MOLECULAR BIOSYSTEMS INC, 10-K405, 2000-06-23

MOLECULAR BIOSYSTEMS INC
10-K405, 2000-06-23
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the fiscal year ended March 31, 2000

[ ] Transaction Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Commission file number 0-12648

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

Delaware 36-3078632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

Registrant's telephone number, including area code: (858) 812-7001

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

Title of each class Name of each exchange on which registered
Common Stock, $.01 par value NASD Over-The-Counter Bulletin Board

Securities registered pursuant to Section 12(g) of the Act:
None

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

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of voting stock held by non-affiliates of
the registrant was $12,800,000 as of June 15, 2000 (computed by reference to the
last sale price of a share of the registrant's Common Stock on that date as
reported on the NASD Over-The-Counter Bulletin Board).

There were 18,858,789 shares outstanding of the registrant's Common
Stock as of June 15, 2000.

DOCUMENTS INCORPORATED BY REFERENCE

Certain exhibits filed with the registrant's prior registration
statements and period reports under the Securities Exchange Act of 1939 are
incorporated herein by reference into Part IV of this report.

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PART I

ITEM 1. BUSINESS

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

GENERAL

Molecular Biosystems, Inc. ("MBI" or the "Company"), the developer of
OPTISON(R), the only approved intravenous ultrasound contrast agent marketed
in the United States and Europe, is a Delaware corporation incorporated on
April 14, 1980. Doctors and medical technicians use contrast agents primarily
to improve the real-time images or "moving pictures" of organs and body
structures, especially the heart, obtained through ultrasound examinations.

In May 2000, the Company agreed to transfer full control of the OPTISON
business to Mallinckrodt, Inc., a global manufacturer of specialty medical
products, in exchange for a 5% royalty on sales. Mallinckrodt's territory is
world wide, excluding Japan, South Korea and Taiwan. Chugai Pharmaceuticals,
a pharmaceutical company in Japan, is MBI's partner for Japan, South Korea
and Taiwan. MBI receives a 28% royalty on product sales from Chugai plus
certain milestone payments and has no manufacturing or clinical development
responsibilities.

This restructuring of MBI's relationship with Mallinckrodt relating to
OPTISON manufacturing and marketing coincided with the settlement of patent
litigation with several competitors claiming patent rights in various
ultrasound contrast agent technologies. MBI will pay Mallinckrodt a total of
seven million dollars as part of this intellectual property settlement. Three
million dollars of this settlement was paid in May 2000. An additional three
million dollars will be satisfied through the transfer of property owned by
MBI to Mallinckrodt as soon as practicable. MBI is required to make the final
one million-dollar payment to Mallinckrodt upon receipt of a milestone
payment form Chugai Pharmaceutical Co., Ltd.

The Company has developed other technologies that it is not exploiting at
this time and currently has reduced its workforce to three employees. The
Company plans to use its existing cash and future cash flows from royalties
and milestone payments to pursue alliances and business development
opportunities in the life sciences industry.

ULTRASOUND IMAGING

Since the discovery of x-rays, medical imaging has been used extensively to
diagnose and guide the treatment of diseases and injuries to internal organs.
Generally, imaging improves patient care and lowers health care costs by
enabling the detection of disease or abnormal structures not apparent by
routine physical examination.

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

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

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

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

- LARGE INSTALLED BASE. There is a large installed base of ultrasound
machines throughout the world. According to published reports, there
are more than 70,000 machines installed in the United States.
Several large manufacturers such as Agilent, Phillips (ATL), Acuson,
General Electric and Toshiba compete in the ultrasound hardware
market.

- PRICE. Ultrasound is a relatively inexpensive procedure for imaging
the heart, compared to perfusion nuclear exams and catheterization,
two standard techniques.

- IMPROVEMENTS TO ULTRASOUND IMAGING. The development and approval of
OPTISON has enabled clinicians to use a contrast agent to enhance
the visual clarity of ultrasound images.

PRODUCT AND MARKETS

OPTISON

OPTISON is an ultrasound contrast imaging agent consisting of gas-filled
human serum albumin microspheres manufactured using MBI's patented albumin
microsphere technology. The application of OPTISON begins when a physician or
nurse injects OPTISON into an arm vein. The microspheres then pass through the
bloodstream to the right atrium and ventricle of the heart, where they are
pumped through the lungs and into the left atrium and ventricle of the heart.
The left ventricle is the chamber of the heart that pumps oxygenated blood
arriving from the lungs out to the rest of the body and is the portion of the
heart that is of the greatest clinical interest in the diagnosis of heart
disease. OPTISON uses a 1% albumin solution (in saline). Human albumin is a
protein extracted from blood and has been used as a blood expander for many
years. OPTISON, which has been marketed in the United States and Europe since
1998, has a strong safety profile as demonstrated in over 150,000 patients with
no unexpected adverse events.

OPTISON is the first and currently the only perfluorocarbon based FDA
approved contrast agent. The Company received FDA approval for OPTISON in
December 1997. In May 1998, OPTISON became the first perfluorocarbon based agent
to receive final marketing authorization by the European Agency for the
Evaluation of Medicinal Products for use in patients with suspected or known
cardiovascular disease. OPTISON consists of octafluoropropane-filled albumin
microspheres. Because octafluoropropane is insoluble in blood, the microspheres
in OPTISON remain intact in the bloodstream for over 5 minutes. This durability
permits more of the microspheres to pass from the right side of the heart,
through the microvasculature of the lungs, and into the left side of the heart.
As a result, OPTISON can be used to see more clearly the inside walls of the
heart ("endocardial border delineation") and how the inside walls of the heart
move as the heart pumps blood ( " regional wall motion") using ultrasound. More
importantly, the durability of the OPTISON microspheres enable them to circulate
into the heart muscle and may permit the assessment of myocardial perfusion
using ultrasound (see below).

CARDIAC FUNCTION. Clinical studies have demonstrated that OPTISON is
effective in visualizing blood flow in the chambers of the heart, including the
delineation of endocardial borders and the assessment of regional wall motion.
In an estimated 15-20% of the echocardiograms (ultrasound exams of the heart)
performed annually in the United States, cardiologists cannot adequately
visualize the location of the wall of the left ventricle, or "endocardial
border," or its location appears ambiguous. Clinical studies demonstrated a high
success rate for this indication in cases of suboptimal chamber wall imaging in
both stressed and non-stressed patients. When sufficient numbers of OPTISON
microspheres reach the left ventricle, the acoustical reflectivity of OPTISON in
the chamber permits the endocardial border to be seen by defining the walls of
the chamber, or "endocardial border delineation." This delineation in turn
permits visualization of the movement of the walls of the chamber as the heart
beats, "regional wall motion." Information regarding endocardial border
delineation and regional wall motion is important for diagnostic purposes. If
the chamber walls appear thicker than normal or are not moving normally, it is a
potential indicator that the surrounding heart muscle is not receiving
sufficient blood or is abnormal in some other way. This may indicate heart
attack, partial blockage of an artery or other abnormal condition.

MYOCARDIAL PERFUSION. To increase the potential applications of OPTISON, MBI
recently completed Phase 2 clinical trials to evaluate the product's efficacy in
determining whether the heart muscle is receiving an adequate blood supply
("myocardial

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perfusion"). The multiple Phase 2 trials included use of OPTISON in the
emergency room for patients with chest pain and in various forms of stress
echocardiography (an ultrasound exam of the heart under drug or exercise
induced stress). Results using OPTISON in each of these applications suggest
a close agreement with nuclear imaging for the detection of ischemia "reduced
blood supply" by wall motion and perfusion. Furthermore, the results indicate
that use of OPTISON could help to "rescue" a large proportion of non-contrast
utilizing exams that clinicians would not otherwise be able to interpret,
thereby reducing the need for additional, more expensive and time-consuming
testing. The Company believes the information regarding perfusion will enable
cardiologists to diagnose heart attacks and coronary artery disease more
accurately and safely than is currently feasible. The most recently conducted
Phase 2 studies were performed to evaluate OPTISON with new "second harmonic"
ultrasound imaging technology, which reads ultrasound echoes that return to
the ultrasound equipment at frequencies that are a multiple of the
"fundamental" frequency transmitted into the body. The results of these
trials again demonstrate the agreement between contrast echo and nuclear
imaging as well as coronary arteriography. These results formed the basis for
a proposal to the FDA to conduct pivotal phase 3 clinical trials for
myocardial perfusion. The FDA has reviewed the proposal and Mallinckrodt, now
responsible for conduct of clinical trials, is evaluating the FDA's comments.

Myocardial perfusion is important because it provides oxygenated blood to
the heart muscle. If cardiologists do not detect OPTISON, or do not detect it at
the expected level of intensity in a portion of the heart muscle, it means that
a portion of the muscle is not receiving enough blood ("ischemia"). This finding
may help cardiologists diagnose several conditions, including coronary arterial
stenosis (blockage) and myocardial infarction (heart attack).

The ability to rapidly assess the condition of the heart using OPTISON may
also prove efficacious and cost-effective in the emergency room and in the
subsequent treatment of heart attacks. For example, a physician using ultrasound
with OPTISON may quickly assess a patient arriving at the emergency room
complaining of chest pain. If the physician does not see a perfusion defect in
the heart, the physician may rule out a heart attack. Where a physician does
detect a perfusion defect using OPTISON, the Company believes that information
regarding its severity, size and location may assist the physician in
determining the patient's condition. Physicians may send a patient with an
extensive infarction immediately for an angiogram and even emergency
angioplasty. Physicians may give a patient with a less severe infarction a
clot-dissolving agent. This patient may then undergo an additional OPTISON
echocardiogram to see whether the affected area of the heart muscle has
reperfused; that is, whether the clot-dissolving agent was successful in
treating the condition. If the OPTISON echocardiogram shows that the muscle has
reperfused, the physician would not have to order any additional emergency
procedures and conventional treatment might begin. Cardiologists may use
subsequent OPTISON echocardiograms to assess the effectiveness of the
post-emergency-room treatment; for example, how the heart muscle has responded
to different medications, changes in diet, exercise program, weight loss and
other therapies.

The Company believes that the assessment of myocardial perfusion may also be
important in screening high-risk patients prior to general surgery or other
potentially stressful treatment regimens. For example, a surgeon may wish to
assess whether an elderly or weakened patient is capable of undergoing a
particular surgery or treatment without a cardiac incident. An OPTISON
echocardiogram may be safely administered to assist the physician in making this
determination.

RADIOLOGY INDICATIONS. Preclinical studies have shown that OPTISON perfuses
the liver, which may permit physicians to use ultrasound to detect tumors and
lesions of the liver. Clinical studies have demonstrated that OPTISON may be
useful in differentiating benign from malignant liver tumors. In addition,
preliminary animal studies have shown OPTISON is able to perfuse the kidneys,
ovaries, prostate, testes and blood vessels surrounding the brain. Mallinckrodt
is currently conducting phase 2 clinical trials for some of these indications.

OTHER TECHNOLOGIES

The Company has developed other technologies that it is currently not
exploiting. The Company may seek to continue to develop these other technologies
when it has found a collaborative partner to fund a significant portion of the
necessary clinical and regulatory activities.

MARKETING AND LICENSE AGREEMENTS

<PAGE>

Mallinckrodt to assume full control of the OPTISON business, including
responsibility for all related intellectual property disputes, clinical
development and manufacturing. MBI will receive an ongoing royalty of 5% on
sales of ultrasound contrast agents by Mallinckrodt and its partner, Nycomed.
The Mallinckrodt territory is worldwide, excluding Japan, South Korea and
Taiwan.

This restructuring of MBI's relationship with Mallinckrodt relating to
OPTISON manufacturing and marketing coincided with the settlement of patent
litigation with certain competitors claiming patent rights in various
ultrasound contrast agent technologies. MBI will pay Mallinckrodt a total of
seven million dollars as part of this intellectual property settlement. Three
million dollars of this settlement was paid in May 2000. An additional three
million dollars will be satisfied through the transfer of property owned by
MBI to Mallinckrodt as soon as practicable. MBI is required to make the final
one million-dollar payment to Mallinckrodt upon receipt of a milestone
payment form Chugai Pharmaceutical Co., Ltd.

CHUGAI PHARMACEUTICAL CO., LTD.. In an agreement dated March 31, 1998, the
Company entered into a cooperative development and marketing agreement with
Chugai Pharmaceutical Co., Ltd. ("Chugai") of Japan. The parties entered into
this strategic alliance which covers Japan, Taiwan and South Korea, to develop
OPTISON (which Chugai may market under a different name) and ORALEX, as well as
related products. The Company granted Chugai an exclusive license to develop,
manufacture, and market these products in the subject territory, for which the
Company received $14.0 million. Chugai will pay the Company a 28% royalty on net
sales of licensed products which Chugai manufactures. Additionally, Chugai
purchased 691,883 shares of the Company's common stock at a premium of 40% over
the then-prevailing market price. The equity investment was valued at $8.3
million. The Company is also eligible to receive milestone payments of up to
$20.0 million based on Chugai's achievement of certain Japanese product
development and regulatory goals, of which the Company has received $4 million
to date.

FEINSTEIN LICENSE. In November 1986, the Company entered into a license
agreement under which it acquired the exclusive right to develop, use and sell
any products derived from patents and applications which Steven B. Feinstein,
M.D. owned covering sonicated gas-filled albumin microspheres used for imaging
and any future related patents and applications. In June 1989, the parties
restructured this agreement. The Company paid the licensor $4.5 million as an
additional license fee and $2.0 million as a prepayment of royalties on the
first $66.7 million of sales of the licensed products in the United States, and
the parties agreed to reduce the royalty rate on sales of licensed products from
6% to 3% on worldwide net sales by the Company (and United States sales by a
sublicensee) and from 2 1/2% to 1 1/4% on net sales by sublicensees outside of
the United States. The restructured agreement requires the Company to pay
minimum royalties each year, increasing from $100,000 in 1994 to $600,000 in
1999 and subsequent years. Minimum royalty payments are decreased as certain
levels of OPTISON sales are reached. OPRA obligates Mallinckrodt to assume
financial responsibility for the Feinstein license.

ABBOTT LICENSE. On December 16, 1993, MBI entered into an exclusive license
agreement with Abbott Laboratories under which Abbott acquired the exclusive
worldwide right to make, have made, use and sell products based on nucleic acid
probe technology for in vitro diagnosis of infectious diseases and cancer.
Abbott is obligated to pay MBI quarterly royalties on product sales made by
Abbott or its sublicensee.

PATENTS AND TRADEMARKS

The Company's products are covered by a number of issued United States and
foreign patents, and MBI has filed a number of patent applications in the United
States and other countries. Under OPRA (see "Marketing and License Agreements"
above), while ownership of the patents and trademarks remains with MBI, all
related rights covering OPTISON worldwide, excluding the territory granted to
Chugai, were transferred to Mallinckrodt. Mallinckrodt will assume
responsibility for the protection of proprietary technologies deemed to be
material to its business prospects.

The Company was accused in various lawsuits of infringing certain patents
belonging to its competitors in its manufacture and sale of OPTISON in the
United States. Additionally, Nycomed accused the Company of infringing certain
European patents. Effective May 5, 2000, the Company reached a settlement in
patent disputes between the Company, Nycomed, Mallinckrodt and Sonus. See
further discussion in "Legal Proceedings".

<PAGE>

The Company also owns certain other patents that are unrelated to
OPTISON. In May 2000, the Company licensed to Genta Inc. a patent portfolio
relating to "antisense" molecular therapeutic technology for $2.8 million. Of
this amount, $400,000 is payable in cash and $2.4 million will be paid in
unrestricted shares of Genta stock upon completion of an S-3 registration
statement. All costs related to this patent had been expensed in prior years.
In 1992, MBI entered into a nonexclusive license with ISIS Pharmaceuticals,
Inc. for this technology in return for a license fee and royalties.

MANUFACTURING

During the fiscal year ended March 31, 2000, the Company manufactured
OPTISON in its aseptic plant at its principal San Diego facility for commercial
sale and distribution by Mallinckrodt. The plant employed the Company's patented
continuous-flow sonication process in which a mixture of sterile albumin
solution and gas was subjected to ultrasonic energy. This treatment denatures
the albumin protein and facilitates a process known as "cavitation" in which the
stable gas-filled microspheres are created.

Effective May 8, 2000, Mallinckrodt assumed full control and
responsibility for the manufacture of OPTISON and MBI agreed to transfer title
to the San Diego facility over to Mallinckrodt pursuant to OPRA (see "Marketing
and License Agreements - Mallinckrodt" above.) Manufacturing operations are
expected to continue at the San Diego facility for at least the next twelve to
eighteen months.

COMPETITION

In general, competition in the field of contrast agents is based on such
factors as product performance and safety, product acceptance by physicians,
patent protection, manner of delivery, ease of use, price, distribution and
marketing, and the availability of competing technologies. Several major
pharmaceutical companies are developing ultrasound contrast agents which may
compete with OPTISON in the future. Competition may increase in the future as
new products enter the market and as advanced technologies become available.

Future development of OPTISON-related products as a contrast agent for
imaging may be performed by Mallinckrodt and Chugai. There can be no assurance
that existing products or new products developed by competitors will not be more
effective than any products that may be developed by Mallinckrodt or Chugai. The
Company depends on Mallinckrodt's and Chugai's exploitation of the ultrasound
contrast imaging market to sustain and improve its royalty stream.

