Item 1 - Legal Proceedings                                         14

        Item 2 - Changes in Securities                                     14

        Item 3 - Defaults Upon Senior Securities                           14

        Item 4 - Submission of Matters to a Vote of Securities Holders     14

        Item 5 - Other Information                                         14

        Item 6 - Exhibits and Reports on Form 8-K                          14

           (a) Exhibits
           (b) Reports on Form 8-K

        Signatures                                                         15
                      

<PAGE>
<TABLE>
<CAPTION>
                               MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

                                     CONSOLIDATED BALANCE SHEETS

                                       (Dollars in thousands)

                                                                                       December 31,
                                                                        March 31,         1996
                                                                          1996          (Unaudited)
                                                                      --------------  ----------------
                              ASSETS
<S>                                                                     <C>            <C>        
Current assets:

    Cash and cash equivalents                                           $    12,542    $     4,855
    Marketable securities, available-for-sale                                 8,028         39,093
    Accounts and notes receivable                                               260            810
    License rights                                                            3,000          8,500
    Inventories                                                                 622            326
    Prepaid expenses and other assets                                           406            339
                                                                      --------------  -------------
         Total current assets                                                24,858         53,923
                                                                      --------------  -------------

Property and equipment, at cost:
    Building and improvements                                                14,158         14,184
    Equipment, furniture and fixtures                                         3,943          4,598
    Construction in progress                                                    941            836
                                                                      --------------  -------------
                                                                             19,042         19,618
    Less:  Accumulated depreciation and amortization                          5,322          6,224
                                                                      --------------  -------------

         Total property and equipment                                        13,720         13,394
                                                                      --------------  -------------

Other assets:
    Patents and license rights, net of amortization
        $932 and $1,058, respectively                                           297            185
    Certificate of deposit, pledged                                           3,000          3,000
    Other assets, net                                                         1,954          2,225
                                                                      --------------  -------------
         Total other assets                                                   5,251          5,410
                                                                      --------------  -------------

                                                                        $    43,829    $    72,727
                                                                      ==============  =============

                LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term debt                                  $      1,262    $     1,262
    Accounts payable and accrued liabilities                                  3,964          4,050
    Compensation accruals                                                     1,031          1,002
    Deferred contract revenue                                                     -              -
                                                                      --------------  -------------
         Total current liabilities                                            6,257          6,314
                                                                      --------------  -------------

Long-term debt, net of current portion                                        8,610          7,668

Other noncurrent liabilities                                                      -          3,500

Commitments and contingencies (Note 2)

Stockholders' equity:
    Common Stock, $.01 par value, 20,000,000 shares
      authorized, 13,296,186 and 17,609,962 shares
      issued and outstanding, respectively                                      133            176
    Additional paid-in capital                                               91,468        126,669
    Accumulated deficit                                                     (62,185)       (71,141)
    Unrealized loss on available-for-sale securities                             (6)           (11)
    Less notes receivable from sale of Common Stock                            (281)          (281)
    Less 18,970 shares of treasury stock, at cost                              (167)          (167)
                                                                      --------------  -------------

         Total stockholders' equity                                          28,962         55,245
                                                                      --------------  -------------

                                                                        $    43,829    $    72,727
                                                                      ==============  =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                           
                                   MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF OPERATIONS

                           (Unaudited; dollars in thousands, except per share amounts)



                                                               Three Months Ended           Nine Months Ended
                                                                  December 31,                 December 31,
                                                               1995          1996           1995          1996
                                                            -----------  -------------  ------------- -------------
<S>                                                          <C>           <C>            <C>           <C>       
Revenues:
   Revenues under collaborative agreements                   $   1,013     $    1,091     $    1,412    $    3,250
   Product and royalty revenues                                    232            216            506           426
   License fees                                                      -          5,700             25         5,725
                                                            -----------  -------------  ------------- -------------
                                                                 1,245          7,007          1,943         9,401
                                                            -----------  -------------  ------------- -------------
Operating expenses:
   Research and development costs                                3,276          2,354          9,857         7,318
   Costs of products sold                                          587          1,078          1,311         3,707
   Selling, general and administrative expenses                  1,066          1,866          4,178         5,429
   Litigation and Other                                          3,110          3,000          3,110         3,000
                                                            -----------  -------------  ------------- -------------
                                                                 8,039          8,298         18,456        19,454
                                                            -----------  -------------  ------------- -------------

   Loss from operations                                         (6,794)        (1,291)       (16,513)      (10,053)

