ALLIANCE PHARMACEUTICAL CORP, S-4, 2000-11-09

ALLIANCE PHARMACEUTICAL CORP
S-4, 2000-11-09
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

Previous: FORTIS ADVISERS INC /MN/ /ADV, 13F-HR, 2000-11-09

Next: ALLIANCE PHARMACEUTICAL CORP, S-4, EX-9.1, 2000-11-09

<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 2000.
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
------------------------
ALLIANCE PHARMACEUTICAL CORP.

(Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S> <C> <C>
NEW YORK 2835 14-1644018
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
Incorporation or Organization) Classification Code Number)
</TABLE>

3040 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121
(858) 410-5200

(Address, including Zip Code, and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)

DUANE J. ROTH
CHIEF EXECUTIVE OFFICER
ALLIANCE PHARMACEUTICAL CORP.
3040 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121
(858) 410-5200

(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------

COPIES TO:

<TABLE>
<S> <C>
JOHN M. DUNN, ESQ. CRAIG P. COLMAR, ESQ.
CHRISTOPHER M. FORRESTER, ESQ. PETER J. DAANE, ESQ.
PILLSBURY MADISON & SUTRO LLP JOHNSON & COLMAR
11975 EL CAMINO REAL, SUITE 200 300 SOUTH WACKER DRIVE, SUITE 1000
SAN DIEGO, CALIFORNIA 92130 CHICAGO, ILLINOIS 60606
(619) 234-5000 (312) 922-1980
FAX: (858) 509-4010 FAX: (312) 922-9283
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this registration statement and the
effective time of the merger of Alliance Merger Subsidiary, Inc., a wholly-owned
subsidiary of Alliance Pharmaceutical Corp., with and into Molecular
Biosystems, Inc. as described in the Agreement and Plan of Merger, dated as of
October 11, 2000, attached as Appendix A to the proxy statement-prospectus
forming a part of this registration statement.
------------------------------

If the securities being registered on this form are being offered in
connection with the formation of a holding company and are in compliance with
General Instruction G, check the following box. / /

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. / /
------------------------------

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AMOUNT TO OFFERING PRICE AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE OFFERING PRICE(2)
<S> <C> <C> <C>
Common stock ($0.01 par value)..... 770,000 Not applicable $7,902,473

AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE(3)
<S> <C>
Common stock ($0.01 par value)..... $2,086
</TABLE>

(1) Represents the maximum number of shares of Alliance Pharmaceutical Corp.
common stock, par value $0.01 per share, to be issued pursuant to the merger
agreement in exchange for all of the issued and outstanding shares of common
stock of Molecular Biosystems, Inc.

(2) Pursuant to Rule 457(f), the registration fee was computed based on the
average of the high and low prices of the common stock of MBI as reported on
the Nasdaq over-the-counter Bulletin Board as permitted by Rule 457(c). The
aggregate offering price is the product of (a) the average of the high and
low prices of Molecular Biosystems, Inc., as reported on the Nasdaq
Over-the-Counter Bulletin Board on Monday, November 6, 2000 ($0.42) and
(b) the maximum number of shares of Alliance common stock to be converted in
the merger (18,815,413).

(3) Calculated by multiplying the estimated aggregate offering price of
securities to be registered by 0.000264.
------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
MOLECULAR BIOSYSTEMS, INC.

NOVEMBER , 2000

To the stockholders of Molecular Biosystems, Inc.:

You are cordially invited to attend the special meeting of stockholders of
Molecular Biosystems, Inc., or MBI, to be held on , 2000 at
10:00 a.m., local time, at the Hilton La Jolla Torrey Pines, 10950 North Torrey
Pines Road, La Jolla, California 92037.

At the MBI special meeting, stockholders will be asked to consider and vote
upon a proposal to adopt an agreement and plan of merger between Alliance
Pharmaceutical Corp., or Alliance, Alliance Merger Subsidiary, Inc., or Merger
Sub, a wholly-owned subsidiary of Alliance, and MBI. The merger agreement
provides for the merger of Merger Sub with and into MBI pursuant to which MBI
will become a wholly-owned subsidiary of Alliance. In connection with the
merger, each outstanding share of MBI common stock, par value $0.01 per share,
will be exchanged for a fraction of a share of Alliance common stock, par value
$0.01 per share, determined by the following exchange ratio:

<TABLE>
<S> <C> <C>
Exchange ratio = 770,000 minus adjustment shares
-------------------------------
MBI securities
</TABLE>

For purposes of determining the exchange ratio,

- The number of MBI securities is the aggregate number of issued and
outstanding shares of MBI common stock, plus 49,000 shares of MBI common
stock subject to outstanding in-the-money MBI stock options. As of the
date of this proxy statement-prospectus, the number of MBI securities is
18,815,413; and

- The number of adjustment shares, if any, will be determined as of the
effective time of the merger and will be equal to the amount by which
MBI's total assets, after deducting accumulated depreciation, amortization
and total liabilities, is less than $5,000,000, divided by 32.50.