GOVERNMENT REGULATION

The FDA and comparable agencies in foreign countries subject the Company's
diagnostic products to substantial regulation. Pursuant to the federal Food,
Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder,
the FDA regulates the research, development, clinical testing, manufacture,
labeling, distribution and promotion of medical products. Pursuant to OPRA, the
Company has no further responsibility for the manufacture of OPTISON and has no
plans to engage in any research or development activities. (See "Marketing and
License Agreements - Mallinckrodt" above.)

The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. Mallinckrodt has assumed the responsibility
for complying with these laws and conditions as part of its overall
responsibility and control of the OPTISON manufacturing process.

THIRD PARTY REIMBURSEMENT

In the United States, OPTISON will be purchased primarily by medical
institutions which will then bill various third-party payors such as Medicare,
Medicaid and other government programs and private insurance plans. In
considering reimbursement for a new medical product, these payors must decide
whether to cover the product and how much to pay for it. In general, to be
covered by Medicare, a health care product or service must be "reasonable and
necessary" for the diagnosis or treatment of an illness or injury.

<PAGE>

Even if a drug has received approval or clearance for marketing by the FDA,
there is no assurance that Medicare or other third-party payors will cover the
drug or related services. Certain third party payors are providing reimbursement
for OPTISON contrast echocardiography procedures. Plans and programs are in
place to develop expanded coverage among third party payors. However, the
Company also acknowledges that these payors may place certain restrictions on
the circumstances in which coverage will be available. The Company is dependent
on Mallinckrodt to secure the necessary third-party reimbursement approvals.

EMPLOYEES

As of March 31, 2000, the Company had 56 full-time employees, including 4
officers. Approximately 16 of the Company's employees were involved directly in
scientific research and development activities. On March 30, 2000, the Company
announced plans to restructure and reduce its workforce by 33 employees by the
end of April 2000. Subsequently, effective May 8, 2000, an additional 20
employees involved with the manufacture of OPTISON were transferred to
Mallinckrodt as part of its takeover of OPTISON (see "Manufacturing and License
Agreements-Mallinckrodt" above). As of June 2000, the Company has three
employees. The Company considers its relations with its employees to be good,
and none of its employees is a party to a collective bargaining agreement.

ITEM 2. PROPERTIES

As of March 31, 2000, the Company's corporate offices and laboratory,
manufacturing and warehouse facilities were housed in a Company owned 44,000
square foot building located in San Diego, California. During May 2000, the
Company agreed to transfer title for the building to Mallinckrodt as part of
a legal settlement. (See discussion in Item 3 - Legal Proceedings.)
Mallinckrodt has agreed to allow the remaining MBI employees to occupy the
building rent-free for a period of one year commencing in May 2000.

ITEM 3. LEGAL PROCEEDINGS

On May 5, 2000, the Company reached a settlement in various ongoing
patent disputes between the Company, Nycomed, Mallinckrodt and Sonus. Pursuant
to OPRA, Mallinckrodt has assumed responsibility for any future intellectual
property disputes relating to MBI's ultrasound contrast patents.

The restructuring of MBI's relationship with Mallinckrodt relating to
OPTISON manufacturing and marketing coincided with the settlement of patent
litigation with Nycomed and Sonus. MBI will pay Mallinckrodt a total of seven
million dollars as part of the intellectual property settlement. Three million
dollars of the settlement was paid in May 2000. An additional three million
dollars will be satisfied through the transfer of property owned by MBI to
Mallinckrodt as soon as practicable. MBI is required to make the final one
million-dollar payment to Mallinckrodt upon receipt of a milestone payment from
Chugai Pharmaceutical Co., Ltd.

On April 27, 2000, MBI filed suit against Palatin Technologies, Inc.
("Palatin") and Evergreen Merger Corporation in United States District Court in
Delaware for damages arising out of Palatin's termination of a merger agreement
between MBI and Palatin. The Company seeks payment of a "termination fee" of
$1.0 million and reimbursement of its expenses in connection with the planned
merger.

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

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following information concerning the names, ages and titles of the
Company's executive officers as of the date of this report is included in
accordance with General Instruction G(3) of Form 10-K. Ms. Harvey and Ms. Hougen
were terminated from service effective April 2000 :

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NAME AGE POSITION
<S> <C> <C>
Bobba Venkatadri................ 56 President and Chief Executive Officer
Howard Dittrich, M.D............ 47 Executive Vice President
Joni Harvey .................... 45 Vice President, Operations
Elizabeth L. Hougen............. 38 Executive Director, Finance and Chief
Financial Officer
</TABLE>

BOBBA VENKATADRI has served as the Company's President since October
1995 and as a director of the Company since November 1995. He served as Chief
Operating Officer from October 1995 until May 1997, at which time he was elected
by the Company's Board to the office of Chief Executive Officer. He held the
position of Executive Vice President of the Pharmaceutical Division of Centocor,
Inc., from September 1992 until he joined the Company, and as Vice President -
Operations of Centocor's Pharmaceutical Division from March 1992 to September
1992. He was employed by Warner-Lambert Company from 1967 until February 1992 in
a variety of Senior Management positions including, Senior Director,
Pharmaceutical Operations, President of Warner-Lambert, Indonesia, and Vice
President Parke-Davis Operations, USA. Mr. Venkatadri serves on the Board of the
San Diego YMCA and American Heart Association.

HOWARD DITTRICH, M.D., has served as the Company's Executive Vice
President since December 1998. He served as the Company's Vice President -
Research/Medical & Regulatory Affairs from November 1996 to December 1998 and as
Executive Director of Medical Affairs from May 1996 to November 1996. He served
as a consultant to the Company from 1989 to 1996. Dr. Dittrich was a full-time
faculty member of the University of California, San Diego, Department of
Medicine from 1984 to May 1996. Currently, Dr. Dittrich practices part-time with
the University of California, San Diego where he holds an appointment as
Clinical Professor of Medicine.

JONI HARVEY has served as Vice President - Operations since April 1998.
Effective April 26, 2000, Ms. Harvey was terminated from the Company as a result
of the Company's effort to restructure and reduce costs. She served as the
Company's Executive Director of Operations from November 1996 to April 1998.
From September 1995 to November 1996, she served as Director of Manufacturing.
Ms. Harvey served with Genzyme from February 1995 until rejoining the Company in
September 1995. From March 1994 to January 1995, Ms. Harvey was Associate
Director of Manufacturing for the Company. She originally joined the Company in
October 1988 as Manager of Manufacturing. From 1980 until October 1988, Ms.
Harvey held various supervisory positions in Quality and Manufacturing with
Baxter Healthcare.

ELIZABETH L. HOUGEN has served as the Company's Executive Director,
Finance and Chief Financial Officer since January 1999. Effective April 26,
2000, Ms. Hougen was terminated from the Company as a result of the Company's
effort to restructure and reduce costs. She served as the Company's Controller
from October 1997 until January 1999. She has been employed at MBI since 1992.
Ms. Hougen has more than 15 years of experience in finance and accounting in the
biomedical, high technology and professional services industries. Ms. Hougen is
a certified management accountant and holds an MBA from the University of San
Diego.

PART II

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

In August 1999, the Company received notice that the New York Stock
Exchange (NYSE) had revised its continuing listing standards and that the
Company was no longer in compliance with the revised standards. As a result, the
Company was delisted by the NYSE effective after the close of trading on January
4, 2000.

Effective January 5, 2000, trading of the Company's common stock was moved
to the NASD Over-The-Counter Bulletin Board. A new trading symbol of "MBIO" was
assigned to the Company by NASD. The Company's common stock traded on the NYSE
under the symbol "MB" through the close of business January 4, 2000."

As of June 15, 2000, there were approximately 1,547 holders of record of
the Company's Common Stock, representing approximately 6,974 beneficial owners.
The Company has not paid dividends on its Common Stock. The following table sets
forth the quarterly high and low last sale price for a share of the Company's
Common Stock for the three fiscal years ended March 31, 2000, 1999 and 1998,
respectively.

<PAGE>

FISCAL 2000 HIGH LOW
--------------- --------------
<S> <C> <C>
First Quarter (4/1 to 6/30) 2-13/16 2-5/16
Second Quarter (7/1 to 9/30) 2-7/16 1-3/4
Third Quarter (10/1 to 12/31) 1-3/4 14/16
Fourth Quarter (1/1 to 3/31) 4 1

--------------- --------------
FISCAL 1999 HIGH LOW
--------------- --------------

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

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

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

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

Selected Financial Data
Fiscal Years Ended March 31, 1996 1997 1998 1999 2000
---------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)

Consolidated Statement of Operations Data:
Revenues:
Revenues under collaborative
agreements $ 2,412 $ 4,500 $ 5,095 $ 5,498 $ 3,000
Product and royalty revenues 647 626 1,151 4,083 1,465
Milestone payments - - - - 4,000
Other 25 - - - 60
-------------------------------------------------------------
Total Revenues 3,084 5,126 6,246 9,581 8,525
Operating expenses:
Research and development costs 13,588 9,902 11,078 9,083 4,261
Costs of products sold 1,553 4,748 5,791 7,840 (107)
Selling, general and
administrative expenses 5,862 8,052 11,912 14,191 10,166
Other nonrecurring charges 3,110 - - - -
Cost Reduction Measures:
Asset disposals - - - 3,143 -
Severance costs - - - 2,328 1,653
Technology transfer - - - 265 -
Exit costs - - - 384 -
-------------------------------------------------------------
Total operating expenses 24,113 22,702 28,781 37,234 15,973
Other income (expenses):
Gain on disposal of asset held for sale - 2,725 - 6,993 -
Interest expense (786) (810) (721) (574) (447)
Interest income 1,102 2,377 1,996 1,394 727
Foreign income tax provision - - - (1,400) (400)
-------------------------------------------------------------
Total other income 316 4,292 1,275 6,413 (120)
-------------------------------------------------------------
Net loss $ (20,713) $(13,284) $(21,260) $(21,240) $ (7,568)
=============================================================
Loss per common share - basic and diluted $ (1.62) $ (0.78) $ (1.19) $ (1.14) $ (0.40)
=============================================================
Weighted average common
shares outstanding 12,758 16,926 17,793 18,564 18,749
=============================================================
</TABLE>

<PAGE>

As of March 31, 1996 1997 1998 1999 2,000
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and
marketable securities $ 20,570 $ 41,414 $ 21,338 $ 18,038 $ 12,043
Working capital 18,601 43,843 21,066 10,693 3,824
Total assets 43,829 70,159 51,318 31,849 22,644
Long-term debt 8,610 7,349 6,082 4,804 3,529
Total stockholders' equity 28,962 51,746 31,164 16,207 8,669
</TABLE>

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

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

(REFERENCES TO YEARS ARE TO THE COMPANY'S FISCAL YEARS ENDED MARCH 31.)

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

OVERVIEW

Molecular Biosystems, Inc. ("MBI" or the "Company") is the developer of
OPTISON, the only approved intravenous ultrasound contrast agent marketed in the
United States and Europe. Doctors and medical technicians use contrast agents to
improve the real-time images or "moving pictures" of organs and body structures,
especially the heart, obtained through ultrasound examinations. OPTISON
increases the diagnostic usefulness of ultrasound examinations through enhanced
visualization of structures and vasculature and reduces the need for diagnostic
procedures that may be more expensive, time-consuming, or invasive.

On May 8, 2000, the Company agreed to transfer full control of the OPTISON
business to Mallinckrodt, Inc., a global manufacturer of specialty medical
products, in exchange for a 5% royalty on sales. This "OPTISON Product Rights
Agreement" ("OPRA") supersedes all previous agreements with Mallinckrodt.
Mallinckrodt's territory is world wide, excluding Japan, South Korea and Taiwan.
Chugai Pharmaceuticals, a pharmaceutical company in Japan, is MBI's OPTISON
partner for Japan, South Korea and Taiwan. MBI receives a 28% royalty on product
sales from Chugai plus certain milestone payments and has no manufacturing or
clinical development responsibilities.

The Company plans to use its existing cash and future cash flows from
royalties and milestone payments to pursue alliances and business development
opportunities in the life sciences industry. Operating losses may occur for at
least the next few years. The magnitude of the losses and the time required by
the Company to achieve profitability are highly dependent on the market
acceptance of OPTISON and are therefore uncertain. There can be no assurance
that the Company will be able to achieve profitability on a sustained basis or
at all. Results of operations may vary significantly from quarter to quarter
depending on, among other things, the progress, if any, of the Company's efforts
to form an alliance or to make investments in the pharmaceutical industry, the
timing of milestone payments, and the timing of certain expenses (see "Liquidity
and Capital Resources" below.)

OPTISON is used to detect heart disease by assessing blood flow within the
heart chambers and by identifying the location of the chamber borders and the
movement of the chamber walls ("cardiac function"). To increase the potential
applications of OPTISON, MBI recently completed Phase 2 clinical trials to
evaluate the product's efficacy in determining whether the heart muscle is
receiving an adequate blood supply ("myocardial perfusion"). The results from
the Phase 2 trials formed the basis for a proposal to the FDA to conduct pivotal
phase 3 clinical trials for myocardial perfusion. The FDA is currently reviewing

<PAGE>

this proposal. The multiple Phase 2 trials included use of OPTISON in the
emergency room for patients presenting with chest pain, and in various forms
of stress echocardiography. Results using OPTISON in each of these
applications suggest a close agreement with nuclear imaging for the detection
of ischemia "reduced blood supply" by wall motion and perfusion. Furthermore,
the results indicate that use of OPTISON could help to "rescue" a large
proportion of non-contrast utilizing exams that clinicians would not
otherwise be able to interpret, thereby reducing the need for additional,
more expensive and time-consuming testing. The Company believes the
information regarding perfusion will enable cardiologists to diagnose heart
attacks and coronary artery disease more accurately and safely than is
currently feasible. The Company has also conducted Phase 2 clinical studies
using OPTISON to detect abnormalities in other organs, such as the liver and
kidney.

In August 1999, the Company received notice that the New York Stock
Exchange (NYSE) had revised its continued listing standards and that the
Company was no longer in compliance with the revised standards. These listing
standards are threefold and include: total market capitalization and
stockholders' equity of not less than $50 million each; total market
capitalization of not less than $15 million over a 30 trading-day period; and
a minimum share price of $1 over a 30 trading-day period. As a result, the
Company was delisted by the NYSE effective after the close of trading on
January 4, 2000.

Effective January 5, 2000, trading of the Company common stock was moved
to the NASD Over-The-Counter Bulletin Board. A new trading symbol of "MBIO"
was assigned to the Company by NASD. The Company common stock traded on the
New York Stock Exchange under the symbol "MB" through the close of business
January 4, 2000.

On November 12, 1999, the Company and Palatin Technologies, Inc., of
Princeton, New Jersey jointly announced that they had signed a definitive
agreement to merge. On March 14, 2000, Palatin announced that it would not
proceed with the planned merger. Under the agreement, stockholders of the
Company would have received 0.525 shares of common stock of Palatin in
exchange for their MBI common stock. The exchange ratio under the merger
agreement would have resulted in shareholders of each company owning
approximately 50% of the merged entity. On April 27, 2000, MBI filed suit
against Palatin and Evergreen Merger Corporation in United States District
Court in Delaware for damages arising out of Palatin's termination of a
merger agreement between MBI and Palatin. The Company seeks payment of a
"termination fee" of $1.0 million and reimbursement of its expenses in
connection with the planned merger.

On March 30, 2000, the Company announced that it would restructure the
company in order to reduce expenses and conserve its cash. As part of the
restructuring, MBI reduced its staff by 33 employees and eliminated the MB
840 development program. Twenty employees involved with the manufacturing of
OPTISON were transferred to Mallinckrodt. As of June 2000, the Company has
three employees, in a rent-free building through May 2001. The Company is not
currently exploiting any of its other technologies.

REVENUE RECOGNITION

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

REVENUES UNDER COLLABORATIVE AGREEMENTS. Revenues under collaborative
agreements have been the primary source of revenues for the Company in the
past. They consist of payments received from Mallinckrodt under the Company's
Amended and Restated Distribution Agreement ("ARDA") to support clinical
trials, regulatory submissions and product development. Pursuant to ARDA,
half of each payment is designated for clinical development expenses and is
recorded as deferred revenue until such expenses are incurred, and the
remaining half of each payment is designated to fund ongoing research and
development activities and is recognized as research is performed.

MILESTONE PAYMENT REVENUES. Milestone payment revenues are earned upon
the achievement of certain product development and territorial milestones.
All milestone payments to date consist of payments received from Chugai based
on Chugai commencing certain specified clinical trials in Japan.

PRODUCT AND ROYALTY REVENUES. For fiscal year 2000, under the terms of the
ARDA II agreement with Mallinckrodt effective in March 1999, the Company
receives a royalty rather than a transfer price on product sales of OPTISON.

For fiscal years 1998 and 1999, product revenues were based upon the
Company's non-refundable sales to Mallinckrodt and were recognized upon shipment
of the product at which time ownership and title to the goods passes to
Mallinckrodt. The transfer prices for the Company's sales of ALBUNEX and OPTISON
to Mallinckrodt were determined under the respective agreements and were
approximately equal to 40% of Mallinckrodt's average net sales price to its end
users of the product. Pursuant to ARDA, the average net sales price to end users
is calculated by dividing the net sales for the preceding quarter by

<PAGE>

the total number of units shipped to end users whether paid for or shipped as
samples. Consistent with industry practice, the Company considers samples a
marketing expense and as such the cost of samples is recorded as selling,
general and administrative expense.