Interest expense                                                  (195)          (203)          (596)         (616)
Interest income                                                    344            615            812         1,713
                                                            -----------  -------------  ------------- -------------


Net loss                                                      $ (6,645)   $      (879)     $ (16,297)   $   (8,956)
                                                            ===========  =============  ============= =============

Loss per common share                                        $   (0.50)   $     (0.05)   $     (1.30)  $     (0.54)
                                                            ===========  =============  ============= =============

Weighted average common shares outstanding                      13,291         17,572         12,535        16,651
                                                            ===========  =============  ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                          
                                  MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

                                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                       (Unaudited; dollars in thousands)
                                                                                          Nine Months Ended
                                                                                            December 31,
                                                                                         1995           1996
                                                                                     -------------  -------------
<S>                                                                                     <C>           <C>        
Cash flows from operating activities:
    Net loss                                                                            $ (16,297)    $   (8,956)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
       Depreciation and amortization                                                        1,868          1,082
       Write-down of property to be sold                                                      667              -
       Loss on write-off of license fees related to discontinued products                   1,025              -
       Forgiveness of note receivable from sale of common stock                                56              -
       Write-off of former Nycomed territory license rights                                     -          3,000
       Changes in operating assets and liabilities:
         Receivables                                                                        4,740            (27)
         Inventories                                                                          697            296
         Prepaid expenses and other assets                                                    (73)          (455)
         Accounts payable and accrued liabilities                                            (351)            87
         Compensation accruals                                                                247            (29)
                                                                                     -------------  -------------

              Cash used in operating activities                                            (7,421)        (5,002)
                                                                                     -------------  -------------

Cash flows from investing activities:
    Purchases of property and equipment                                                    (1,945)          (634)
    Proceeds from sale of property and equipment                                                -              4
    Additions to patents and license rights                                                   (45)           (15)
    Acquisition of license rights from Shionogi                                                 -         (3,000)
    Acquisition of license rights from Nycomed                                                  -         (2,000)
    Increase in other assets                                                                 (677)          (271)
    (Increase) decrease in marketable securities                                           (2,941)       (31,071)
                                                                                     -------------  -------------

              Cash provided by investing activities                                        (5,608)       (36,987)
                                                                                     -------------  -------------

Cash flows from financing activities:
    Net proceeds from public offering of Common Stock                                           -         34,086
    Net proceeds from sale of Common Stock                                                 11,603              -
    Net proceeds from stock options exercised                                                   -          1,158
    Principal payments on long-term debt                                                     (225)          (942)
                                                                                     -------------  -------------

              Cash provided by financing activities                                        11,378         34,302
                                                                                     -------------  -------------

Decrease in cash and cash equivalents                                                      (1,651)        (7,687)

Cash and cash equivalents, beginning of period                                              3,882         12,542
                                                                                     -------------  -------------

Cash and cash equivalents, end of period                                               $    2,231     $    4,855
                                                                                     =============  =============

Supplemental cash flow disclosures:

    Interest income received                                                          $       804     $    1,202
                                                                                     =============  =============

    Interest paid                                                                     $       592    $       613
                                                                                     =============  =============
</TABLE>
<PAGE>

 NOTES TO FINANCIAL STATEMENTS


 (1)  Basis of Presentation-


      The  Notes  to  the   Consolidated   Financial   Statements  of  Molecular
     Biosystems,  Inc. (the  "Company")  were  submitted with the Company's Form
     10-K for the year ended  March 31,  1996 and should be read in  conjunction
     with this Form 10-Q.


      These interim  Consolidated  Financial  Statements of the Company have not
     been audited by independent public accountants.  However, in the opinion of
     the  Company,  all  adjustments  required  for a fair  presentation  of the
     financial  position of the Company as of December 31, 1996, and the results
     of its  operations  for the three- and nine- months ended December 31, 1995
     and 1996,  and its cash flows for the  nine-months  ended December 31, 1995
     and 1996,  have been made.  The  results of  operations  for these  interim
     periods are not  necessarily  indicative of the  operating  results for the
     full year.


      Effective  April 1, 1996,  the  Company  adopted  Statement  of  Financial
     Accounting   Standards  No.  123  ("SFAS"),   Accounting  for   Stock-Based
     Compensation,  which  provides  companies  the option to account for equity
     instrument  awards based on their estimated fair value at the date of grant
     resulting  in a charge to income in the periods the awards are  expected to
     vest. However, companies are permitted to continue to apply APB Opinion No.
     25, which recognizes  compensation cost based on the intrinsic value of the
     equity  award.  The Company  will  continue to apply APB Opinion No. 25 and
     will present pro forma  footnote  disclosure  describing  the effect to the
     Company's  net income and net  income per share data as  permitted  by SFAS
     123.