For example, the exchange ratio, if determined as of the date of the
attached proxy statement-prospectus, would be 0.0409238 shares of Alliance
common stock for each share of MBI common stock using the following formula, and
assuming there are no adjustment shares:

<TABLE>
<S> <C> <C>
770,000
----------

18,815,413 = 0.0409238
</TABLE>

The maximum number of shares of Alliance common stock which will either be
issued in the merger or become subject to outstanding in-the-money options
assumed by Alliance in the merger is 770,000. This number will be reduced by the
number of adjustment shares, if any.

MBI stockholders will also be asked to approve the adjournment or
postponement of the MBI special meeting if an adjournment or postponement is
necessary in order to solicit additional votes for adoption of the merger
agreement.

Details of the foregoing proposals and the MBI special meeting are contained
in the attached notice of special meeting and proxy statement-prospectus. Your
vote on the merger agreement is important to MBI, so please read this
information carefully.

The board of directors of MBI believes that the merger is fair to and in the
best interests of MBI and its stockholders and, accordingly, has unanimously
approved the merger. The board recommends that you vote FOR the merger. In
addition, the board has obtained a written opinion dated October 10, 2000 of
Prudential Securities Incorporated, MBI's financial advisor, to the effect that,
as of such date and based upon and subject to matters described in the opinion,
the exchange ratio, which
<PAGE>
was 0.0407239 at the time of the opinion, was fair, from a financial point of
view, to the holders of MBI common stock.

All stockholders of MBI are invited to attend the MBI special meeting. To
assure your representation at the MBI special meeting, please complete, sign,
date and return the accompanying proxy in the enclosed postage prepaid envelope.
If you are able to attend the MBI special meeting, you may, if you wish, vote
your shares in person.

SEE RISK FACTORS BEGINNING AT PAGE 10 FOR A DISCUSSION OF FACTORS YOU SHOULD
CONSIDER BEFORE DETERMINING WHETHER TO VOTE FOR THE MERGER.

You should rely only on the information contained or incorporated by
reference in this proxy statement-prospectus. Neither Alliance nor MBI has
authorized any other person to provide you with different information. We are
not making an offer to sell these securities, or the solicitation of a proxy, in
any jurisdiction in which, or to any person to whom, it is unlawful to make an
offer or solicitation of an offer or proxy solicitation. You should assume that
the information appearing in this proxy statement-prospectus is accurate only as
of the date on the front cover of this proxy statement-prospectus. The business,
financial condition, results of operation and proxy statement-prospectus may
have changed since that date. All information contained in this proxy
statement-prospectus regarding Alliance and Merger Sub has been furnished by
Alliance, and all information contained in this proxy statement-prospectus
regarding MBI has been furnished by MBI.

THE SECURITIES TO WHICH THIS PROXY STATEMENT-PROSPECTUS RELATE HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

Sincerely yours,
------------------------------------------------------------
BOBBA VENKATADRI
PRESIDENT

The date of this proxy statement-prospectus is November , 2000.
<PAGE>
MOLECULAR BIOSYSTEMS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 2000

To the stockholders of Molecular Biosystems, Inc.:

A special meeting of stockholders of Molecular Biosystems, Inc., or MBI,
will be held , 2000 at 10:00 a.m., local time, at the Hilton La
Jolla, Torrey Pines, 10950 North Torrey Pines Road, La Jolla, California 92037
for the following purposes:

PROPOSALS

1. To consider and vote upon a proposal to adopt an agreement and plan of
merger between Alliance Pharmaceutical Corp., or Alliance, Alliance Merger
Subsidiary, Inc., or Merger Sub, a wholly-owned subsidiary of Alliance, and MBI.
The merger agreement provides for the merger of Merger Sub with and into MBI
pursuant to which MBI will become a wholly-owned subsidiary of Alliance. In
connection with the merger, each outstanding share of MBI common stock, par
value $0.01 per share will be exchanged for shares of Alliance common stock, par
value $0.01 per share, determined by using the following exchange ratio:

<TABLE>
<S> <C> <C>
Exchange ratio = 770,000 minus adjustment shares
-------------------------------
MBI securities
</TABLE>

For purposes of determining the exchange ratio,

<TABLE>
<S> <C> <C>
770,000
----------

18,815,413 = 0.0409238
</TABLE>

2. To approve the adjournment or postponement of the MBI special meeting if
an adjournment or postponement is necessary in order to solicit additional votes
for adoption of the merger agreement.

3. To transact such other business as may properly come before the MBI
special meeting or any adjournment or postponement thereof.

The foregoing proposals are described in the proxy statement-prospectus
accompanying this notice.

UNLESS PROPOSAL 1 IS APPROVED BY THE STOCKHOLDERS HOLDING A MAJORITY OF THE
OUTSTANDING SHARES OF COMMON STOCK OF MBI, THE MERGER WILL NOT BE CONSUMMATED.
<PAGE>
Stockholders of record at the close of business on , 2000 are
entitled to receive notice of, and to vote at, the MBI special meeting and any
adjournment thereof.

It is important that your shares be represented at the MBI special meeting.
Whether or not you plan to attend the MBI special meeting, please complete,
sign, date and promptly mail the enclosed proxy in the envelope provided.

THE BOARD OF DIRECTORS OF MBI RECOMMENDS THAT ITS STOCKHOLDERS VOTE FOR EACH
OF THE PROPOSALS DESCRIBED ABOVE. PLEASE COMPLETE, SIGN, DATE AND PROMPTLY
RETURN YOUR PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE EVEN IF YOU ARE PLANNING
TO ATTEND THE MBI SPECIAL MEETING.

By order of the board of directors
------------------------------------------------------------
BOBBA VENKATADRI
PRESIDENT

November , 2000
<PAGE>
TABLE OF CONTENTS

<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... iv
PROXY STATEMENT-SUMMARY..................................... 1
The Companies............................................. 1
Reasons for the Merger.................................... 2
The Special Meeting....................................... 3
Rights of Dissenting Stockholders......................... 3
Management of the Combined Company Following the Merger... 4
Structure of Merger and Conversion of MBI Stock........... 4
Interests of Directors and Officers in the Merger......... 4
Treatment of MBI Stock Options............................ 4
Treatment of MBI Warrants................................. 4
Summary Historical Financial Data......................... 5
Unaudited Comparative Historical and Pro Forma Per Share
Data...................................................... 7
COMPARATIVE MARKET PRICE INFORMATION........................ 8
RISK FACTORS................................................ 10
Risks Relating to Alliance................................ 10
Risks Relating to MBI..................................... 15
Risks Relating to the Merger.............................. 17
THE SPECIAL MEETING......................................... 19
Quorum.................................................... 19
Vote Required............................................. 19
Record Date; Stock Entitled to Vote; Beneficial Owners.... 20
Voting of Proxies......................................... 20
MBI stockholders should not send stock certificates with
their proxy cards......................................... 20
Revocation of Proxies..................................... 20
Solicitation of Proxies................................... 20
THE MERGER.................................................. 22
Alliance's Reasons for the Merger......................... 22
MBI's Reasons for the Merger.............................. 23
Opinion of MBI's Financial Advisor........................ 26
Effective Time of the Merger.............................. 30
Interests of Directors and Officers in the Merger......... 30
Rights of Dissenting Stockholders......................... 31
Completion and Effective of the Merger.................... 33
Structure of the Merger and Conversion of MBI Stock....... 33
Exchanging of MBI Stock Certificates for Alliance Stock
Certificates.............................................. 34
Treatment of MBI Stock Options............................ 34
Treatment of MBI Warrants................................. 35
Material United States Federal Income Tax Consequences of
the Merger................................................ 35
Accounting Treatment of the Merger........................ 37
Restrictions on Sales of Shares by Affiliates of MBI...... 37
Nasdaq National Market System Inclusion of Alliance Common
Stock to be Issued in the Merger.......................... 37
Delisting and Deregistration of MBI Common Stock after the
Merger.................................................... 38
</TABLE>