Royalty revenues during fiscal years 1998, 1999 and 2000 were also
earned pursuant to a licensing agreement between the Company and Abbott
Laboratories.

IMPACT OF THE YEAR 2000 ISSUE

The Year 2000 problem is the result of computer programs being written
using two digits rather than four digits to define the applicable year. This
problem could create unforeseen risks to the Company from its internal computing
systems as well as from computer systems of third parties with which it deals.
The Company has conducted a comprehensive review of its internal computing
systems and of its vendors, service providers (including financial institutions
and insurance companies), and collaborative partners. As of the date of this
document, the Company has not experienced any significant costs or disruptions
associated with the Year 2000 problem.

RESULTS OF OPERATIONS

FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999.

REVENUES UNDER COLLABORATIVE AGREEMENTS. Revenues under collaborative
agreements were $3.0 million for the fiscal year ended March 31, 2000 compared
to $5.5 million for the same period in the prior year. Revenues in both years
consisted solely of quarterly payments to support clinical trials, regulatory
submissions and product development received from Mallinckrodt under the Amended
and Restated Distribution Agreement ("ARDA"). As of March 31, 2000, these
payments were completed. Effective March 1, 1999, the ARDA agreement with
Mallinckrodt was replaced by ARDA II.

MILESTONE PAYMENTS. Revenues from milestone payments were $4.0 million
for fiscal year 2000. There were no milestone payments during the same period in
the prior year. Revenues in the current year represent two $2.0 million
milestone payments from Chugai Pharmaceutical Co., Ltd. (Chugai) received during
the third quarter and fourth quarters for the initiation of pivotal trials in
Japan for OPTISON.

PRODUCT AND ROYALTY REVENUES. Revenues from product sales and royalties
were $1.5 million for fiscal year 2000, compared to $4.1 million for the prior
year. In the fiscal year ended March 31, 2000, royalty revenues amounted to $1.4
million from Mallinckrodt, and $64,000 from Abbott Laboratories. Royalties from
Mallinckrodt were calculated by applying a royalty rate to end-user sales under
the terms of ARDA II. ARDA II changed the nature of revenues recognized by the
Company from product revenues recognized upon shipment to royalty revenues
recognized as a percentage of end-user sales. As a result, there were no product
sales revenues for the fiscal year ended March 31, 2000.

In the fiscal year ended March 31, 1999, product and royalty revenues
were $4.1 million. Royalty revenues amounted to $122,000 from Abbott
Laboratories. Product revenues came from the Company's sales of OPTISON to
Mallinckrodt and were recognized upon shipment of the product. The transfer
price for the Company's sales of OPTISON to Mallinckrodt was approximately equal
to 40% of Mallinckrodt's average net sales price to its end users of the product
for the immediately preceding quarter. Pursuant to ARDA, the average net sales
price to end users was calculated by dividing the net sales for the preceding
quarter by the total number of units shipped to end users whether paid for or
shipped as samples. Consistent with industry practice, the Company considered
samples a marketing expense and as such the cost of samples was recorded as
selling, general and administrative expense.

Included in product and royalty revenues were $60,000 for the year
ended March 31, 2000, representing non-refundable amounts received from ISIS
Pharmaceuticals.

COST OF PRODUCTS SOLD. Cost of products sold totaled ($107,000) for
fiscal year 2000 compared to $7.8 million during the prior year. Under the terms
of ARDA II, which were retroactive to March 1, 1999, Mallinckrodt agreed to
reimburse MBI for all fully allocated manufacturing expenses. The manufacturing
expenses from March 1999 were included in the prior fiscal year. As a result,
the recoupment of these March 1999 expenses totalling $541,000 were reflected as
a negative expense in the current fiscal year. Cost of products sold in fiscal
year 2000 reflects the $541,000 negative expense, partially offset by $434,000
of

<PAGE>

royalty expense. ARDA II changed the nature of revenues recognized by the
Company from product revenues recognized upon shipment to royalty revenues
recognized as a percentage of end-user sales. As a result, there was no
product cost of sales for the fiscal year ended March 31, 2000.

In the fiscal year ended March 31, 1999, cost of products sold totaled
$7.8 million, resulting in a negative gross profit margin. This negative gross
profit margin was primarily because the low levels of production were
insufficient to cover the Company's fixed manufacturing overhead expenses. In
addition, included in cost of sales for fiscal 1999 was $1.1 million in expensed
inventory as a result of the planned out-sourcing of manufacturing.

RESEARCH AND DEVELOPMENT COSTS. The Company's research and development
costs totaled $4.3 million for fiscal year 2000 as compared to $9.1 million for
fiscal 1999. Approximately $2.3 million of the $4.8 million decrease in the
current year was due to Mallinckrodt's responsibility under ARDA II for funding
clinical trials, and the remaining decrease of $2.5 million was due to cost
reduction measures.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the fiscal year 2000,
the Company's selling, general and administrative costs totaled $10.2 million,
as compared to $14.2 million for the same period in the prior year. The higher
expenses for fiscal year 1999 were due primarily to continuing legal expenses
and marketing costs associated with the launch of OPTISON. Expenses for fiscal
year 2000 decreased due to cost reduction measures.

COST REDUCTION MEASURES. On November 10, 1998, as a result of the
slower than planned ramp up of OPTISON sales, the Company announced the
initiation of a multi-phase program to reduce expenses and preserve capital. The
initial phase of cost reduction occurred in November 1998 and affected
approximately 40 employees of the Company's 140-person workforce. The second
reduction in force occurred in April 1999 and affected an additional 26
employees. In addition, attrition since November 1998 further reduced the
workforce to approximately 56 employees. On March 30, 2000, the Company
announced plans to restructure and further reduce its workforce by 33 employees.
Effective May 8, 2000, an additional 20 employees involved with the manufacture
of OPTISON were transferred to Mallinckrodt as part of its takeover of OPTISON
manufacturing pursuant to OPRA (see "Overview," above). As of June 2000, the
Company has three employees. The impact of the cost reduction measures on the
Company's financial statements for the year ended March 31, 2000 included $1.7
million in accrued severance costs and a write-off of $700,000 in fixed assets
through accelerated depreciation. For the year ended March 31, 1999, the impact
included $3.1 million in asset disposals, $2.3 million in severance costs,
$300,000 in costs related to technology transfer and $400,000 in exit costs. In
addition, $1.1 million of inventories were expensed through cost of sales as a
result of the planned out-sourcing of manufacturing.

A summary of the fiscal year 2000 activity related to the accrual for cost
reduction measures is provided below.

<TABLE>

<S> <C>
Accrued at March 31, 1999 .... $ 2,000,000

Severance paid ............... (1,300,000)

Additional severance accrued . 1,700,000

Exit costs ................... (400,000)

Technology transfer .......... (300,000)

Accrued at March 31, 2000 .... $ 1,700,000
</TABLE>

The $1.7 million of the cost reduction accrual is included in compensation
accruals in the accompanying balance sheet as of March 31, 2000.

GAIN ON DISPOSAL OF ASSET HELD FOR SALE. Gain on disposal of asset held
for sale totaled $7.0 million for the year ended March 31, 1999. The Company
resold territory rights to Chugai for $14.0 million, as well as a $2.4 million
premium received for the sale of MBI common stock to Chugai. This gain is the
net of the cost of these rights previously reacquired from Shionogi & Co. for
$8.5 million and related transaction fees of $878,000.

INTEREST EXPENSE AND INTEREST INCOME. Interest expense for fiscal years
2000 and 1999 amounted to $447,000 and $574,000, respectively. Interest expense
consists of mortgage interest on the Company's manufacturing building and
interest on a note payable that is secured by the tangible assets of the
Company. The interest rate on the mortgage was 8% in March 2000. The note
payable bears interest at the prime rate and is payable in monthly installments
of principal plus interest over

<PAGE>

five years. The note payable was renegotiated in September 1998 lowering the
interest rate from prime plus one to the prime rate and releasing the Company
from a compensating balance requirement. The interest rate on the note was
9.0% in March 2000.

Interest income for fiscal year 2000 was $727,000 compared to $1.4
million in fiscal year 1999. The decrease in interest income in the current year
is due to lower average cash and marketable securities balances. 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.

FOREIGN INCOME TAX PROVISION. The Company paid $400,000 in foreign
taxes during the fiscal year ended March 31, 2000 related to two milestone
payments received from Chugai. In fiscal year 1999, the Company paid $1.4
million in foreign taxes related to the Chugai alliance. No tax benefit has been
recognized for fiscal years 2000 or 1999 as the Company had fully utilized its
operating loss carryback ability in 1993. Realization of future tax benefits
from utilization of net operating loss carryforwards is uncertain.

FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998.

REVENUES UNDER COLLABORATIVE AGREEMENTS. Revenues under collaborative
agreements were $5.5 million for the fiscal year ended March 31, 1999, compared
to $5.1 million for the fiscal year ended March 31, 1998. This increase was
primarily due to an increase in the quarterly payments from Mallinckrodt to $1.5
million for the last two quarters in fiscal year 1999 over $1.25 million in the
prior year. These revenues in both years consisted of quarterly payments to
support clinical trials, regulatory submissions and product development received
from Mallinckrodt under ARDA.

PRODUCT AND ROYALTY REVENUES. Product and royalty revenues were $4.1
million for fiscal year 1999, compared to $1.2 million for the prior year.
Product revenues in fiscal 1999 were based on the Company's sales to
Mallinckrodt and were recognized upon shipment of the product. The increase in
product revenues for fiscal year 1999 as compared to 1998 resulted primarily
from sales of OPTISON to Mallinckrodt which were launched in the fourth quarter
of fiscal year 1998. Royalty revenues were pursuant to a license agreement
between the Company and Abbott Laboratories and totaled $123,000 in fiscal year
1999 and $132,000 in fiscal year 1998.

COST OF PRODUCTS SOLD. Cost of products sold totaled $7.8 million for
fiscal year 1999, resulting in a negative gross profit margin. This negative
gross profit margin was due to the fact that the low levels of production were
insufficient to cover the Company's fixed manufacturing overhead expenses. For
fiscal year 1998, costs of products sold totaled $5.8 million. The increase over
the prior year was primarily due to two factors. First, the Company sold OPTISON
throughout the entire fiscal year 1999 as compared to only during the fourth
quarter of fiscal year 1998. Second, $1.1 million in inventories were expensed
through cost of sales as a result of the planned out-sourcing of manufacturing.

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

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

COST REDUCTION MEASURES. On November 10, 1998, as a result of the
slower than planned ramp up of OPTISON sales, the Company announced the
initiation of a multi-phase program to reduce expenses and preserve capital. The
initial phase was a reduction principally in administrative, development and
support staff. Phase II was the out-sourcing of the product packaging
operations. The initial phase of cost reduction affected approximately 40
employees of the Company's 140-person workforce. The next reduction in force, in
April 1999, affected an additional 26 employees. In addition, attrition since
November 1998 further reduced the workforce to approximately 56 employees. On
March 30, 2000, the Company announced plans to restructure and further reduce
its workforce by 33 employees. Effective May 8, 2000, an additional 20 employees
involved with the manufacture of OPTISON were transferred to Mallinckrodt as
part of its takeover of OPTISON manufacturing pursuant to OPRA (see
"Manufacturing and License Agreements - Mallinckrodt" above). As of June 2000,
the Company has three employees. All employees expected to be terminated as a
result of this program were notified of such termination and their estimated
severance benefits were accrued.

15
<PAGE>
The impact of the cost reduction measures on the Company's financial results
included a one-time charge of $7.2 million for the year ended March 31, 1999.
This charge included $6.1 million in nonrecurring charges and $1.1 million in
cost of sales. The $6.1 million nonrecurring charge included $3.1 million for
the full write off of fixed assets, principally building improvements of
abandoned facilities, capitalized license fees and capitalized patent costs that
will no longer be used by the Company and the discontinuation of certain
projects, $2.3 million of severance costs, and approximately $300,000 of
technology transfer costs, primarily direct labor and travel costs, and
approximately $400,000 of lease exit costs. In addition, the Company wrote off
$1.2 million in fixed assets through accelerated depreciation during fiscal year
1999. As of March 31, 1999, the Company had approximately $2.0 million in
accrued liabilities related to the future costs of restructuring.

A summary of the $8.4 million cost reduction measures charge reflected in
the accompanying statements of operations for the year ended March 31, 1999 is
as follows:

Amount
------
<S> <C>
(in millions)
Non cash charges:
Accelerated depreciation, recorded prospectively in operations,
resulting from a change in estimates of the useful lives of
manufacturing assets................................................ $1.2
Write off of abandoned fixed assets ($2.8) and other
capitalized assets ($0.3)........................................... 3.1
Inventory disposed of.................................................... 1.1
----------

$5.4
----------
Cash charges:
Severance................................................................. 2.3
Exit costs................................................................ .4
Technology transfer....................................................... .3
----------
$3.0
----------
Less amounts paid through March 31, 1999:
Severance................................................................. 1.0
All other................................................................. -
----------
Accrued at March 31, 1999......................................................... $2.0
========
</TABLE>

Of the $2.0 million cost reduction accrual at March 31, 1999, $1.3 million is
included in compensation accruals and the remaining $0.7 million is included in
accounts payable and accrued liabilities in the accompanying balance sheet as of
March 31, 1999.

GAIN ON DISPOSAL OF ASSETS HELD FOR SALE. Gain on disposal of assets
held for sale totaled $7.0 million for fiscal 1999. The Company resold territory
rights to Chugai for $14.0 million, as well as a $2.4 million premium received
for the sale of the Company's common stock to Chugai. This gain is net of these
rights previously reacquired from Shionogi & Co. for $8.5 million and related
transaction fees of $878,000.

INTEREST EXPENSE AND INTEREST INCOME. Interest expense for fiscal years
1999 and 1998 amounted to $574,000 and $721,000, respectively. Interest expense
consisted of mortgage interest on the Company's manufacturing building and
interest related to a note payable, secured by the tangible assets of the
Company, which bears interest at the prime rate and is payable in monthly
installments of principal plus interest over five years. The interest rate on
the note was 7.75% in March 1999. In September 1998, the Company renegotiated
its note payable to reduce the interest rate from prime plus one to the prime
rate and to release compensating balance requirements.

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

16
<PAGE>

FOREIGN INCOME TAX PROVISION. The Company paid $1.4 million in foreign
taxes during fiscal 1999 related to the Chugai alliance. No tax benefit has been
recognized for fiscal years 1999 or 1998 as the Company had fully utilized its
operating loss carryback ability in 1993. Realization of future tax benefits
from utilization of net operating loss carryforwards is uncertain.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2000, the Company had net working capital of $3.8 million
compared to $10.7 million at March 31, 1999. Cash, cash equivalents and
marketable securities were $12.0 million at March 31, 2000 compared to $18.0
million at March 31, 1999. Pursuant to OPRA, the Company has transferred all
employees, facilities and overhead related to the manufacture of OPTISON to
Mallinckrodt. The Company plans to use its existing cash and future cash flows
from royalties and milestone payments to pursue alliances and business
development opportunities in the life sciences industry. The Company anticipates
that its cash and marketable securities on hand and future cash flows will
enable the Company to fund its operations and obligations, including the amounts
owed to Mallinckrodt pursuant to OPRA, for at least the next fifteen months. The
time required by the Company to achieve profitability is highly dependent on the
market acceptance of OPTISON and on other future alliances and investment
opportunities and is therefore uncertain.

In an agreement dated March 31, 1998, the Company entered into a
cooperative development and marketing agreement with Chugai. The parties entered
into this strategic alliance which covers Japan, Taiwan and South Korea, to
develop OPTISON (which Chugai may market under a different name) and ORALEX, as
well as related products. The Company granted Chugai an exclusive license to
develop, manufacture, and market these products in the subject territory, for
which the Company received $14.0 million during fiscal year 1999. With respect
to licensed products manufactured by Chugai, Chugai will pay the Company a
royalty on net sales. For licensed products manufactured by the Company, the
Company will receive royalties on net sales, the amount of which will depend
upon the sales volume, in addition to a transfer price based on average net
sales per unit from the previous quarter. Additionally, Chugai purchased 691,883
shares of the Company's common stock at a premium of 40% over the
then-prevailing market price. The equity investment was valued at $8.3 million.
The Company is also eligible to receive milestone payments of up to $20.0
million based on Chugai's achievement of certain Japanese product development
and regulatory goals. As of March 31, 2000, the Company had received $4.0
million in milestone payments from Chugai.

On September 7, 1995, the Company entered into an Amended and Restated
Distribution Agreement ("ARDA") and a related investment agreement with
Mallinckrodt which will provide the Company with between $33.0 million and $42.5
million. Under the terms of the agreement, Mallinckrodt was obligated to make
payments to the Company totaling $20.0 million over four years to support
clinical trials, related regulatory submissions and associated product
development of the licensed products, which include, but are not limited to,
ALBUNEX and OPTISON. These payments were made in 16 quarterly installments of
$1.0 million for the first four quarters, $1.25 million for the following eight
quarters and $1.5 million for the final four quarters. As of March 31, 2000, the
Company has received all payments under ARDA.