 (2)  Shionogi Settlement Agreement-


      In  September  1996,  the Company  announced  that it had entered  into an
     agreement  with  Shionogi & Co.,  Ltd.  ("Shionogi")  pursuant to which the
     Company  reacquired  all  rights  to  manufacture,   market  and  sell  its
     ALBUNEX(R) family of products in the territory, consisting of Japan, Taiwan
     and South Korea, formerly exclusively licensed to Shionogi.  This agreement
     settles an  outstanding  dispute  between the two companies  concerning the
     license and  distribution  agreement  for  ALBUNEX(R)  and  resulted in the
     dismissal of all claims raised by the  companies  against each other in the
     pending arbitration  proceeding.  Under the agreement,  the Company paid $3
     million to  Shionogi  in  September  1996 and will pay an  additional  $5.5
     million as follows:  $2 million in September  1997, $2 million in September
     1998 and $1.5  million in  September  1999.  The  Company is  currently  in
     discussions with potential licensees for Shionogi's territory.


 (3)  Nycomed Territory Agreement-


      In   December   1996,   the  Company  and   Mallinckrodt   Medical,   Inc.
     ("Mallinckrodt")  amended the Amended and Restated  Distribution  Agreement
     ("ARDA")   that  they  entered  into  in  September   1995  to  expand  the
     geographical scope of Mallinckrodt's  exclusive  marketing and distribution
     rights for ALBUNEX(R),  FS069 and related products.  The amendment extended
     Mallinckrodt's  exclusive  territory  to  include  the  territory  that the
     Company had formerly licensed to Nycomed Imaging AS ("Nycomed")  consisting
     of Europe, Africa, India and parts of Asia.


      Under  the  amendment  of ARDA,  Mallinckrodt  agreed to pay fees of up to
     $12.9  million  plus 40  percent of product  sales to cover  royalties  and
     manufacturing.  Mallinckrodt  made an  initial  payment  of  $7.1  million,
     consisting of reimbursement to the Company of $2.7 million that the Company
     paid to Nycomed to  reacquire  the  exclusive  product  rights in Nycomed's
     territory,  payment of $3 million  to the  Company  under the terms of ARDA
     upon the extension of  Mallinckrodt's  exclusive rights to Nycomed's former
     territory,  and payment of $1.4 million to Nycomed in  satisfaction  of the
     Company's obligation to pay 45% of any amounts that the Company receives in
     excess of $2.7 million upon the licensing of the former  Nycomed  territory
     to a  third  party.  Of the  remaining  $5.8  million  that  may  be  paid,
     Mallinckrodt  will pay $4 million to the Company (upon the  achievement  of
     the specified  product  development  milestone) and $1.8 million to Nycomed
     (representing 45% of the $4 million payment to the Company.).  There can be
     no assurance,  however, that this milestone will be satisfied.  The Company
     has included all costs related to the  reacquisition  of its license rights
     from  Nycomed  in  Litigation  and  Other  direct  costs  in the  financial
     statements.  Of these  costs,  approximately  $1 million was paid in fiscal
     1995 and the remainder was paid in fiscal 1996.


 (4)  Stockholders' Equity-


     On May 30,  1996,  the Company  completed a public  offering of 4.1 million
     shares of Common Stock at $9.00 per share.  Net proceeds from this offering
     (after  deducting  underwriting  discounts  and  commissions  and  offering
     expenses) amounted to approximately $34.1 million.




<PAGE>



PART I   -  FINANCIAL INFORMATION


Item 2   -  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS


         The  following  management  discussion  and analysis  should be read in
conjunction with (1) the current  consolidated  financial statements and (2) the
Company's  consolidated  financial  statements and  management's  discussion and
analysis of financial  condition  and results of operations in its Annual Report
on Form 10-K for the year ended March 31, 1996.


         From time to time, the Company may publish  forward-looking  statements
relating  to  such  matters  as  anticipated  financial  performance,   business
prospects,  technological  developments,  new products, research and development
activities and similar matters. The Private Securities  Litigation Reform Act of
1995 provides a safe harbor for forward-looking  statements.  In order to comply
with the terms of the safe harbor,  the Company  notes that a variety of factors
could cause the Company's  actual  results and  experience to differ  materially
from the anticipated  results or other  expectations  expressed in the Company's
forward-looking  statements.  The risks and  uncertainties  that may  affect the
operations,  performance,  development  and  results of the  Company's  business
include the following:  difficulties  and delays with respect to the performance
of clinical trials; delays by regulatory  authorities;  manufacturing  problems;
difficulties  and delays with respect to  marketing  and sales  activities;  and
general  uncertainties  accompanying  the  development  and  introduction of new
products.