In April 1999, the Company and Mallinckrodt Inc. agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties' agreement was
incorporated into the Second Amended and Restated License and Distribution
Agreement ("ARDA II"). Under the terms of ARDA II, which were retroactive to
March 1, 1999, Mallinckrodt reimbursed MBI for all manufacturing expenses,
including incremental costs related to the technology transfer. In exchange for
the transfer of manufacturing, ARDA II extended Mallinckrodt's responsibility
for funding clinical trials to include all cardiology trials for OPTISON and
radiology trials in the United States. In exchange for the transfer of
manufacturing and increased financial support of clinical trials for OPTISON,
MBI received a royalty on end-user product sales of OPTISON.

On May 8, 2000, the Company agreed to transfer full control of the OPTISON
business to Mallinckrodt in exchange for a 5% royalty on sales. This "OPTISON
Product Rights Agreement" ("OPRA") supersedes all previous agreements with
Mallinckrodt. Mallinckrodt's territory is world wide, excluding Japan, South
Korea and Taiwan. Pursuant to OPRA, Mallinckrodt assumes all responsibility for
manufacturing OPTISON, all expenses associated with intellectual property
protection, including patent prosecution, and all future product development.

17
<PAGE>

transfer of property owned by MBI to Mallinckrodt as soon as practicable. MBI
is required to make the final one million-dollar payment to Mallinckrodt upon
receipt of a milestone payment form Chugai Pharmaceutical Co., Ltd.

Capital expenditures for facilities, laboratory equipment, furniture and
fixtures were $13,000, $791,000 and $1.4 million for fiscal years 2000, 1999 and
1998, respectively. Expenditures in each fiscal year consisted primarily of
building improvements and equipment for aseptic manufacturing facilities being
constructed for the manufacture of OPTISON and other products. In June 1997, the
Company entered into an equipment leasing agreement with Mellon US Leasing for a
lease line of $1.6 million with a term of 48 months. The outstanding balance on
this lease line at March 31, 2000 was $622,000.

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

The Company believes that inflation and changing prices have not had a
material effect on operations for fiscal years 2000, 1999 and 1998 and that the
impact of government regulation on the Company is not materially different from
the impact on other similar enterprises.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Public Accountants

Consolidated Balance Sheets as of March 31, 1999 and 2000

Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 1998, 1999 and 2000

Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended March 31, 1998, 1999 and 2000

Consolidated Statements of Cash Flows for the Fiscal Years Ended
March 31, 1998, 1999 and 2000

Notes to Consolidated Financial Statements

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Molecular Biosystems, Inc.:

We have audited the accompanying consolidated balance sheets of
Molecular Biosystems, Inc. (a Delaware corporation) and subsidiaries as of March
31, 1999 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 2000. 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 Molecular
Biosystems, Inc. and subsidiaries as of March 31, 1999 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States.

ARTHUR ANDERSEN LLP

San Diego, California
May 10, 2000

<PAGE>

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

MARCH 31, MARCH 31,
1999 2000

ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,056 $ 1,756
Marketable securities, available-for-sale (Note 4) 16,982 10,287
Accounts and notes receivable 2,320 1,820
Inventories 748 203
Prepaid expenses and other assets 425 204
-------------- ---------------
Total current assets 21,531 14,270
-------------- ---------------

Property and equipment, at cost:
Building and improvements 11,113 11,226
Equipment, furniture and fixtures 2,893 2,930
Construction in progress 930 -
-------------- ---------------
14,936 14,156
Less: Accumulated depreciation and amortization 6,672 7,572
-------------- ---------------
Total property and equipment 8,264 6,584
-------------- ---------------

Other assets, net 2,054 1,790
-------------- ---------------
$ 31,849 $ 22,644
============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,278 $ 1,285
Accounts payable and accrued liabilities (Notes 1, 2 and 7) 7,395 7,218
Compensation accruals (Note 2) 2,165 1,943
-------------- ---------------
Total current liabilities 10,838 10,446
-------------- ---------------
Long-term debt, net of current portion (Note 6): 4,804 3,529
-------------- ---------------
Commitments and contingencies (Note 7):

Stockholders' equity (Note 8):
Common Stock, $.01 par value, 40,000,000 shares
authorized, 18,580,745 and 18,858,789 shares
issued and outstanding, respectively 186 186
Additional paid-in capital 134,347 134,388
Accumulated deficit (117,969) (125,537)
Unrealized loss on available-for-sale securities 6 11
Less 40,470 and 42,298 shares of treasury stock,
at cost, respectively (363) (379)
-------------- ---------------
Total stockholders' equity 16,207 8,669
-------------- ---------------
$ 31,849 $ 22,644
============== ===============
</TABLE>

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

<PAGE>

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

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------------
1998 1999 2000
<S> <C> <C> <C>
Revenues (Note 9):
Revenues under collaborative agreements $ 5,095 $ 5,498 $ 3,000
Milestone payments - - 4,000
Product and royalty revenues 1,151 4,083 1,525
------------ ------------ ------------
6,246 9,581 8,525
------------ ------------ ------------

Operating expenses:
Research and development costs (Note 9) 11,078 9,083 4,261
Costs of products sold 5,791 7,840 (107)
Selling, general and administrative expenses 11,912 14,191 10,166
Cost reduction measures (Note 2):
Asset disposals - 3,143 -
Severance costs - 2,328 1,653
Technology transfer - 265 -
Exit costs - 384 -
------------ ------------ ------------
28,781 37,234 15,973
------------ ------------ ------------

Loss from operations (22,535) (27,653) (7,448)

Gain on disposal of assets held for sale (Note 10) - 6,993 -
Interest expense (721) (574) (447)
Interest income 1,996 1,394 727
------------ ------------ ------------
Loss before income taxes
(21,260) (19,840) (7,168)
Foreign income tax provision
- (1,400) (400)
------------ ------------ ------------
Net Loss $ (21,260) $ (21,240) $ (7,568)
============ ============ ============

Loss per common share - basic and diluted $ (1.19) $ (1.14) $ (0.40)
============ ============ ============

Weighted average common shares
outstanding 17,793 18,564 18,749
============ ============ ============
</TABLE>

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

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

COMMON STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL DEFICIT STOCK
------------- --------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 17,745,897 $ 177 $ 127,483 $ (75,469) $ (363)
Comprehensive Loss
Net loss - - - (21,260) -
Unrealized loss on available-
for-sale securities - - - - -
Exercise of stock options 100,340 1 662 - -
---------- ----- --------- ---------- ------
Balance at March 31, 1998 17,846,237 178 128,145 (96,729) (363)
Comprehensive Loss
Net loss - - - (21,240) -
Unrealized gain on available-
for-sale securities - - - - -
Sale of common stock to Chugai 691,883 7 5,922 - -
Exercise of stock options 42,625 1 280 - -
---------- ----- --------- ---------- ------
Balance at March 31, 1999 18,580,745 186 134,347 (117,969) (363)
Comprehensive Loss
Net loss - - - (7,568) -
Unrealized gain on available-
for-sale securities - - - - -
Purchase of treasury stock (1,828) - - - (16)
Issuance of stock grants 279,872 - - - -
Options issued in lieu of salary - - 41 - -
---------- ----- --------- ---------- ------
Balance at March 31, 2000 18,858,789 $ 186 $ 134,388 $ (125,537) $ (379)
========== ===== ========= ========== ======

<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME TOTAL LOSS
-------------- ------------ --------------
<S> <C> <C> <C>
Balance at March 31, 1997 $ (82) $ 51,746
Comprehensive Loss
Net loss - (21,260) $ (21,260)
Unrealized loss on available-
for-sale securities 15 15 15
Exercise of stock options - 663
------- -------- ---------
Balance at March 31, 1998 (67) 31,164 (21,245)
=========
Comprehensive Loss
Net loss - (21,240) (21,240)
Unrealized gain on available-
for-sale securities 73 73 73
Sale of common stock to Chugai - 5,929
Exercise of stock options - 281
------- -------- ---------
Balance at March 31, 1999 6 16,207 (21,167)
=========
Comprehensive Loss
Net loss - (7,568) (7,568)
Unrealized gain on available-
for-sale securities 5 5 5
Purchase of treasury stock - (16) -
Issuance of stock grants -
Options issued in lieu of salary - 41 -
------- -------- ---------
Balance at March 31, 2000 $ 11 $ 8,669 $ (7,563)
======= ======== =========
</TABLE>

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

<PAGE>

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

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-------------------------------------------
1998 1999 2000
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (21,260) $ (21,240) $ (7,568)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,085 1,915 1,126
Disposals/write-downs of tangible and intangible property 20 3,092 466
Gain on sale of former Shionogi territory license rights - (6,993) -
Premium received on Chugai Investment - (2,371) -
Changes in operating assets and liabilities:
Receivables (702) (1,171) 500
Inventories (1,560) 1,154 545
Prepaid expenses and other assets (45) 326 221
Accounts payable and accrued liabilities 2,814 397 1,407
Deferred contract revenue 1,575 (1,575) -
Compensation accruals 614 (62) (222)
------------ ------------ ---------------
Cash used in operating activities (17,459) (26,528) (3,525)
------------ ------------ ---------------
Cash flows from investing activities:
Purchases of property and equipment (1,387) (791) (13)
Proceeds from sale of property and equipment - 42 17
Write off of patents and license rights 17 - -
Additions to patents and license rights (32) (30) -
Purchase of license rights from Shionogi (2,000) (2,000) (1,500)
Proceeds from sale of territorial license rights - 15,493 -
Decrease in other assets 37 132 264
Purchases of marketable securities (25,566) (42,988) (22,447)
Maturities of marketable securities 46,135 49,353 29,147
------------ ------------ ---------------
Cash provided by investing activities 17,204 19,211 5,468
------------ ------------ ---------------
Cash flows from financing activities:
Proceeds from sale/leaseback transaction 1,331 - -
Net proceeds from sale of common stock to Chugai - 8,300 -
Net proceeds from issuance of Common Stock 663 281 -
Purchase of treasury stock - - (16)
Increase in additional paid in capital - - 41
Principal payments on long-term debt (1,262) (1,272) (1,268)
------------ ------------ ---------------
Cash provided by (used in) financing activities 732 7,309 (1,243)
------------ ------------ ---------------

Increase (decrease) in cash and cash equivalents 477 (8) 700
Cash and cash equivalents, beginning of year 587 1,064 1,056
------------ ------------ ---------------
Cash and cash equivalents, end of year $ 1,064 $ 1,056 $ 1,756
============ ============ ===============

Supplemental cash flow disclosures:
Interest income received $ 2,101 $ 1,744 $ 1,039
============ ============ ===============
Interest paid $ 715 $ 568 $ 448
============ ============ ===============
</TABLE>

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

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS-

Molecular Biosystems, Inc. ("MBI" or the "Company"), a Delaware
corporation incorporated on April 14, 1980, is the developer of
OPTISON-Registered Trademark-, the only U.S. Food and Drug
Administration-approved intravenous ultrasound contrast agent. On
May 8, 2000, the Company entered into a new agreement with
Mallinckrodt, Inc. ("Mallinckrodt"), a global manufacturer of
specialty medical products. The agreement known as "OPTISON Product
Rights Agreement" ("OPRA") supersedes all previous agreements with
Mallinckrodt and requires Mallinckrodt to assume full control of the
OPTISON business, including responsibility for all related
intellectual property disputes, clinical development, and
manufacturing. MBI will receive an ongoing royalty of 5% of
ultrasound contrast agents by Mallinckrodt and its partner, Nycomed.
Mallinckrodt's territory is world wide, excluding Japan, South Korea
and Taiwan. In addition, MBI will pay Mallinckrodt a total of seven
million dollars as part of the intellectual property settlement.
Chugai Pharmaceuticals, a pharmaceutical company in Japan, is MBI's
OPTISON partner for Japan, South Korea and Taiwan. MBI receives a
28% royalty on product sales from Chugai plus certain milestone
payments and has no manufacturing or clinical development
responsibilities.

The restructuring of MBI's relationship with Mallinckrodt relating to
OPTISON manufacturing and marketing coincided with the settlement of
patent litigation with certain competitors claiming patent rights in
various ultrasound contrast agent technologies.

The Company's annual continuing operations have been unprofitable since
1992. The Company plans to use its existing cash and future cash flows
from royalties and milestone payments to pursue alliances and business
development opportunities in the life sciences industry. The Company
believes that operating losses may occur for at least the next several
years. The magnitude of the losses and the time required by the Company
to achieve profitability are highly dependent on the market acceptance
of OPTISON and other future alliances and investment opportunities and
are therefore uncertain. The Company anticipates that its cash and
marketable securities on hand and future cash flows will enable the
Company to fund its operations and obligations, including the amounts
owed to Mallinckrodt pursuant to OPRA, for at least the next fifteen
months.

PRINCIPLES OF CONSOLIDATION

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

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

USE OF ESTIMATES-

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

RESEARCH AND DEVELOPMENT COSTS-

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

REVENUES UNDER COLLABORATIVE AGREEMENTS-

<PAGE>

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

Additionally, under the terms of the Amended and Restated Distribution
Agreement ("ARDA") entered into in September 1995, Mallinckrodt paid
the Company $20.0 million over four years to further the development of
OPTISON (the Company's second-generation product) and related products.
These payments were made in 16 quarterly installments starting at $1.0
million for the first four quarters, $1.25 million for the following
eight quarters and $1.5 million for the final four quarters. Pursuant
to the agreement, half of each payment was designated for clinical
development expenses and was recorded as deferred revenue until such
expenses were incurred, and the remaining half of each payment was
designated to fund ongoing research and development activities and was
recognized as research was performed. As of March 31, 2000, these
payments were completed.

REVENUE RECOGNITION FOR PRODUCT SOLD-

For fiscal years 1998 and 1999, the Company recognized revenue when
goods were shipped to its customer, Mallinckrodt. Under ARDA, the
transfer price for the Company's sales of OPTISON to Mallinckrodt was
equal to 40% of Mallinckrodt's average net sales price to its end users
of the product for the immediately preceding quarter. Effective March
1, 1999, the agreement with Mallinckrodt was replaced by ARDA II. Under
the terms of ARDA II, the Company received a 20% royalty from
Mallinckrodt on product sales of OPTISON. Pursuant to ARDA II, the
average net sales price to end users was calculated by dividing the net
sales for the preceding quarter by the total number of units shipped to
end users whether paid for or shipped as samples. Consistent with
industry practice, the Company considered samples a marketing expense
and as such the cost of samples is recorded as selling, general and
administrative expense.

Effective May 8, 2000, Mallinckrodt assumed full control of and
responsibility for the manufacture of OPTISON pursuant to OPRA. See
"Description of Business" above.

The Company has not provided for potential uncollectible accounts,
based on its collection history and credit worthiness of its one
customer, Mallinckrodt.

INCOME TAXES-

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

CASH EQUIVALENTS-

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

MARKETABLE SECURITIES

In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company's management has classified

<PAGE>

its investment securities as available-for-sale and records holding
gains or losses as a separate component of stockholders' equity. The
cost basis for determining realized gains and losses is based on
specific identification.

CONCENTRATION OF CREDIT RISK-

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

INVENTORIES-

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

<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1999 2000
<S> <C> <C>
Raw materials and supplies $ 551 $ 203
Work in process 92 -
Finished goods 105 -
------- ------
$ 748 $ 203
======= ======
</TABLE>

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

PROPERTY AND EQUIPMENT-

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

PATENTS AND LICENSE RIGHTS AND OTHER ASSETS-

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

In June 1989, the Company prepaid $2.0 million in royalties on the
first $66.6 million of sales of ALBUNEX and OPTISON in the United
States.

Included in other assets at March 31, 2000 is approximately $1.5
million which is the portion of this prepayment that has not yet been
expensed. OPRA obligates Mallinckrodt to assume financial
responsibility for the licensing agreement related to this prepayment.
Additionally, other assets at March 31, 1999 and 2000 include a real
estate investment of $300,000 related to an employment agreement with
one of the Company's officers.

IMPAIRMENT OF LONG-LIVED ASSETS-

The Company complies with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121). The Company reviews
its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not
be fully recoverable. To determine recoverability of its long-lived
assets, the Company evaluates the probability that future undiscounted
net cash flows, without interest charges, will be less than the
carrying amount of the assets. Impairment is measured at fair value.
Fair value is determined by an evaluation of

<PAGE>

available price information at which assets could be bought or sold
including quoted market prices, if available, or the present value of
the estimated future discounted cash flows based on reasonable and
supportable assumptions.

During fiscal year 1999, the Company wrote off approximately $2.8
million of fixed assets that will no longer be used by the company as a
result of restructuring and the discontinuation of certain projects.
These assets principally relate to tenant improvements at the Company's
research facility not transferable to other facilities. This facility
was abandoned in fiscal 1999.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES-

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

MARCH 31,
-----------------------
1999 2000

<S> <C> <C>
Accrued legal and professional fees $ 3,423 $ 6,432
License rights payable and related fees (Note 7) 1,500 450
Restructuring accruals 649 -
Accounts payable - trade 1,226 65
Other miscellaneous accruals 597 271
------- --------
$ 7,395 $ 7,218
======= ========
</TABLE>

STOCK BASED COMPENSATION-

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

LOSS PER SHARE-

Basic earnings per share was computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution that
could occur if net income were divided by the weighted-average number
of common shares and potential common shares from outstanding stock
options for the period. Potential common shares are calculated using
the treasury stock method and represent incremental shares issuable
upon exercise of the Company's outstanding options. For the years ended
March 31, 1998, 1999, and 2000, the diluted loss per share calculation
excludes effects of 3,139,000, 3,855,000 and 3,884,000 outstanding
stock options, respectively, as such inclusion would be anti-dilutive.

GEOGRAPHIC AND CUSTOMER INFORMATION-

The Company derived all of its product revenues from sales in the
United States to its sole customer Mallinckrodt. The Company operates
out of one factory in San Diego, California, has one product that is an
ultrasound imaging agent and is managed on an aggregate basis. Based on
the above factors, the Company has determined that it operates in one
reportable segment.

SALES OF ASSETS-

During 2000 and 1999, the Company sold certain fully depreciated
equipment. These sales resulted in gains of $17,000 and $42,000,
respectively, which have been reflected in the accompanying statements
of operations.

<PAGE>

FAIR VALUE OF FINANCIAL INSTRUMENTS-

The carrying amounts of the Company's financial instruments, including
cash, accounts receivable, and accounts payable and accrued liabilities
approximate their fair values due to their short-term nature. The
Company's long term debts approximate fair value as they carry a
variable market rate of interest. Financial instruments which
potentially subject the Company to concentration of credit risk consist
primarily of trade accounts receivable. The Company believes it is not
exposed to any significant credit risk on its accounts receivable.

NEW ACCOUNTING STANDARDS-

In 1999, the Company adopted the provisions of AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal use" ("SOP 98-1"). This statement provides
guidance on accounting for the costs of computer software developed or
obtained for internal use and identifies characteristics of
internal-use software as well as assists in determining when computer
software is for internal use. The adoption had no material impact on
the Company's financial statements or related disclosure thereto.

In 1998, the Company adopted the provisions of AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP
98-5"). This Statement provides guidance on the financial reporting of
start-up and organization costs and requires that such costs of
start-up activities be expensed as incurred. The adoption had no
material impact on the Company's Financial Statements or Related
Disclosure thereto.

In December 1999, the Securities and Exchange Commission issued the
Staff Accounting Bulletin No. 101-Revenue Recognition in Financial
Statements (SAB 101). The bulletin draws on existing accounting rules
and provides specific guidance on how those accounting rules should be
applied and specifically addresses revenue recognition for
non-refundable technology access fees in the biotechnology industry.
The Company has performed an evaluation of SAB 101 and believes that
its revenue recognition policies are in conformity with the provisions
of SAB 101.

In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This Statement was amended by SFAS No. 137 which refers the
effective date to all fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS No. 133 is effective for the Company's first
quarter in the fiscal year beginning April 1, 2001 and is not expected
to have a material effect on the Company's financial position or
results of operations.

2. COST REDUCTION MEASURES

On November 10, 1998, as a result of the slower than planned ramp up of
OPTISON sales, the Company announced the initiation of a multi-phase
program to reduce expenses and preserve capital. The initial phase was
a reduction principally in administrative, development and support
staff. Phase II was the out-sourcing of the product packaging
operations. The initial phase of cost reduction affected approximately
40 employees of the Company's 140-person workforce. The next reduction
in force, in April 1999, affected an additional 26 employees. In
addition, attrition since November 1998 further reduced the workforce
to approximately 56 employees. On March 30, 2000, the Company announced
plans to restructure and reduce its workforce by another 33 employees.
Effective May 8, 2000, an additional 20 employees involved with the
manufacture of OPTISON were transferred to Mallinckrodt as part of its
takeover of the OPTISON manufacturing

<PAGE>

pursuant to OPRA. All employees expected to be terminated as a
result of this program were notified of such termination and their
estimated severance benefits were accrued.

For the fiscal year ended March 31, 2000, the impact of the cost
reduction measures on the Company's financial statements included $1.7
million in accrued severance costs and a write-off of $700,000 in fixed
assets through accelerated depreciation.

For the fiscal year ended March 31, 1999, the impact of the cost
reduction measures included $3.1 million in asset disposals, $2.3
million in severance costs, $265,000 in costs related to technology
transfer and $384,000 in exit costs. In addition, $1.1 million of
inventories were expensed through cost of sales, and $1.2 million in
fixed assets were written off through accelerated depreciation.

A summary of the $8.4 million cost reduction measures charge reflected
in the accompanying statements of operations for the year ended March
31, 1999 is as follows:

Amount
-------------
(in millions)
<S> <C>
Non cash charges:
Accelerated depreciation, recorded prospectively in operations,
resulting from a change in estimates of the useful lives of
manufacturing assets........................................... $1.2
Write off of abandoned fixed assets ($2.8) and other
capitalized assets ($0.3)....................................... 3.1
Inventory disposed of............................................... 1.1
----------
$5.4
----------
Cash charges:
Severance............................................................ 2.3
Exit costs........................................................... .4
Technology transfer.................................................. .3
----------
$3.0
----------
Less amounts paid through March 31, 1999:

Severance............................................................. 1.0
All other............................................................. -
--------
Accrued at March 31, 1999.................................................... $2.0
========
</TABLE>

At March 31, 1999, $1.3 million of the cost reduction accrual was
included in compensation accruals and the remaining $0.7 million was
included in accounts payable and accrued liabilities in the
accompanying balance sheet.

<PAGE>

A summary of the fiscal year 2000 activity related to the accrual for
cost reduction measures is provided below:

<TABLE>
<CAPTION>
Amount
------------
(in millions)
<S> <C>
Accrued at March 31, 1999 .............................. $2.0

Severance paid ....................................... (1.3)

Additional severance accrued ......................... 1.7

Exit costs ........................................... (0.4)

Technology transfer .................................. (0.3)
-----
Accrued at March 31, 2000 .............................. $1.7
-----
</TABLE>

At March 31, 2000, the $1.7 million cost reduction accrual was included
in compensation accruals in the accompanying balance sheet.

3. THE CHUGAI AGREEMENT

In April, 1998, the Company entered into a cooperative development and
marketing agreement with Chugai Pharmaceutical Co., Ltd. ("Chugai") of
Japan. The parties entered into this strategic alliance which covers
Japan, Taiwan and South Korea, to develop OPTISON (which may be
marketed under a different name), as well as related products. The
Company granted Chugai an exclusive license to develop, manufacture,
and market these products in the subject territory, for which the
Company received $14.0 million (See Note 10) in fiscal year 1999. With
respect to licensed products manufactured by Chugai, Chugai will pay
the Company a royalty on net sales. For licensed products manufactured
by the Company, the Company will receive royalties on net sales, the
amount of which will depend upon the sales volume, in addition to a
transfer price based on average net sales per unit from the previous
quarter. The Company has satisfied all existing contractual obligations
related to the license granted to Chugai.

Additionally, Chugai purchased 691,883 shares of the Company's common
stock at a premium of 40% over the then-prevailing market price. This
premium was equal to $2.4 million and is included in "Gain on disposal
of asset" (See Note 10) in the first quarter of fiscal year 1999. The
equity investment was valued at $8.3 million. The Company is also
eligible to receive milestone payments of up to $20.0 million based on
Chugai's achievement of certain Japanese product development and
regulatory goals. As of March 31, 2000, the Company has received $4
million in milestone payments from Chugai.

4. MARKETABLE SECURITIES

Investments are recorded at estimated fair market value, and consist
primarily of treasury securities, government agency securities and
corporate obligations. The Company has classified all of its
investments as available-for-sale securities. The following table
summarizes available-for-sale securities at March 31, 2000 (in
thousands):

31
<PAGE>

<TABLE>
<CAPTION>
COST NET OF
PREMIUMS/ GROSS GROSS ESTIMATED
DISCOUNTS UNREALIZED UNREALIZED FAIR
AMORTIZED GAINS LOSSES VALUE
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Money market $ 3,304 $ - $ - $ 3,304
Certificate of Deposit 3,000 - - 3,000
Corporate obligations 3,972 11 - 3,983
----------- ------------- ------------ -------------
Marketable securities available-for-sale $ 10,276 $ 11 $ - $ 10,287
=========== ============= ============ =============
</TABLE>

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

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

There were no gross realized gains or losses on sales of
available-for-sale securities for the years ended March 31, 2000, 1999
or 1998.

The amortized cost and estimated fair value of debt and marketable
securities at March 31, 2000, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations
without prepayment penalties (in thousands):

<TABLE>
<CAPTION>
COST LESS
PREMIUMS/ ESTIMATED
DISCOUNTS FAIR
AMORTIZED VALUE
------------- ------------
<S> <C> <C>
Due in one year or less $ 10,276 $ 10,287
Due after one year - -
------------- ------------
$ 10,276 $ 10,287
============= ============
</TABLE>

5. INCOME TAXES

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

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

32
<PAGE>

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-------------------------------------
1998 1999 2000
<S> <C> <C> <C>
Computed statutory tax $ (7,342) $ (7,221) $ (2,437)
State income taxes (1,275) (1,274) (430)
Tax exempt interest (64) (23) -
Foreign Income Tax - 1,400 400
Losses without income tax benefit 8,634 8,508 2,857
Other 47 10 10
----------- ----------- -----------
Provision for income taxes $ - $ 1,400 $ 400
=========== =========== ===========
</TABLE>

At March 31, 2000, the Company has deferred tax assets of approximately
$46.6 million relating to the following tax loss carryforwards for
income tax purposes (in thousands):

EXPIRATION
AMOUNT DATES
------------- --------------
<S> <C> <C>
Federal ($103,400) and state ($45,500) net operating losses $ 148,900 2000-2019
Research and development credit - federal 2,734 2000-2014
Research and development credit - state 1,513 2000-2014
Alternative minimum tax credit 300 Indefinite
</TABLE>

For financial reporting purposes, a valuation allowance has been
recognized to offset the deferred tax assets related to the
carryforwards. If realized, approximately $1.1 million of the tax
benefit for those items will be applied directly to paid-in capital,
related to deductible expenses reported as a reduction of the proceeds
from issuing common stock in connection with the exercise of stock
options.

The foreign income tax provision of $0.4 million and $1.4 million
included in the Company's fiscal 2000 and 1999 net losses,
respectively, represents foreign taxes paid related to the Chugai
transaction.

6. LONG-TERM DEBT

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

MARCH 31,
----------------------------
1999 2000
<S> <C> <C>
Note payable - due 2004 $ 3,682 $ 3,614
Note payable - due 2001 2,400 1,200
------------ ------------
6,082 4,814
Less - current portion 1,278 1,285
------------ ------------
$ 4,804 $ 3,529
============ ============
</TABLE>

The note payable due in 2004 bears interest at a variable rate based
upon the weighted average Federal Reserve Eleventh District cost of
funds as quoted in The Wall Street Journal plus 2.35 percent. The
interest rate on this note is adjusted semi-annually and was 8.0% at
March 31, 1999 and 2000. The note is secured by the Company's
manufacturing facility and certain of the equipment contained therein
and is payable in monthly installments of principal and interest. As of
March 31, 2000, maturities of this note in each of the next four fiscal
years are: $85,000, $92,000, $100,000 and $3,337,000.

The note payable due in April, 2001 bears interest at the prime rate
(9.0% at March 31, 2000) and is payable in monthly installments of
$100,000 plus accrued interest through March 2001. The loan contains
covenants relating to cashflow coverage and minimum cash balances. The

33
<PAGE>

Company is in compliance with the loan covenants. In September 1998,
the terms of the loan were renegotiated which lowered the interest rate
from prime plus one percent to the prime rate and released a
compensating balance requirement. The loan is secured primarily by
equipment and fixtures in addition to all other tangible assets of the
Company.

7. COMMITMENTS AND CONTINGENCIES

LEASES-

In 1997, the Company entered into an equipment leasing agreement with
Mellon US Leasing ("Mellon") for a lease line of $1.6 million with a
term of 48 months, accounted for as an operating lease. The outstanding
balance on this line of credit at March 31, 2000 was $622,000. Future
minimum rental commitments for the Company's noncancelable operating
lease were as follows (in thousands):

FISCAL YEAR ENDED MARCH 31, AMOUNT
<S> <C>
2001 $ 379
2002 234
2003 9
2004 -
2005 -
----------
Total minimum lease payments $ 622
==========
</TABLE>

In fiscal 1998, the Company entered into a lease for its corporate
headquarters. The Company was obligated to pay real estate taxes,
insurance and utilities on its portion of the leased property. As part
of the cost reduction measures implemented in fiscal year 1999, the
Company consolidated facilities and no longer occupies the building
that had become its corporate headquarters in fiscal year 1998. As a
result of this move, the Company recognized approximately $370,000 of
the remaining rent expense through February 2000, the end of the lease
term, as exit costs in fiscal year 1999. Rental expense for the years
ended March 31, 1998 and 1999 was $245,000 and $297,000, respectively.

LICENSE AGREEMENTS-

MALLINCKRODT, INC. MBI's distribution agreement with Mallinckrodt forms
the basis of its product development and marketing program for OPTISON.
On May 8, 2000, the Company entered into an agreement with Mallinckrodt
known as the "OPTISON Product Rights Agreement" ("OPRA"). This
agreement supersedes all previous agreements and requires Mallinckrodt
to assume full control of the OPTISON business, including
responsibility for all related intellectual property disputes, clinical
development and manufacturing. MBI will receive an ongoing royalty of
5% on sales of ultrasound contrast agents by Mallinckrodt and its
partner, Nycomed. The Mallinckrodt territory is worldwide, excluding
Japan, South Korea and Taiwan. In addition, the Company will pay a
total of $7.0 million to Mallinckrodt as part of an intellectual
property settlement (see Note 12.)

This restructuring of MBI's relationship with Mallinckrodt relating to
OPTISON manufacturing and marketing coincided with the settlement of
patent litigation with certain competitors claiming patent rights in
various ultrasound contrast agent technologies. MBI will pay
Mallinckrodt a total of seven million dollars as part of this
intellectual property settlement. Three million dollars of this
settlement was paid in May 2000. An additional three million dollars
will be satisfied through the transfer of property owned by MBI to
Mallinckrodt as soon as practicable. MBI is required to

34
<PAGE>

make the final one million-dollar payment to Mallinckrodt upon receipt
of a milestone payment form Chugai Pharmaceutical Co., Ltd.

OPRA also obligates Mallinckrodt to assume financial responsibility for
a license agreement with Steven B. Feinstein, M.D. covering the
exclusive right to develop, use and sell any products derived from
patents and applications involving sonicated gas-filled albumin
microspheres used for imaging and any future related patents and
applications. Beginning in 1999, the agreement requires payment of
minimum royalties of $600,000 each year. Minimum royalty payments are
decreased as certain levels of OPTISON sales are reached.

CHUGAI PHARMACEUTICAL CO., LTD. In an agreement dated March 31, 1998,
the Company entered into a cooperative development and marketing
agreement with Chugai Pharmaceutical Co., Ltd. ("Chugai") of Japan. The
parties entered into this strategic alliance which covers Japan, Taiwan
and South Korea, to develop OPTISON (which Chugai may market under a
different name) as well as related products. The Company granted Chugai
an exclusive license to develop, manufacture, and market these products
in the subject territory, for which the Company received $14.0 million.
Chugai will pay the Company a 28% royalty on net sales of licensed
products that Chugai manufactures. Additionally, Chugai purchased
691,883 shares of the Company's common stock at a premium of 40% over
the then-prevailing market price. The equity investment was valued at
$8.3 million. The Company is also eligible to receive milestone
payments of up to $20.0 million based on Chugai's achievement of
certain Japanese product development and regulatory goals. As of March
31, 2000, the Company had received $4.0 million in milestone payments
from Chugai.

FEINSTEIN LICENSE. In November 1986, the Company entered into a license
agreement under which it acquired the exclusive right to develop, use
and sell any products derived from patents and applications which
Steven B. Feinstein, M.D. owned covering sonicated gas-filled albumin
microspheres used for imaging and any future related patents and
applications. In June 1989, the parties restructured this agreement.
The Company paid the licensor $4.5 million as an additional license fee
and $2.0 million as a prepayment of royalties on the first $66.7
million of sales of the licensed products in the United States, and the
parties agreed to reduce the royalty rate on sales of licensed products
from 6% to 3% on worldwide net sales by the Company (and United States
sales by a sublicensee) and from 2 1/2% to 1 1/4% on net sales by
sublicensees outside of the United States. The restructured agreement
requires the Company to pay minimum royalties each year, increasing
from $100,000 in 1994 to $600,000 in 1999 and subsequent years. Minimum
royalty payments are decreased as certain levels of OPTISON sales are
reached. OPRA obligates Mallinckrodt to assume financial responsibility
for this license agreement

ABBOTT LICENSE. On December 16, 1993, MBI entered into an exclusive
license agreement with Abbott Laboratories under which Abbott acquired
the exclusive worldwide right to make, have made, use and sell products
based on nucleic acid probe technology for in vitro diagnosis of
infectious diseases and cancer. Abbott is obligated to pay MBI
quarterly royalties on product sales made by Abbott or its sublicensee.