Recent Events


         In September  1996,  the Company  announced that it had entered into an
agreement with Shionogi & Co., Ltd.  ("Shionogi")  pursuant to which the Company
reacquired all rights to manufacture,  market and sell its ALBUNEX(R)  family of
products in the territory, consisting of Japan, Taiwan and South Korea, formerly
exclusively licensed to Shionogi.  This agreement settled an outstanding dispute
between the two companies concerning the license and distribution  agreement for
ALBUNEX(R)  and resulted in the  dismissal of all claims raised by the companies
against each other in a pending arbitration proceeding. Under the agreement, the
Company paid $3 million to Shionogi and will pay an additional $5.5 million over
the next three years.  The Company is currently in  discussions  with  potential
licensees for  Shionogi's  territory.  As a result,  included in current  assets
under license rights is $8.5 million which  represents  the Company's  rights in
the former Shionogi  territory.  The Company  believes that the future licensing
agreement  for this  territory  will be in excess of the amount  recorded  as an
asset.


         In  December  1996,  the  Company  and   Mallinckrodt   Medical,   Inc.
("Mallinckrodt")   amended  the  Amended  and  Restated  Distribution  Agreement
("ARDA") to expand the geographical scope of Mallinckrodt's  exclusive marketing
and  distribution  rights  for  ALBUNEX(R),  FS069  and  related  products.  The
amendment extended  Mallinckrodt's  exclusive territory to include the territory
that the  Company  had  formerly  licensed  to Nycomed  Imaging  AS  ("Nycomed")
consisting of Europe, Africa, India and parts of Asia.


         Under the amendment of ARDA,  Mallinckrodt  agreed to pay fees of up to
$12.9  million  plus  40  percent  of  product  sales  to  cover  royalties  and
manufacturing.  Mallinckrodt made an initial payment of $7.1 million, consisting
of reimbursement to the Company of $2.7 million that the Company paid to Nycomed
to reacquire the exclusive product rights in Nycomed's territory,  payment of $3
million  to  the  Company  under  the  terms  of  ARDA  upon  the  extension  of
Mallinckrodt's  exclusive rights to Nycomed's former  territory,  and payment of
$1.4 million to Nycomed in satisfaction  of the Company's  obligation to pay 45%
of any amounts  that the Company  receives  in excess of $2.7  million  upon the
licensing of the former  Nycomed  territory to a third party.  Of the  remaining
$5.8 million that may be paid,  Mallinckrodt  will pay $4 million to the Company
(upon the achievement of the specified product  development  milestone) and $1.8
million to Nycomed (representing 45% of the $4 million payment to the Company.).
There can be no assurance,  however, that this milestone will be satisfied.  The
Company  has  included  all costs  related to the  reacquisition  of its license
rights  from  Nycomed in  Litigation  and Other  direct  costs in the  financial
statements. Of these costs, approximately $1 million was paid in fiscal 1995 and
the remainder was paid in fiscal 1996.


Liquidity and Capital Resources


         On May 30, 1996, the Company completed a public offering of 4.1 million
shares of Common  Stock at $9.00 per  share.  Net  proceeds  from this  offering
(after deducting  underwriting  discounts and commissions and offering expenses)
amounted to approximately $34.1 million.


         At December  31,  1996,  the  Company had net working  capital of $47.6
million  compared to $18.6 million at March 31, 1996.  Cash,  cash  equivalents,
marketable  securities and certificates of deposit pledged were $46.9 million at
December  31, 1996  compared to $23.5  million at March 31,  1996.  For the next
several years, the Company expects to incur substantial additional  expenditures
associated with product  development.  The Company anticipates that its existing
resources,  including  the  proceeds  of the  public  offering  in May  1996 and
interest  thereon,  plus payments under its existing  collaborative  agreements,
will enable the Company to fund its  operations for at least the next two years.
The Company continually reviews its product development  activities in an effort
to allocate its resources to those  products that the Company  believes have the
greatest commercial potential.  Factors considered by the Company in determining
the  products  to pursue may  include,  but are not  limited  to, the  projected
markets, potential for regulatory approval,  technical feasibility and estimated
costs to bring the product to the market.  Based upon these factors, the Company
may from time to time  reallocate  its resources  among its product  development
activities.  The  Company  may pursue a number of  options  to raise  additional
funds,  including  borrowings;  lease arrangements;  collaborative  research and
development arrangements with pharmaceutical companies; the licensing of product
rights to third parties; or additional public and private financing,  as capital
requirements  change as a result of strategic,  competitive,  technological  and
regulatory factors. There can be no assurance that funds from these sources will
be available on favorable terms, if at all.