PATENT MATTERS-

The Company's products are covered by a number of issued United States
and foreign patents, and MBI has filed a number of patent applications
in the United States and other countries. Under OPRA (see "Description
of Business"), while ownership of the patents and trademarks remains
with MBI, all patents and trademarks rights covering OPTISON worldwide,
excluding the territory granted to Chugai, were transferred to
Mallinckrodt. Mallinckrodt will assume responsibility for the
protection of proprietary technologies deemed to be material to its
business prospects.

35
<PAGE>

Company reached a settlement in these patent disputes between the
Company, Nycomed, Mallinckrodt and Sonus. Pursuant to OPRA,
Mallinckrodt has assumed responsibility for any future intellectual
property disputes relating to MBI's ultrasound contrast patents.

The Company also owns certain other patents that are unrelated to
OPTISON. In May 2000, the Company licensed to Genta Inc. a patent
portfolio relating to "antisense" molecular therapeutic technology for
$2.8 million. Of this amount, $400,000 is payable in cash and $2.4
million will be paid in unrestricted shares of Genta stock upon
completion of an S-3 registration statement. All costs related to this
patent had been expensed in prior years. In 1992, MBI entered into a
nonexclusive license with ISIS Pharmaceuticals, Inc. for this
technology in return for a license fee and royalties.

8. STOCKHOLDERS' EQUITY

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

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

COMMON SHARES RESERVED

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

MARCH 31,
-----------------------
1999 2000
<S> <C> <C>
Options granted 3,855 3,884
Future grants of options 1,699 1,663
---------- ----------
5,554 5,547
========== ==========
</TABLE>

STOCK OPTIONS-

1998 PLAN

In fiscal 1999, the Board of Directors and the shareholders of the
Company approved the 1998 Stock Option Plan as the successor to the
Company's 1993 and 1997 Plans. All outstanding options under the 1993
and 1997 Plans were incorporated into the 1998 Plan plus an additional
2.0 million shares. The 1998 Plan provides for the grant of both
qualified incentive stock options and nonstatutory stock options to
purchase Common Stock to employees, non-employee directors, independent
consultants and advisors of the Company under four separate equity
incentive programs. The exercise price per share may be either 85% of
the fair value on the date of grant or fair market value of the stock
on date of grant depending on the program. Options granted under this
plan are exercisable per the terms specified in each individual option,
but not before one year (unless the option exercisability is
accelerated by the Company's Board of Directors), or later than ten
years from the date of grant. Additionally, the 1998 Plan permits
certain senior executives, as defined, to reduce their compensation and
receive options with an intrinsic value equal to that reduction in
compensation. In 1999, the Company's chief executive officer elected to
reduce his compensation by $20,000 and receive options to purchase
10,613 shares at $0.93 per share on January 4, 1999 when the fair
market value was $2.81 per share. The

36
<PAGE>

compensation expense related to the grant of these options is included
in operations for fiscal 1999. On April 1, 1999, the Company's chief
executive officer elected to receive an additional grant of 11,662
shares at $0.89 per share on April 1, 1999 when the fair market value
was $2.69 per share. The compensation expense related to this grant
was included in operations for fiscal 2000.

1997 OUTSIDE DIRECTORS' PLAN

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

1993 PLANS

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

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

1984 PLAN

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

OTHER OPTION GRANTS

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

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

37
<PAGE>

EMPLOYEE OPTION PLANS DIRECTORS' OPTION PLAN
------------------------------------ --------------------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
------------- --------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding at March 31, 1997 2,610,070 6.00 - 22.25 75,000 6.88 - 17.00
Granted 724,100 6.63 - 10.38 78,000 9.13 9.25
Exercised (100,340) 6.00 - 8.63 -
Expired or lapsed (248,250) 6.25 - 22.25 -
------------- ----------- ---------- ---------- ---------- ---------
Options Outstanding at March 31, 1998 2,985,580 6.00 - 22.25 153,000 6.88 - 17.00
------------- ----------- ---------- ---------- ---------- ---------
Granted 1,194,288 0.93 - 9.69 -
Exercised (42,625) 6.00 - 10.13 -
Expired or lapsed (434,912) 3.31 - 22.00 -
------------- ----------- ---------- ---------- ---------- ---------
Options Outstanding at March 31, 1999 3,702,331 0.93 - 22.25 153,000 6.88 - 17.00
------------- ----------- ---------- ---------- ---------- ---------
Granted 259,562 0.88 2.38 -
Exercised - -
Expired or lapsed (230,473) 1.75 22.25 -
------------- ----------- ---------- ---------- ---------- ---------
Options Outstanding at March 31, 2000 3,731,420 0.88 - 20.38 153,000 6.88 - 17.00
------------- ----------- ---------- ---------- ---------- ---------
Options exercisable at March 31, 2000 3,185,218 153,000
------------- ----------
Reserved for future grants at March 31, 2000 1,638,165 25,000
------------- ----------
</TABLE>

The following table summarizes information about fixed stock options
outstanding at March 31, 2000:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ---------------------------
Weighted-Avg Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Life Exercise Exercisable Exercise
Exercise Prices at 3/31/00 Life (years) Price at 3/31/00 Price
----------------- -------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
0.8750 - 7.00 1,520,157 7.64 $ 4.4004 1,128,703 $ 5.0372
7.125 - 9.6875 1,527,775 7.06 $ 8.2329 1,401,693 $ 8.2879
9.875 - 20.375 836,488 5.26 $14.3083 807,822 $14.4228
-------------- ------------ ------------- ------------ ------------
0.8750 - 20.375 3,884,420 6.90 $ 8.0430 3,338,218 $ 8.6751
</TABLE>

As permitted, the Company has adopted the disclosure only provisions of
SFAS 123. Accordingly, no compensation expense has been recognized for
the stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with SFAS
123, the Company's net loss and net loss per common share for March 31,
1998, 1999 and 2000 would approximate the pro forma amounts below (in
thousands, except per share amounts).

Fiscal Years Ended, March 31,
----------------------------------------
1998 1999 2000
<S> <C> <C> <C>
Net income (loss) - as reported $(21,260) $(21,240) $(7,568)
Net income (loss) - pro forma $(23,877) $(26,429) $(9,055)
Earning per share (loss) - as reported $ (1.19) $ (1.14) $ (0.40)
Earning per share (loss) - pro forma $ (1.34) $ (1.42) $ (0.48)
</TABLE>

Because the SFAS 123 method of accounting has not been applied to
options granted prior to April 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected

38
<PAGE>

in future years. The fair value of each option grant was estimated on
the date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions used for grants in fiscal year
2000: risk free rate of 6.0%, expected option life of 4 years, expected
volatility of 80% and a dividend rate of zero. The weighted average
fair value of options granted from the Employee stock option plans
during fiscal 1998, 1999 and 2000 was $7.85, $5.43 and $2.11,
respectively. The weighted average fair value of options granted from
the Outside Director stock option plan during fiscal 1998, 1999 and
2000 was $6.88, $9.19 and $1.93, respectively.

9. SIGNIFICANT RESEARCH CONTRACTS

Pursuant to OPRA, the Company has no future responsibility for the
development of OPTISON and currently has no plans to engage in any
research or development activities. OPRA supersedes all previous
agreements with Mallinckrodt and requires Mallinckrodt to assume full
control of the OPTISON business.

In December 1987, December 1988 and March 1989, the Company entered
into respective agreements (the Original Agreements) with Nycomed A.S.
(Nycomed), a Norwegian corporation, Mallinckrodt, Inc. (Mallinckrodt),
of St. Louis, Missouri and Shionogi & Co., Ltd. (Shionogi), a Japanese
corporation, under which the Company granted exclusive licenses,
restricted to certain geographic areas, to test, evaluate, develop and
sell products covered by specified patents of the Company relating
directly to the design, manufacture or use of microspheres for
ultrasound imaging in vascular applications. The Company also granted
rights to sublicense, use, make and sell the licensed products under
specified royalty arrangements. Under the terms of the Original
Agreements, as amended, the Company earned and received license fees of
$6.5 million.

In September 1995, the Company entered into an Amended and Restated
Distribution Agreement ("ARDA"), as well as a related investment
agreement, with Mallinckrodt. Under ARDA, the geographical scope of
Mallinckrodt's exclusive right was expanded to include all of the
countries of the world other than those covered by the Company's
license agreements with Shionogi and Nycomed. The agreement provided
the Company with between $33.0 million and $42.5 million in financing
(including the $13.0 million common stock investment discussed below).
Under the terms of the agreement, Mallinckrodt made guaranteed payments
to the Company totaling $20.0 million over four years to support
clinical trials, related regulatory submissions and associated OPTISON
product development. These payments were made in 16 quarterly
installments of $1.0 million for the first four quarters, $1.25 million
for the following eight quarters and $1.5 million for the final four
quarters. As of March 31, 2000, all quarterly payments had been
received by the Company.

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

In connection with ARDA, the Company also entered into an investment
agreement whereby the Company sold 1,118,761 unregistered shares of its
common stock to Mallinckrodt for $13.0 million, or a price of $11.62
per share before related costs. Combined with the 181,818 shares of the
Company's common stock that Mallinckrodt acquired in December 1988,
Mallinckrodt currently owns approximately 6.9% of the Company's issued
and outstanding shares.

In December 1996, the Company and Mallinckrodt amended ARDA to expand
the geographical scope of Mallinckrodt's exclusive marketing and
distribution rights for OPTISON and related products. The amendment
extended Mallinckrodt's exclusive territory to include the territory
that

39
<PAGE>

the Company had formerly licensed to Nycomed consisting of Europe,
Africa, India and parts of Asia.

In April 1999, the Company and Mallinckrodt agreed to transfer the
manufacture of OPTISON from MBI to Mallinckrodt. The parties' agreement
was incorporated into the Second Amended and Restated License and
Distribution Agreement ("ARDA II"). Under the terms of ARDA II, which
were retroactive to March 1, 1999, Mallinckrodt reimbursed MBI for all
manufacturing expenses, including incremental costs related to the
technology transfer. In addition to the transfer of manufacturing, ARDA
II extended Mallinckrodt's responsibility for funding clinical trials
to include all cardiology and radiology clinical trials for OPTISON in
the United States. In exchange for the transfer of manufacturing and
increased financial support of clinical trials for OPTISON, MBI
received a royalty on end-user product sales of OPTISON.

On May 8, 2000, the Company entered into the OPRA agreement with
Mallinckrodt. This agreement supersedes all previous agreements and
requires Mallinckrodt to assume full control of the OPTISON business,
including responsibility for all related intellectual property
disputes, clinical development and manufacturing (see Note 12.)

In September 1996, the Company entered into an agreement with Shionogi
pursuant to which the Company reacquired all rights to manufacture,
market and sell its ALBUNEX family of products in the territory
consisting of Japan, Taiwan and South Korea, formerly exclusively
licensed to Shionogi. This agreement settled an outstanding dispute
between the two companies concerning the license and distribution
agreement for ALBUNEX and resulted in the dismissal of all claims
raised by the companies against each other. Under the agreement, the
Company paid $3.0 million to Shionogi and agreed to pay an additional
$5.5 million over the next three years. As of March 31, 2000, all
payments to Shionogi had been made.

In April 1998, the Company and Chugai entered into a strategic alliance
to develop and commercialize OPTISON (which may be marketed under a
different name) in Japan, Taiwan and South Korea in exchange for
granting to Chugai a royalty-based license to market these products in
the named countries. In addition, Chugai made an equity investment in
the Company's common stock. The Company is eligible to receive
milestone payments of up to $20 million based on the achievement of
certain product development goals and will receive royalties from
Chugai from the sale of commercialized products in the territory. As of
March 31, 2000, the Company had received $4.0 million in milestone
payments from Chugai.

10. GAIN ON DISPOSAL OF ASSETS HELD FOR SALE

The accompanying 1999 statement of operations reflects a gain on the
disposal of assets held for sale. This gain resulted from the resale of
territorial rights which had been reacquired from licensees in prior
periods as follows:

In the Company's fiscal 1989, Shionogi & Co. Ltd. (Shionogi) acquired
from MBI the rights to develop, market, manufacture and sell certain of
the Company's contrast agent products in specified territories (Japan,
Korea, Taiwan). In fiscal 1997, as a result of a change of strategic
focus at Shionogi, Shionogi sold these territorial rights back to the
Company for $8.5 million. MBI accounted for this transaction as the
purchase of an asset held for sale in the amount of $8.5 million.
Effective April 1, 1998, the Company entered into an agreement to
resell the above rights to Chugai. The key terms of that agreement are
as follows:

The Company granted Chugai an exclusive license under the Company's
patents and technology related to FS069 (OPTISON) and another product
ORALEX, to sell, distribute, develop, have developed, make and have
made licensed products in Japan, Korea and Taiwan. Chugai also granted
the Company a license to any improvements made by Chugai to the
products. Under the

40
<PAGE>

agreement, any further development as well as the attainment of any
regulatory approvals within the subject territory are the sole
responsibility of Chugai.

At the time of this agreement, OPTISON was an FDA approved product and
was being sold in the U.S., and further development of ORALEX was
terminated by the Company in 1999.

I. Chugai paid the Company a non-refundable license fee of $14.0
million payable in a series of payments with the full amount paid
within 300 days of the effective date of the agreement.

II. Chugai shall also pay the Company non-refundable milestone
payments of $20 million if and when various clinical and
regulatory milestones are achieved by Chugai.

These above payments are contingent upon Chugai attaining the
above milestones. The Company has no obligation to and does not
participate in the development activities or clinical trials of
Chugai.

III. Chugai shall also pay to the Company earned royalties on
Chugai's sales of the products and minimum royalties for certain
years of sales after the launch of the products. The previous
agreement with Shionogi also provided for a royalty on sales of
the product at a rate which closely approximated the Chugai
royalty rate.

IV. Chugai also made an equity investment in the form of a common
stock purchase of 691,883 MBI shares at a premium of $2.4 million.

V. Term of the agreement is 15 years from the effective date of April
1, 1998.

VI. MBI has an ongoing indemnification obligation to Chugai to protect
its Japanese patents, if and when challenged.

Accordingly, MBI has recorded this asset sale to Chugai as a gain
on disposal of assets held for sale in its fiscal 1999 statement
of operations, as follows:

AMOUNT IN
MILLIONS
---------
<S> <C>
Up-front non-refundable payment received by MBI $ 14.0
Premium on sale of equity 2.4
Less asset held for sale (8.5)
Less transaction fee (0.9)
---------
Net gain on disposal. $ 7.0
=========
</TABLE>

41
<PAGE>

11. SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION

The following is a summary of the unaudited quarterly results of
operations for the years ended March 31, 2000 and 1999 (in thousands,
except per share amounts):

Quarter Ended: Jun 30 Sep 30 Dec 31 Mar 31
-------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Fiscal 2000
Revenues $1,660 $1,857 $2,493 $2,515
Research and Development Costs 1,412 1,036 839 974
Total Operating Costs and Expenses 3,160 2,857 3,627 6,329
Net Loss (1,402) (930) (1,290) (3,946)
Loss Per Common Share (0.07) (0.05) (0.07) (0.21)
Weighted Average Common Shares Outstanding 18,730 18,727 18,724 18,724
</TABLE>
<TABLE>
<CAPTION>

Quarter Ended: Jun 30 Sep 30 Dec 31 Mar 31
-------------- ------ ------ ------- -------
<S> <C> <C> <C> <C>
Fiscal 1999
Revenues $2,617 $2,666 $2,185 $2,113
Research and Development Costs 2,227 2,409 2,358 2,089
Total Operating Costs and Expenses 7,735 9,950 14,238 5,311
Net Income/(Loss) 740 (7,068) (11,870) (3,042)
Income/ (Loss) Per Common Share 0.04 (0.38) (0.64) (0.16)
Weighted Average Common Shares Outstanding 18,843 18,581 18,581 18,581
</TABLE>

12. SUBSEQUENT EVENTS

On May 5, 2000, the Company reached a settlement in various ongoing
patent disputes between the Company, Nycomed, Mallinckrodt and Sonus.
In addition, Mallinckrodt assumed responsibility for any future
intellectual property disputes relating to MBI's ultrasound contrast
patents.

On May 8, 2000, the Company and Mallinckrodt agreed to restructure
their agreement known as ARDA II to allow Mallinckrodt to assume full
control of the OPTISON business, including responsibility for all
related intellectual property disputes, clinical development,
manufacturing and real estate. The agreement was incorporated into a
document called "OPTISON Product Rights Agreement" ("OPRA"). Under
OPRA, the Company will receive an ongoing royalty of 5% on sales of
ultrasound agents in the Mallinckrodt territory, which is worldwide,
excluding Japan, South Korea and Taiwan. In addition, MBI will pay
Mallinckrodt a total of seven million dollars as part of the
intellectual property settlement. Three million dollars of the
settlement was paid in May 2000. An additional three million dollars
will be satisfied through the transfer of property owned by MBI to
Mallinckrodt as soon as practicable. MBI is required to make the final
one million-dollar payment to Mallinckrodt upon receipt of a milestone
payment form Chugai.

The implementation of the OPRA agreement will involve transferring all
property, plant, equipment and inventory used in the manufacture of
OPTISON to Mallinckrodt. Effective May 8, 2000, twenty employees
involved in the manufacturing process were transferred to Mallinckrodt
leaving MBI with three employees.

42
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning the Company's executive officers is included in
Part I Item 4 of this report under the caption "Executive Officers of the
Registrant".

DIRECTORS

There is set forth below for each of the Company's seven directors his principal
occupation, age, the year that he became a director of the Company and
additional biographical data:

BOBBA VENKATADRI, 56
President and Chief Executive Officer

Bobba Venkatadri has served as the Company's President since October
1995 and as a director of the Company since November 1995. He served as Chief
Operating Officer from October 1995 until May 1997, at which time he was elected
by the Company's Board to the office of Chief Executive Officer. He held the
position of Executive Vice President of the Pharmaceutical Division of Centocor,
Inc., from September 1992 until he joined the Company, and as Vice President -
Operations of Centocor's Pharmaceutical Division from March 1992 to September
1992. He was employed by Warner-Lambert Company from 1967 until February 1992 in
a variety of Senior Management positions including, Senior Director,
Pharmaceutical Operations, President of Warner-Lambert, Indonesia, and Vice
President Parke-Davis Operations, USA. Mr. Venkatadri serves on the Board of the
San Diego YMCA and American Heart Association.

DAVID W. BARRY, M.D., 56
Chairman and Chief Executive Officer
Triangle Pharmaceuticals, Inc.

David W. Barry, M.D., was elected to the Company's Board of Directors
in May 1996. He currently serves as Chairman and Chief Executive Officer of
Triangle Pharmaceuticals, Inc. Prior to joining Triangle Pharmaceuticals in
1995, Dr. Barry served for 18 years with Burroughs Wellcome and the Wellcome
Foundation in various positions, including Worldwide Group Director, Research,
Development & Medical Affairs of the Wellcome Foundation; President of the
Wellcome Research Laboratories; and a member of the Board of Directors for the
Wellcome Foundation and Wellcome PLC. He previously spent five years with the
U.S. Food and Drug Administration in various capacities. Dr. Barry received his
medical degree from Yale University School of Medicine.

ROBERT W. BRIGHTFELT, 56
President, Global Products
Dade Behrinr, Inc.

Robert W. Brightfelt has served as a director of the Company since
October 1987. Mr. Brightfelt received his B.S. and M.S. degrees in mechanical
engineering from the University of Nebraska in 1965 and 1967, respectively, and
his M.B.A. from the University of Georgia in 1970. He joined the DuPont Company
in 1967 as a mechanical engineer and held various management positions in
Dupont's Medical Products Department. Mr. Brightfelt retired from DuPont in May
1996, and currently serves as President, Global Products, and as a member of the
Board of Directors for Dade Behring, Inc.

CHARLES C. EDWARDS, M.D., 76

Charles C. Edwards, M.D., has served as a director of the Company
since March 1987. In 1969, he was appointed by President Nixon as Commissioner
of the U.S. Food and Drug Administration, and in 1973 he was appointed
Assistant Secretary for Health in the U.S. Department of Health, Education and
Welfare. In 1977, Dr. Edwards assumed the position of President and Chief
Executive Officer of Scripps Clinic and

43
<PAGE>

Research Foundation and served in that position until 1991. In 1991, he was
appointed the President and Chief Executive Officer of the Scripps
Institutions of Medicine and Science and served in that position until 1993.
Dr. Edwards currently serves as a director of Bergen Brunswig Corporation,
Northern Trust of California and the IDEC Pharmaceutical Corporation.
Additionally, Dr. Edwards serves on the Board of Trustees of the Scripps
Research Institute, the Scripps Institutes of Medicine and Science, the San
Diego Hospice and the San Diego YMCA. He received his medical degree from the
University of Colorado in 1948, and received his surgical training at the
Mayo Clinic in Rochester, Minnesota.

JERRY T. JACKSON, 59

Jerry T. Jackson has served as a director of the Company since December
1996. From 1965 until his retirement in 1995, Mr. Jackson was employed with
Merck & Company, Inc. in various management positions. From 1993 until
retirement, he held the position of Executive Vice President of Merck. During
this time, Mr. Jackson had responsibility for Merck's International Human Health
Division, Worldwide Human Vaccines, the AgVet Division, Astra/Merck U.S.
Operations and Worldwide Marketing. Mr. Jackson was Senior Vice President of
Merck & Company, Inc. from 1991 to 1992 and previously was President of Merck
Sharp and Dohme International. Mr. Jackson also currently serves as a director
on the boards of CorTherapeutics, Inc., Crescendo Pharmaceutials Corp., and
Alexion Pharmaceutical, Inc.

GORDON C. LUCE, 74

Gordon C. Luce has served as a director of the Company since June 1989.
Mr. Luce joined Great American First Savings Bank in San Diego, California in
1969 as its President and Chief Executive Officer and held the position of
Chairman of the Board from 1979 until his retirement in July 1990. During 1982,
he was an Alternate Delegate to the United Nations and has served as a member of
three Presidential commissions. Mr. Luce is a former Chairman of Scripps Clinic
and Research Foundation and Scripps Health and is a former trustee of Scripps
Research Institute. He is a Life Trustee of the University of Southern
California in Los Angeles.

DAVID RUBINFIEN, 79

David Rubinfien has served as a director of the Company since December
1985. He held the position of President and Chief Executive Officer of Systemix,
Inc. from January 1989 until January 1991, and from 1985 to 1988 he was Chairman
and Chief Executive Officer of Microgenics Corporation in Concord, California.
From 1973 to 1984, he held several key positions at Syntex Corporation in Palo
Alto, California. Mr. Rubinfien also currently serves as a director of
Matritech, Inc., another publicly held company.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors has standing Executive, Audit,
Compensation and Officer Options Committees. It does not have a standing
nominating committee.

Mr. Venkatadri is currently the only member of the Executive Committee;
the remaining position is vacant. The Executive Committee generally possesses
the same powers as the full Board of Directors to manage the affairs of the
Company, but may not amend the Company's certificate of incorporation or by-laws
or make recommendations to the stockholders with respect to the merger,
consolidation or dissolution of the Company or the sale of all or substantially
all of the Company's assets.

The Audit Committee, composed of Messrs. Brightfelt, Jackson, Luce and
Rubinfien, reviews the scope and results of the independent public accountants'
engagement, the Company's internal accounting controls and other pertinent
auditing and internal control matters.

The Compensation Committee, composed of Messrs. Brightfelt and
Rubinfien and Drs. Barry and Edwards, reviews and recommends to the Board of
Directors the compensation levels of the Company's

44
<PAGE>

executive officers. In addition, the Compensation Committee reviews the
procedures involved in setting management compensation and employee benefits.
Acting as the Officer Options Committee, the Compensation Committee
administers the Company's stock option plans as they relate to the executive
officers of the Company.

MEETINGS

During the fiscal year ended March 31, 2000, the Board of Directors
held 10 meetings, including five held by teleconference. The Audit Committee and
the Compensation Committee each met once during the year. Messrs. Luce,
Rubinfien and Venkatadri each attended all 10 meetings of the Board; Dr. Barry
and Mr. Brightfelt each attended nine meetings; Dr. Edwards attended seven
meetings; and Mr. Jackson attended eight meetings. All of the members of the
Audit Committee attended its one meeting. All of the members of the Compensation
Committee, other than Dr. Barry, attended its one meeting.

DIRECTORS' COMPENSATION

Directors receive a retainer of $8,000 per year, and a fee of $750 is
paid to each director for attendance at each regular committee meeting.
Generally, no additional fees are paid for attendance at Board meetings;
however, in recognition of the extraordinary service rendered by the directors,
including participation in five special Board meetings during calendar year 1999
and participation in the due diligence process with respect to the Company's
proposed merger with Palatin Technologies, Inc., the Company approved the
payment of $3,500 to each non-employee director. Furthermore, pursuant to the
terms of the 1998 Stock Option Plan, on the date of each Annual Meeting of
Stockholders, each individual who is to continue to serve as a non-employee
director automatically will be granted a non-statutory option to purchase 6,500
shares of the Company's common stock, provided that he has served as a
non-employee director for at least six months and is not an owner of more than
5% of the stock of the Company.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers, and any persons holding more than ten
percent of the Company's stock to report their initial ownership of the
Company's stock and any subsequent changes in ownership to the Securities and
Exchange Commission. Reports of changes in ownership generally are required to
be filed by the tenth day of the month following the transaction.

Based solely on its review of copies of such reports, the Company
believes that during the fiscal year ended March 31, 2000, all filing
requirements applicable to its directors, executive officers and other
beneficial owners holding more than ten percent of the Company's common stock
were satisfied.

<PAGE>

The following table sets forth the compensation paid by the Company during the
fiscal years ended March 31, 2000, 1999 and 1998 to the following persons (the
"named executive officers"): (i) the Chief Executive Officer, and (ii) each of
the other most highly compensated executive officers of the Company serving as
of the fiscal year end on March 31, 2000.

ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------- --------------------------------------------
YEAR OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
ENDED COMPENSATION STOCK UNDERLYING COMPENSATION
NAME MARCH 31 SALARY ($) BONUS ($) ($) AWARD ($) OPTIONS (#) ($) (8)
--------------------------- --------- ----------- ------------ ------------- ----------- ------------ -------------
--------------------------- --------- ----------- ------------ ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bobba Venkatadri 2000 298,122 47,040 (1) - - 11,662 2,982
President, Chief 1999 311,355 103,800 (2) - 79,688 (6) 213,513 3,115
Executive
Officer and Member of 1998 299,141 55,899 (3) 37,606 (5) - 100,000 3,269
the Executive Committee

Howard Dittrich, M.D. 2000 250,000 37,495 (1) - - - 2,000
Executive Vice 1999 235,303 103,300 (4) - 63,750 (6) 131,300 4,005
President
1998 196,538 29,910 (3) - - 32,000 3,374

Elizabeth L. Hougen 2000 129,000 21,276 (1) - - - 2,462
Executive Director - 1999 110,046 12,178 (2) - 38,250 (6) 63,000 1,833
Finance and Chief Financial 1998 87,500 5,274 (3) 1,500 (7) - 9,500 1,833
Officer

Joni Harvey 2000 163,500 23,829 (1) - - - -
Vice President - 1999 149,500 31,900 (2) - 47,813 (6) 91,000 -
Operations
1998 129,231 30,570 (3) - - 24,000 -
</TABLE>

(1) Represents retention bonuses for the fiscal year ended March 31, 2000.

(2) Paid in respect of performance for the fiscal year ended March 31,
1998.

(3) Paid in respect of performance for the fiscal year ended March 31,
1997.

(4) Includes $40,800 paid in respect of performance for fiscal year ended
March 31, 1998, and $62,500 paid in recognition of promotion to
Executive Vice-President in February 1999.

(5) Represents relocation expense payment.

(6) Awarded in respect of performance as a retention bonus. The shares were
awarded as follows: Mr. Venkatadri, 25,000 shares; Dr. Dittrich, 20,000
shares; Ms. Hougen, 12,000 shares; Ms. Harvey, 15,000 shares. The
shares were granted in December 1998 and issued in May 1999. These
shares fully vested on February 1, 2000. Once vested, the shares are
immediately taxable to the recipients and the officers have the ability
to immediately trade these shares.

(7) Represents proceeds from same day sale of nonqualified stock options.

(8) These amounts represent the Company's matching contribution under the
Company's 401(k) plan. For each of the fiscal years ended March 31,
2000, 1999 and 1998, the matching contribution was 2% of the first 6%
contributed by each participant.

46
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

The Company granted stock options under the Company's 1998 Stock Option
Plan in respect of performance during the fiscal year ended March 31, 2000. The
following table sets forth each grant of stock options made during the fiscal
year ended March 31, 2000 to the named executive officer:

% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS EXERCISE AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO PRICE OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES PER EXPIRATION FOR OPTION TERM
NAME OPTIONS (#) IN FISCAL YEAR SHARE DATE 5% ($) (2) 10% ($) (2)
------------------------- ------------- --------------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bobba Venkatadri 11,662 (1) 5.3% $0.89 4/1/09 $ 40,709 $ 70,949
</TABLE>

(1) These options were granted on April 1, 1999 under the Company's 1998
Stock Option Plan in exchange for a salary deferral of $21,000.

(2) The dollar amounts presented in these columns are the results of
calculations at the 5% and 10% annual rates of stock appreciation
prescribed by the Securities and Exchange Commission and are not
intended to forecast possible future appreciation, if any, of the
Company's stock price. No gain to the optionees is possible without an
increase in the price of the Company's stock, which will
correspondingly benefit all stockholders. For options granted during
fiscal year ended March 31, 2000, assuming 5% and 10% compounded annual
appreciation of the stock price over the term of the options, the
average price of a share of Common Stock would be $3.49 and $6.08,
respectively, on March 31, 2010.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

None of the named executive officers exercised stock options during the
fiscal year ended March 31, 2000. The following table sets forth, for each of
the named executive officers, the fiscal year-end number and value of
unexercised options:

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 3/31/00 (#) OPTIONS AT 3/31/00 ($) (1)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------- ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Bobba Venkatadri 571,703 138,472 $7,298 $353

Howard Dittrich, M.D. 193,050 87,250 - -

Elizabeth L. Hougen 61,333 24,667 - -

Joni Harvey 123,000 52,000 - -
</TABLE>

(1) Based on the $ 1.25 per share closing price of the Company's Common
Stock on March 31, 2000.

47
<PAGE>

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

As of April 1, 2000, Mr. Venkatadri is paid an annual salary of
$336,000; Dr. Dittrich is paid an annual salary of $250,000. The Company's
employment contracts with its executive officers are of indefinite duration,
subject, however, to termination in certain events.

In April 2000, two executive officers, Ms. Hougen and Ms. Harvey
terminated their employment with the company. In accordance with employment
agreements, both Ms. Hougen and Ms. Harvey received severance in the amount of
12 months salary.

The Company currently has employment contracts with all executive
officers of the Company. In the event of the termination of these employment
agreements as a result of (i) a termination without cause within 2 years
following a change of control or (ii) a constructive termination, MBI is
required to pay severance in an amount ranging from 1.5 to 3 times (A) the
officer's base salary in effect immediately prior to the change of control and
(B) the higher of (x) 100% of the officer's target bonus as determined under
MBI's incentive compensation plan or (y) an average of the three most recent
bonuses awarded to the officer (collectively, referred to as "Severance
Payments").

The employment agreements contain a limitation providing that the
Severance Payments will be reduced as necessary so that their present value does
not exceed 2.99 times the officer's base amount, as "base amount" is defined in
Section 280G(b)(3) of the Internal Revenue Code.

Additionally, the employment agreements specify that during the period
of time in which Severance Payments are being paid to the officer, MBI is
required to provide COBRA continuation coverage to the officer and dependents
who are insured at the time of termination under the Company's medical, dental
and vision insurance plans, and to assume the cost of continuation coverage
provided to the officer and his or her covered dependents.

The employment agreements also provide that, in the event of a change
of control (whether or not followed by termination of employment), all stock
options under any MBI stock option plan which the officer holds at the time of
such change of control shall become fully "vested" (I.E., immediately
exercisable).

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The compensation of the Company's executive officers is determined
generally by the Compensation Committee of the Company's Board of Directors. The
four members of the Compensation Committee, Drs. Edwards and Barry and Messrs.
Brightfelt and Rubinfien, are outside directors of the Company.

Decisions of the Compensation Committee relating to executive officers'
base salaries and cash bonuses are reviewed and approved on an annual basis by
the full Board; decisions of the Compensation Committee relating to executive
officers' stock options are not subject to the Board's review.

The Company's fiscal year begins on April 1. Compensation for fiscal
year 2000 accordingly covers the calendar months of April through December 1999
and January through March 2000. Decisions as to salary increases for fiscal year
2000 were based on performance during fiscal year 1999 (i.e., April through
December 1998 and January through March 1999).

48
<PAGE>

EXECUTIVE COMPENSATION POLICIES

The Company's executive compensation policies seek to coordinate
compensation with the Company's product development goals, performance
objectives and business strategy. These policies are intended to attract,
motivate and retain executive officers whose contributions are critical to the
Company's long-term success and to reward executive officers for attaining
individual and corporate objectives which enhance stockholder value.

In the past, the Company's compensation program for its executive
officers consisted of a base salary and incentive compensation paid in the form
of a cash bonus and stock options. In light of the Company's financial
performance and its failure to meet its fiscal year 1999 performance objectives,
the Company opted not to have any incentive compensation plan in fiscal year
2000. However, pursuant to an officer retention incentive and compensation
program, the Company paid retention bonuses in February 2000. These bonuses were
part of a Company-wide employee retention program, which was recommended by
management, reviewed by the Compensation Committee and approved by the Board of
Directors in December 1998. The program was implemented in response to a need to
retain key corporate personnel amidst an overall workforce reduction following
the Company's strategic decision to outsource manufacturing.

SALARIES. The Compensation Committee determines the salaries of
executive officers on the basis of (i) the individual officers' scope of
responsibilities and level of experience, (ii) the rate of inflation, (iii) the
range of the Company's merit increases for its employees generally and (iv) the
salaries paid to comparable officers in comparable companies. The Compensation
Committee has not commissioned a formal survey of executive officer compensation
at comparable companies, but has relied on published salary surveys for general
indications of salary trends and informal surveys by the Company of other
biomedical companies of roughly similar size.