Results of Operations


         Revenues Under Collaborative  Agreements.  Revenues under collaborative
agreements were $1.1 million and $3.3 million for the three-month and nine-month
periods ended  December 31, 1996,  compared to $1.1 million and $1.4 million for
both of the same periods in the prior year.  These  revenues in the current year
consist  solely of quarterly  payments to support  clinical  trials,  regulatory
submissions  and  product  development  received  from  Mallinckrodt  under  the
Company's amended agreement with Mallinckrodt  which the Company entered into in
September  1995.  The prior  year  revenue  is  attributable  to a bonus paid by
Mallinckrodt  under the original license agreement  equivalent to Mallinckrodt's
first year product  sales of  ALBUNEX(R)  at its sales price to end users of the
product.


         License Revenues.  Revenues from licensing agreements were $5.7 million
in the  three-month  and nine-month  periods ended December 31, 1996 compared to
$25,000  in the  nine-month  period in the prior  year.  These  revenues  in the
current year consist of payments from Mallinckrodt  pursuant to the amendment to
ARDA that the Company  entered into with  Mallinckrodt in December 1996. See the
discussion under "Recent Events".


         Product and Royalty Revenues. Revenues from product sales and royalties
were  $216,000 and $426,000 for the  three-month  and  nine-month  periods ended
December 31, 1996, compared to $232,000 and $506,000 for the same periods in the
prior year.  Product revenues are based upon the Company's sales to Mallinckrodt
and  Shionogi and are  recognized  upon  shipment of the  product.  The transfer
prices for the Company's  sales of ALBUNEX(R) to  Mallinckrodt  and Shionogi are
determined under the Company's respective  agreements with them and are equal to
40% of Mallinckrodt's net sales price to its end users of the product and 30% of
Shionogi's sales price to its end users.


         Costs of Products Sold.  Cost of products sold totaled $1.1 million and
$3.7 million for the three-month and nine-month periods ended December 31, 1996,
resulting in a negative gross profit  margin.  This negative gross profit margin
was due to the fact that the current low levels of production  are  insufficient
to cover the  Company's  fixed  manufacturing  overhead  expenses.  For the same
periods in the prior  year,  cost of products  sold  totaled  $587,000  and $1.3
million,  respectively.  In the prior year, certain expenses associated with the
manufacturing of the product had been recorded as research and development costs
as they represented the cost of developing the Company's  manufacturing process.
Because the Company has left the pilot manufacturing  phase, these costs are now
classified  as cost of goods sold.  The Company  anticipates  an increase in its
gross profit margins if and when  ALBUNEX(R)  sales volume  increases and if and
when FS069, the Company's second generation  ultrasound imaging agent,  receives
regulatory approval and obtains market acceptance.  The increase in sales volume
would permit the fixed costs included in manufacturing  overhead to be allocated
over a larger number of vials produced.  Manufacturing fixed costs are currently
running  at an  annual  rate of  approximately  $5  million.  The  amount of any
increase  in the  Company's  margins  and the time  required  by the  Company to
achieve  higher  margins  are  highly  dependent  on the  market  acceptance  of
ALBUNEX(R) and FS069 and are therefore uncertain.


         Research and  Development  Costs.  For the  three-month  and nine-month
periods ended December 31, 1996, the Company's  research and  development  costs
totaled  $2.4  million and $7.3  million,  as compared to $3.3  million and $9.9
million for the same periods in 1995. This current decrease of approximately 25%
is due to the fact that the  Company is no longer  incurring  significant  costs
related to the development of its manufacturing process as in prior years.


         Selling,  General and Administrative  Expenses. For the three-month and
nine-month periods ended December 31, 1996, the Company's  selling,  general and
administrative  expenses  totaled $1.9 million and $5.4 million,  as compared to
$1.1 million and $4.2 million for the same period in 1995.  This increase in the
current  year  is  attributable  in  part  to  legal  expenses  related  to  the
arbitration with Shionogi.  See the discussion under "Prospective  Information."
The increase is also attributable to increased compensation costs.