For fiscal year 2000, Mr. Venkatadri received a salary increase of
$21,000, or 6.7%, to $336,000; Dr. Dittrich did not receive a salary increase
and continued at his current salary of $250,000; Ms. Harvey received a salary
increase of $14,000, or 9.4%, to $163,500; and Ms. Hougen received a salary
increase of $4,000, or 3.2%, to $129,000. Mr. Venkatadri elected to defer his
salary increase pursuant to the salary deferral feature of the Company's 1998
Stock Option Plan.

CASH BONUSES. In February 2000, the Company awarded cash bonuses of
$47,040, $37,495, $23,829 and $21,276 to Mr. Venkatadri, Dr. Dittrich, Ms.
Harvey and Ms. Hougen, respectively, pursuant to the Company's officer retention
incentive and compensation program.

STOCK OPTIONS AND RESTRICTED STOCK GRANTS. No stock options or
restricted stock grants were given to executive officers in fiscal year 2000,
with the exception that Mr. Venkatadri received stock options on April 1, 1999
for 11,662 shares in exchange for his salary deferral of $21,000 as noted above.

COMPANY-WIDE PERFORMANCE AND OTHER FACTORS INFLUENCING COMPENSATION
DECISIONS. The principal Company-wide factor influencing the Compensation
Committee's decisions in respect of cash retention bonuses was the need to
retain key corporate personnel amidst an overall workforce reduction, as
discussed above.

The Compensation Committee's decision not to give cash incentive
bonuses was based on the Company's failure to achieve a number of its
performance objectives, as well as certain issues relating to the Company's
contemplated (but ultimately abortive) merger with Palatin Technologies, Inc.

The Compensation Committee's decision not to give stock options or
restricted stock grants to executive officers was based on the reasoning that
such long-term incentive compensation vehicles were not appropriate in light of
the fact that, due to the contemplated merger, a majority of the senior
management team would no longer be employed by the Company after June 2000.

49
<PAGE>

COMPENSATION OF CHIEF EXECUTIVE OFFICER

The Compensation Committee determined Mr. Venkatadri's compensation
for fiscal year 2000 on the basis of the criteria applicable to the Company's
executive officers generally. As noted, Mr. Venkatadri received a salary
increase for the fiscal year 2000 of $21,000, or 6.7%, to $336,000 and was
awarded a cash retention bonus of $47,040 in February 2000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of each person (other than directors and executive officers of the
Company) known to the Company to own more than 5% of the Company's outstanding
Common Stock as of June 15, 2000:

SHARES OF SHARES OF PERCENT OF
NAME AND ADDRESS OF COMMON STOCK OUTSTANDING
BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK
------------------- ------------------ ------------
<S> <C> <C>
State of Wisconsin Investment Board
P.O. Box 7842 3,398,400 18.02%
Madison, WI 53707

Mallinckrodt Group, Inc.
675 McDonnell Blvd. 1,300,579 6.90%
St. Louis, MO 63134
</TABLE>

STOCK OWNERSHIP OF DIRECTORS AND OFFICERS

The following table sets forth certain information regarding the shares
of the Company's Common Stock beneficially owned as of June 15, 2000 by (i) each
director and nominee for director, (ii) each executive officer named in the
Summary Compensation Table and (iii) all of the directors and executive officers
of the Company as a group:

SHARES OF PERCENT OF
COMMON STOCK OUTSTANDING
BENEFICIALLY COMMON
NAME OWNED (1)(2) STOCK (3)
------------------------------------ ------------------- ---------------
<S> <C> <C>
Bobba Venkatadri 654,378 3.26%
David W. Barry, M.D. 19,500 *
Robert W. Brightfelt 39,500 *
Charles C. Edwards, M.D. 34,500 *
Jerry T. Jackson 44,500 *
Gordon C. Luce 37,000 *
David Rubinfien 34,500 *
Howard Dittrich, M.D. 261,024 1.30%
Elizabeth Hougen (4) 117,325 *
Joni Harvey (4) 211,532 1.05%

officers as a group - 10 persons. 1,453,759 7.24%
</TABLE>

* Represents less than 1% of the Company's outstanding Common Stock.

50
<PAGE>

(1) Each person named has voting and investment power over the shares
listed, and these powers are exercised solely by the person named or
shared with a spouse.

(2) The shares listed for each person named or the group include shares of
the Company's Common Stock subject to stock options exercisable on or
within 60 days after June 15, 2000. These shares are as follows: Mr.
Venkatadri, 572,675 shares; Dr. Barry, 19,500 shares; Mr. Brightfelt,
34,500 shares; Dr. Edwards, 34,500 shares; Mr. Jackson, 34,500 shares;
Mr. Luce, 34,500 shares; Mr. Rubinfien, 34,500 shares; Dr. Dittrich,
200,550 shares; Ms. Hougen, 86,000 shares; Ms. Harvey, 175,000 shares;
and the group of all directors and executive officers, 1,226,225
shares.

(3) The percentage for each person named or the group has been determined
by including in the number of shares of the Company's outstanding
Common Stock the number of shares subject to stock options exercisable
by that person or group on or within 60 days after June 15, 2000.

(4) These persons terminated from service in April 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the fiscal year ended March 31, 1997, the Company entered into a real
estate investment agreement with Mr. Venkatadri and his wife in connection with
the purchase of their home in San Diego, California. The Company contributed
$300,000 to the purchase and acquired an undivided 53% interest in the home as
tenants in common with Mr. and Mrs. Venkatadri.

PART IV

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

(a) (1) Financial Statements and Financial Statement Schedules

(2) The financial statements and financial statement schedules
filed as a part of this Report are listed in the "Index to
Consolidated Financial Statements and Schedules."

(3) Exhibits - Exhibits marked with an asterisk are filed with
this Report; all other Exhibits are incorporated by reference.
Exhibits marked with a dagger are management contracts or
compensatory plans or arrangements.

3.1 Certificate of Incorporation of the Company, as amended to
date (by amendments filed March 4, 1981, March 30, 1982, March
14, 1983, April 18, 1983, and November 20, 1987).
(Incorporated by reference from Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1988.)

3.2 Certificate of Amendment to Certificate of Incorporation of
Molecular Biosystems, Inc. dated August 20, 1996.
(Incorporated by reference from Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1998.)

3.3 Certificate of Incorporation of Syngene, Inc. as amended
September 20, and December 31, 1989. (Incorporated by
reference from Exhibit 3.2 to

51
<PAGE>

the Company's Annual Report of Form 10-K for the fiscal year
ended March 31, 1990.)

3.4 By-Laws of the Company, as amended and restated September 18,
1990. (Incorporated by reference from Exhibit 3.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1991).

3.5 First Amendment, dated August 20, 1992 to the By-Laws of the
Company, as amended and restated September 18, 1990.
(Incorporated by reference from Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1994.)

3.6 By-Laws of Syngene, Inc. (Incorporated by reference from
Exhibit 3.4 to the Company's Annual Report on form 10-K for
the fiscal year ended March 31, 1990.)

10.1 Restated License Agreement dated June 1, 1989 between the
Company and Steven B. Feinstein, M.D., and related Research
and Supply Agreement dated June 1, 1989. (Incorporated by
reference from Exhibits 10.1 and 10.2 to the Company's Current
Report on Form 8-K filed on June 9, 1989.)

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

10.3 License and Cooperative Development Agreement dated December
31, 1987 between the Company and Nycomed AS ("Nycomed"), and
related Investment Agreement dated December 31, 1987,
Registration Agreement dated December 31, 1987 and Common
Stock Purchase Warrant dated January 19, 1988. (Incorporated
by reference from Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1988.)

10.4 Amendment to License and Cooperative Development Agreement
dated June 15, 1989 between the Company and Nycomed.
(Incorporated by reference from Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1989.)

10.5 Amendment No. 3 to License and Cooperative Development
Agreement dated October 24, 1995 between the Company and
Nycomed Imaging AS. (Incorporated by reference from Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q/A for the
quarterly period ended December 31, 1995.)

10.6 Amended and Restated Distribution Agreement dated September 7,
1995 between the Company and Mallinckrodt Medical, Inc.
(Incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1995.)

10.7 Amendment to Amended and Restated Distribution Agreement dated
November 4, 1996 between the Company and Mallinckrodt Medical,
Inc. (Incorporated by reference from Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997.)

52
<PAGE>

10.8 Second Amended and Restated License and Distribution Agreement
between the Company and Mallinckrodt, effective March 1, 1999.
(Incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q/A for the quarterly period ended
September 30, 1999.)

10.9 Investment Agreement dated December 7, 1988 between the
Company and Mallinckrodt Medical, Inc. (Incorporated by
reference from Exhibit 10.9 to the Company's Annual Report on
form 10-K for the fiscal year ended March 31, 1989.)

10.10 Investment Agreement dated September 7, 1995 between the
Company and Mallinckrodt Medical, Inc. (Incorporated by
reference from Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q/A for the quarterly period ended December 31,
1995.)

10.11 Cooperative Development and Marketing Agreement effective
March 31, 1998 between the Company and Chugai Pharmaceutical
Co., Ltd. (Incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K dated April 7, 1998)

10.12 Common Stock Purchase Agreement effective March 31, 1998
between the Company and Chugai Pharmaceutical Co., Ltd.
(Incorporated by reference from Exhibit 2.2 to the Company's
Current Report on Form 8-K dated April 7, 1998)

10.13 Letter Agreement dated February 18, 1991 between the Company
and Schering Aktiengesellschaft. (Incorporated by reference
from Exhibit 10.9 to the Company's Annual Report of Form 10-K
for the fiscal year ended March 31, 1991.)

10.14 Settlement Agreement and Mutual Release dated September 10,
1996 between the Company and Shionogi & Co., Ltd.
(Incorporated by reference from Exhibit 10.11 to the Company's
Annual Report of Form 10-K for the fiscal year ended March 31,
1997.)

10.15 Exclusive License Agreement dated April 1, 1992 between the
Company and The Regents of the University of California.
(Incorporated by reference from Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1992.)

10.16 License Agreement dated August 23, 1991 between the Johns
Hopkins University, Towson State University and the Company.
(Incorporated by reference from Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1992.)

10.17 License Agreement dated November 11, 1991 between the Company
and the Regents of the University of Michigan. (Incorporated
by reference from Exhibit 10.32 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1992.)

10.18 Exclusive License Agreement dated July 31, 1990 between the
Company and the Regents of the University of California, and
Amendment Agreement dated April 1, 1992. (Incorporated by
reference from Exhibit 10.33 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1992.)

53
<PAGE>

10.19 License Option Agreement dated January 29, 1993 between the
Company and Abbott Laboratories. (Incorporated by reference
from Exhibit 10.1 to the Company's Current Report on Form 8-K
dated January 29, 1993.)

10.20+ Molecular Biosystems, Inc. Pre-1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1989.)

10.21+ Molecular Biosystems, Inc. 1984 Incentive Stock Option Plan
and 1984 Nonstatutory Stock Option Plan, as amended by First
and Second Amendments. (Incorporated by reference from Exhibit
10.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1988.)

10.22+ Third and Fourth Amendments to Molecular Biosystems, Inc. 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1989.)

10.23+ Fifth Amendment to Molecular Biosystems, Inc. 1984 Incentive
Stock Option Plan and 1984 Nonstatutory Stock Option Plan.
(Incorporated by reference from Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1990.)

10.24+ Sixth and Seventh Amendments to Molecular Biosystems, Inc.
1984 Incentive Stock Option Plan and 1984 Nonstatutory Stock
Option Plan. (Incorporated by reference from Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1991.)

10.25+ Eighth and Ninth Amendments to Molecular Biosystems, Inc. 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993.)

10.26+ Form of Stock Option Agreement used with the Company's 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1988.)

10.27+ Molecular Biosystems, Inc. 1993 Stock Option Plan.
(Incorporated by reference from Exhibit 4.2 to the Company's
Registration Statement No. 33-78572 on Form S-8, dated May 3,
1994, filed on May 5, 1994.)

10.28+ Form of Stock Option Agreement used with the Company's 1993
Stock Option Plan. (Incorporated by reference from Exhibit
10.33 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994.)

10.29+ Molecular Biosystems, Inc. 1993 Outside Directors Stock Option
Plan. (Incorporated by reference from Exhibit 4.2 to the
Company's Registration Statement No. 33-78564 on Form S-8,
dated May 3, 1994, filed on May 5, 1994.)

54
<PAGE>

10.30+ Form of Stock Option Agreement used with the Company's 1993
Outside Directors Stock Option Plan. (Incorporated by
reference from Exhibit 10.35 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994.)

10.31+ First Amendment to the Molecular Biosystems, Inc. 1993 Stock
Option Plan (Incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-8 filed on
September 15, 1997 (Registration No. 333-35633.)

10.32+ Molecular Biosystems, Inc. 1997 Outside Directors Stock Option
Plan (Incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-8 filed on
September 15, 1997 (Registration No. 333-35631.)

10.33+ Second Amendment to 1993 Stock Option Plan. (Incorporated by
reference from Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998.)

10.34+ Third Amendment to 1993 Stock Option Plan. (Incorporated by
reference from Exhibit 10.33 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998.)

10.35+ 1998 Stock Option Plan. (Incorporated by reference to the
Company's Proxy Statement on Form 14A for the fiscal year
ended March 31, 1998.)

10.36+ 1998 Stock Option Plan (as amended and restated through
September 22, 1998.) (Incorporated by reference from Exhibit
10.35 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999.)

10.37+ Employment Agreement dated April 25, 1995 between the Company
and Kenneth J. Widder, M.D. (Incorporated by reference from
Exhibit 10.30 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995.)

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

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

10.40+ Partnership Agreement dated October 18, 1996 between the
Company and Bobba and Annapurna Venkatadri. (Incorporated by
reference from Exhibit 10.36 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997).

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

55
<PAGE>

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

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

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

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

10.46+ Employment Agreement between the Company and Bobba Venkatadri,
effective as of January 21, 1999. (Incorporated by reference
from Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1999.)

10.47+ Employment Agreement between the Company and Howard Dittrich,
M.D., effective as of January 21, 1999. (Incorporated by
reference from Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended December 31,
1999.)

10.48+ Employment Agreement between the Company and Joni Harvey,
effective as of January 21, 1999. (Incorporated by reference
from Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1999.)

10.49+ Employment Agreement between the Company and Elizabeth Hougen,
effective as of January 21, 1999. (Incorporated by reference
from Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1999.)

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

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

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

56
<PAGE>

10.53+ Separation Agreement effective December 31, 1998 between the
Company and Gerard A. Wills. (Incorporated by reference from
Exhibit 10.48 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1999.)

10.54+ Separation Agreement effective March 3, 1999 between the
Company and William T. Ramage. (Incorporated by reference from
Exhibit 10.49 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1999.)

10.55+ Separation Agreement effective March 3, 1999 between the
Company and Thomas Jurgensen. (Incorporated by reference from
Exhibit 10.50 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1999.)

10.56 Triple Net Lease dated June 19, 1995 between the Company and
Radnor/Collins/Sorrento Partnership. (Incorporated by
reference from Exhibit 10.43 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995.)

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

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

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

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

10.61 Promissory note dated December 31, 1993 between the Company
and James L. Barnhart. (Incorporated by reference from Exhibit
10.48 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994.)

10.62 Second Amendment to Promissory note dated June 24, 1996
between the Company and James L. Barnhart. (Incorporated by
reference from Exhibit 10.52 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1996.)

10.63 Promissory note dated December 31, 1993 between the Company
and John W. Young. (Incorporated by reference from Exhibit
10.49 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994.)

57
<PAGE>

10.64 License Agreement dated March 26, 1999 between the Company and
Schering Aktiengesellschaft. (Incorporated by reference from
Exhibit 10.59 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1999.)

10.65 Agreement and Plan of Merger dated November 11, 1999 between
the Company and Palatin Technologies of Princeton, New Jersey.
(Incorporated by reference from Exhibit 10.2 to the Company's
Current Report on Form 8-K dated November 11, 1999.)

10.66 License agreement between the Company and Genta Inc.
(Incorporated by reference from Exhibit 10.2 to the Company's
Current Report on Form 8-K dated June 14, 2000.

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

23* Consent of Arthur Andersen LLP.

(b) REPORT ON FORM 8-K

A Current Report on Form 8-K dated January 5, 2000 was filed on January
11, 2000 reporting that effective January 5, 2000, trading of the
Company's common stock was moved to the NASD Over-The-Counter Bulletin
Board and that a new trading symbol of "MBIO" was assigned to the
Company.

58
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on June 23, 2000.

MOLECULAR BIOSYSTEMS, INC.

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

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

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Bobba Venkatadri President, Chief Executive
----------------------------- Officer (Principal Executive June 23, 2000
Bobba Venkatadri Officer and Principle Financial
and Accounting Officer)

/s/ Robert W. Brightfelt Director June 23, 2000
-----------------------------
Robert W. Brightfelt

/s/ Charles C. Edwards, M.D. Director June 23, 2000
-----------------------------
Charles C. Edwards, M.D.

/s/ Gordon C. Luce Director June 23, 2000
-----------------------------
Gordon C. Luce

/s/ David Rubinfien Director June 23, 2000
-----------------------------
David Rubinfien

/s/ David W. Barry, M.D. Director June 23, 2000
-----------------------------
David W. Barry, M.D.

/s/ Jerry Jackson Director June 23, 2000
-----------------------------
Jerry Jackson
</TABLE>