     Litigation  and Other.  During the  quarters  ended  December  31, 1996 and
December 31, 1995, the Company recorded the following charges:
<TABLE>



                                                              Three Months Ended      Nine Months Ended
                                                                 December 31,           December 31,
                                                                1995       1996        1995        1996
                                                             ---------- ----------  ---------- -----------

<S>                                                          <C>        <C>         <C>        <C>       
Write-off of former Nycomed territory license rights         $       -  $   3,000   $       -  $    3,000
Arbitration award and related costs                              1,418          -        1,418          -
Write-off of license fees related to discontinued products       1,025          -        1,025          -
Write-down of real estate to be sold                               667          -          667          -
                                                             ---------- ----------  ---------- -----------
    Total litigation and other                               $   3,110  $   3,000   $   3,110  $    3,000
                                                             ========== ==========  ========== ===========

</TABLE>




         In December 1996, the Company and  Mallinckrodt  amended ARDA to expand
the geographical  scope of Mallinckrodt's  exclusive  marketing and distribution
rights for  ALBUNEX(R),  FS069 and  related  products.  The  amendment  extended
Mallinckrodt's exclusive territory to include the territory that the Company had
formerly licensed to Nycomed  consisting of Europe,  Africa,  India and parts of
Asia. See the discussion  under "Recent  Events".  As a result of the amendment,
the  Company   recorded  a  one-time   charge  of  $3  million  related  to  the
reacquisition of its license rights from Nycomed.


         The Company  recorded  one-time charges in December 1995 related to the
conclusion  of  arbitration  with Bracco  S.p.A.,  the write-off of license fees
associated with discontinued  products and a write down to the sale price of two
buildings that were subsequently sold in March 1996.


         Interest  Expense  and  Interest  Income.   Interest  expense  for  the
three-month and nine-month  periods ended December 31, 1996 amounted to $203,000
and $616,000,  respectively, and consisted of mortgage interest on the Company's
manufacturing building and interest on a second note payable which is secured by
the tangible assets of the Company.  The interest rate on the mortgage was 8% in
December 1996.  Interest expense for the same periods in the prior year amounted
to  $195,000  and  $596,000  and  included  interest  on a loan that the Company
obtained in May 1994 to finance the  purchase of two  unimproved  buildings  and
underlying land in December 1993. In March 1996,  after the buildings were sold,
the loan was restructured  into the second note payable  mentioned above, in the
amount of $6.0 million,  which bears interest at prime plus 1% and is payable in
monthly  installments  of principal plus interest over five years.  The interest
rate on the note was 9.25% in December 1996.


         The  increase in interest  income in the current  year is due to higher
average  cash and  marketable  securities  balances  as a result  of the  public
offering in May 1996 as discussed above.


         The Company's cash is invested primarily in short-term, fixed principal
investments,   such  as  U.S.   Government   agency  issues,   corporate  bonds,
certificates of deposit and commercial paper.


Prospective Information


         The Company  anticipates an increase in its gross profit margins if and
when  ALBUNEX(R)  sales volume  increases  and if and when FS069,  the Company's
second generation  ultrasound imaging agent,  receives  regulatory  approval and
obtains market  acceptance.  The increase in sales volume would permit the fixed
costs included in manufacturing overhead to be allocated over a larger number of
vials  produced.  Manufacturing  fixed costs are currently  running at an annual
rate of  approximately  $5 million.  The amount of any increase in the Company's
margins  and the time  required  by the  Company to achieve  higher  margins are
highly  dependent  on the  market  acceptance  of  ALBUNEX(R)  and FS069 and are
therefore uncertain.


         The  Company  announced  in  January  1997 that the U.S.  Food and Drug
Administration  ("FDA") has  accepted  its  pre-marketing  approval  application
("PMA") for FS069, the Company's second  generation  ultrasound  contrast agent.
The  Company  also  announced  in  January  1997 that the FDA has  scheduled  an
advisory  panel review for FS069 for February  24, 1997.  The Company  filed its
pre-marketing approval application for FS069 with the FDA in October 1996. FS069
is designed to enhance  ultrasound  imaging by enabling  physicians to visualize
blood flow and enhance  resolution  of anatomical  structures in those  patients
with suboptimal  non-contrast ultrasound exams. This submission involved studies
for cardiac function focusing on enhancing  endocardial  border  delineation and
secondarily determining the ability of the agent to opacify the left ventricular
chamber.


         In  September  1995,  the Company  entered into an amended and restated
distribution  agreement  with  Mallinckrodt  which will provide the Company with
between $33 million  and $47.5  million.  This  amended  distribution  agreement
modifies the original December 1988  distribution  agreement between the Company
and  Mallinckrodt  in a number of  respects.  Under the amended  agreement,  the
geographical  scope of  Mallinckrodt's  exclusive  right to market the Company's
proprietary  contrast  agent  for  transpulmonary  cardiac  ultrasound  imaging,
ALBUNEX(R),  the Company's  second  generation  ultrasound  contrast agent,  and
related products was expanded to include all of the countries of the world other
than those covered by the Company's former license  agreements with Shionogi and
Nycomed.  The duration of Mallinckrodt's  exclusive right was also extended from
October  1999 until the later of July 1, 2003 or three years after the date that
the Company  obtains  approval  from the FDA to market FS069 for an  intravenous
myocardial perfusion indication (use).


         Under the terms of the agreement, Mallinckrodt will pay the Company $20
million over four years to support clinical trials of FS069,  related regulatory
submissions and associated product  development.  These payments will be made in
16 quarterly  installments  starting at $1 million for the first four  quarters,
$1.25  million for the following  eight  quarters and $1.5 million for the final
four  quarters.  The first five  quarterly  payments  have been  received by the
Company.


         The amended  distribution  agreement  requires  the Company to spend at
least $10 million of this $20 million on clinical  trials to support  regulatory
filings  with the FDA for cardiac  indications  of FS069.  After the Company has
spent this $10 million, the amended distribution  agreement requires the Company
and Mallinckrodt to share equally in the cost of any additional  clinical trials
of FS069 in the United States, up to a maximum total of $5 million ($2.5 million
each).


         The  Company's  expenditure  of  this  $10  million  will  be  made  in
accordance  with the directions of a joint steering  committee which the Company
and Mallinckrodt established in order to expedite the development and regulatory
approval of FS069 by enabling the parties to share their  expertise  relating to
clinical  trials  and  the  regulatory   approval   process.   The  Company  and
Mallinckrodt  each  appoint  two of the  four  members  of  the  joint  steering
committee.


         The amended distribution agreement also provides for potential payments
to the Company of up to $12 million upon the satisfaction of certain milestones.
To date, the Company has earned $3 million in conjunction  with the extension of
Mallinckrodt's  exclusive rights to Nycomed's former territory.  There can be no
assurance,  however,  that  all  or  any of the  remaining  milestones  will  be
satisfied.


         In addition,  the amended distribution agreement grants the Company the
option (at its own  discretion) to repurchase all of the shares of the Company's
common stock that Mallinckrodt  purchased under the investment agreement for $45
million,  subject to  various  price  adjustments.  This  option is  exercisable
beginning  the  later of July 1,  2000 or the  date  that  the  Company  obtains
approval from the FDA to market FS069 for an  intravenous  myocardial  perfusion
indication  and ending on the later of June 30,  2003 or three  years  after the
date that the  Company  obtains  approval  from the FDA to  market  FS069 for an
intravenous  myocardial  perfusion.  If the Company  exercises this option,  the
Company  may  co-market  ALBUNEX(R),  FS069 and  related  products in all of the
countries covered by the amended distribution agreement.


         In connection with the amended distribution agreement, the Company also
entered  into  an  investment  agreement  whereby  the  Company  sold  1,118,761
unregistered  shares of its common stock to Mallinckrodt  for $13 million,  or a
price of $11.62 per share before related costs.


         In October  1995,  the Company  entered  into an  agreement  whereby it
reacquired all rights to INFOSON(R) (the European  designation for  ALBUNEX(R)),
FS069 and related  products  from  Nycomed,  the  Company's  European  licensee.
Nycomed had received  approval to market  INFOSON(R) in Sweden,  Finland and the
United Kingdom and had filed  applications in several other European  countries,
but had not yet begun to market the  product  when the  Company  reacquired  the
product rights.


         In December 1996, the Company and  Mallinckrodt  amended ARDA to expand
the geographical  scope of Mallinckrodt's  exclusive  marketing and distribution
rights for  ALBUNEX(R),  FS069 and  related  products.  The  amendment  extended
Mallinckrodt's exclusive territory to include the territory that the Company had
formerly licensed to Nycomed  consisting of Europe,  Africa,  India and parts of
Asia.


         Under the amendment of ARDA,  Mallinckrodt  agreed to pay fees of up to
$12.9  million  plus  40  percent  of  product  sales  to  cover  royalties  and
manufacturing.  Mallinckrodt made an initial payment of $7.1 million, consisting
of reimbursement to the Company of $2.7 million that the Company paid to Nycomed
to reacquire the exclusive product rights in Nycomed's territory,  payment of $3
million  to  the  Company  under  the  terms  of  ARDA  upon  the  extension  of
Mallinckrodt's  exclusive rights to Nycomed's former  territory,  and payment of
$1.4 million to Nycomed in satisfaction  of the Company's  obligation to pay 45%
of any amounts  that the Company  receives  in excess of $2.7  million  upon the
licensing of the former  Nycomed  territory to a third party.  Of the  remaining
$5.8 million that may be paid,  Mallinckrodt  will pay $4 million to the Company
(upon the achievement of the specified product  development  milestone) and $1.8
million to Nycomed (representing 45% of the $4 million payment to the Company.).
There can be no assurance, however, that this milestone will be satisfied.



<PAGE>

PART II - OTHER INFORMATION


Item 1-5 - The Company has nothing to report with  respect to these items during
the quarter ended December 31, 1996.


Item 6 - EXHIBITS AND REPORTS ON FORM 8-K


 (a)      Exhibits - None


 (b)      Reports on Form 8-K


A Current Report on Form 8-K dated September 10, 1996, was filed on November 15,
1996,  reporting  that the Company had settled its dispute with  Shionogi & Co.,
Ltd.  ("Shionogi")   concerning  the  license  and  distribution  agreement  for
ALBUNEX(R)  and resulted in the  dismissal of all claims raised by the companies
against each other in the pending arbitration proceeding.


Additionally,  the Company  reported that it had filed a pre-marketing  approval
("PMA") application with the U.S. Food and Drug Administration for the Company's
second-generation  contrast agent for cardiac ultrasound imaging, FS069, for use
in enhancing endocardial border definition of the left ventricular chamber.





A Current  Report on Form 8-K dated December 16, 1996, was filed on February 14,
1997,  reporting  that on December  16,  1996,  the Company had entered  into an
agreement  with  Mallinckrodt  Medical  Inc.   ("Mallinckrodt")  which  expanded
Mallinckrodt's  marketing and distribution  rights for the ALBUNEX(R)  family of
products to the territory  formerly  licensed to Nycomed  Imaging AS ("Nycomed")
consisting of Europe, Africa, India and parts of Asia.


Additionally,  the Company  reported  that it has  appointed  Jerry T.  Jackson,
former  Executive Vice President of Merck & Co., Inc., to the Company's Board of
Directors.


Finally, the Company reported that the U.S. Food and Drug Administration ("FDA")
accepted  its  pre-marketing   approval   application  ("PMA")  for  its  second
generation ultrasound contrast agent, FS069, and has scheduled an advisory panel
review for February 24, 1997.




<PAGE>



SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


MOLECULAR BIOSYSTEMS, INC.




   /s/ Gerard Wills
Gerard A. Wills
Vice President Finance and
Chief Financial Officer


    2/14/97
Date

<TABLE> <S> <C>

<ARTICLE>  5 
<LEGEND>  This  schedule  contains  summary  financial  information
extracted from the consolidated  financial  statements of Molecular  Biosystems,
Inc.  dated  December  31, 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER>                                                               1,000
       
<S>                                                                <C>
<PERIOD-TYPE>                                                    9-mos
<FISCAL-YEAR-END>                                                MAR-31-1997
<PERIOD-END>                                                     DEC-31-1996
<CASH>                                                                     4,855
<SECURITIES>                                                               39093
<RECEIVABLES>                                                                810
<ALLOWANCES>                                                                   0
<INVENTORY>                                                                  326
<CURRENT-ASSETS>                                                          53,923
<PP&E>                                                                    19,618
<DEPRECIATION>                                                             6,224
<TOTAL-ASSETS>                                                            72,727
<CURRENT-LIABILITIES>                                                      6,314
<BONDS>                                                                        0
                                                          0
                                                                    0
<COMMON>                                                                     176
<OTHER-SE>                                                                55,069
<TOTAL-LIABILITY-AND-EQUITY>                                              72,727
<SALES>                                                                      426
<TOTAL-REVENUES>                                                           9,401
<CGS>                                                                      3,707
<TOTAL-COSTS>                                                             19,454
<OTHER-EXPENSES>                                                               0
<LOSS-PROVISION>                                                               0
<INTEREST-EXPENSE>                                                           616
<INCOME-PRETAX>                                                          (8,956)
<INCOME-TAX>                                                                   0
<INCOME-CONTINUING>                                                      (8,956)
<DISCONTINUED>                                                                 0
<EXTRAORDINARY>                                                                0
<CHANGES>                                                                      0
<NET-INCOME>                                                             (8,956)
<EPS-PRIMARY>                                                             (0.54)
<EPS-DILUTED>                                                                  0
        


</TABLE>


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