i
<PAGE>
<TABLE>
<S> <C>
Material Terms of the Merger Agreement.................... 38
No Other Transactions Involving MBI....................... 39
Voting Agreement.......................................... 44
MANAGEMENT OF THE COMBINED COMPANY FOLLOWING THE MERGER..... 45
Board of Directors of Alliance Following the Merger....... 45
Executive Officers of Alliance Following the Merger....... 45
COMPARISON OF RIGHTS OF HOLDERS OF MBI AND ALLIANCE COMMON
STOCK..................................................... 48
SELECTED HISTORICAL FINANCIAL DATA -- MOLECULAR BIOSYSTEMS,
INC....................................................... 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS--MOLECULAR BIOSYSTEMS, INC.......... 55
ALLIANCE PHARMACEUTICAL CORP. UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS............................ 65
BUSINESS OF MBI............................................. 70
MOLECULAR BIOSYSTEMS, INC. SECURITY OWNERSHIP OF BENEFICIAL
OWNERS AND MANAGEMENT..................................... 78
APPROVAL OF ADJOURNMENT OR POSTPONEMENT OF SPECIAL
MEETING................................................... 79
LEGAL MATTERS............................................... 79
EXPERTS..................................................... 79
WHERE YOU CAN FIND MORE INFORMATION......................... 79
APPENDIX A--AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 11, 2000, AMONG ALLIANCE, MERGER SUB
AND MBI................................................. A-1
APPENDIX B--OPINION OF PRUDENTIAL SECURITIES
INCORPORATED............................................ B-1
APPENDIX C--DELAWARE GENERAL CORPORATION SECTION 262...... C-1
</TABLE>

ii
<PAGE>
SOME OF THE INFORMATION IN THIS PROXY STATEMENT-PROSPECTUS CONSTITUTES
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. ALTHOUGH ALLIANCE AND MBI BELIEVE THAT THEIR
EXPECTATIONS ARE BASED ON REASONABLE ASSUMPTIONS WITHIN THE BOUNDS OF THEIR
KNOWLEDGE OF THEIR RESPECTIVE BUSINESSES AND OPERATIONS, ACTUAL RESULTS OF THE
OPERATIONS OF ALLIANCE OR MBI MAY DIFFER FROM EXPECTATIONS AND THOSE DIFFERENCES
MAY BE MATERIAL. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM
EXPECTATIONS INCLUDE THE FACTORS DESCRIBED UNDER RISK FACTORS.

In this proxy statement-prospectus,

- use of the terms Alliance or Alliance Pharmaceutical Corp. is intended to
refer to Alliance Pharmaceutical Corp. and its subsidiaries as they exist
prior to the merger;

- use of the terms Alliance Merger Subsidiary, Inc. or Merger Sub is intended
to refer to Alliance Merger Subsidiary, Inc.;

- use of the terms Molecular Biosystems, Inc. or MBI is intended to refer to
Molecular Biosystems, Inc. and its subsidiaries as they exist prior to the
merger; and

- use of the term the combined company is intended to refer to Alliance
Pharmaceutical Corp. and its subsidiaries assuming completion of the merger.

THE FOLLOWING TRADEMARKS USED IN THIS PROXY STATEMENT-PROSPECTUS ARE
REGISTERED TRADEMARKS OF ALLIANCE PHARMACEUTICAL CORP. OR ITS SUBSIDIARIES:
OXYGENT, LIQUIVENT, FLOGEL, RODA AND PULMOSPHERES. ALLIANCE HAS APPLIED FOR A
TRADEMARK FOR THE TRADENAME OXYGENT. ORALEX IS A REGISTERED TRADEMARK OF
MOLECULAR BIOSYSTEMS, INC. OR ITS SUBSIDIARIES. ALL OTHER TRADE NAMES AND
TRADEMARKS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.

iii
<PAGE>

<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER

Q: WHY ARE ALLIANCE AND MBI PROPOSING THE MERGER?

A: The boards of directors of Alliance and MBI believe that the
combined company will benefit from the creation of a broader
drug and diagnostic product pipeline.

Q: WHAT WILL HAPPEN TO MBI AS A RESULT OF THE MERGER?

A: If the merger is completed, MBI will become a wholly-owned
subsidiary of Alliance.

Q: WHAT WILL I RECEIVE IN THE MERGER?

A: For each share of MBI common stock you own, you will receive
a fraction of a share of Alliance common stock calculated
using an exchange ratio based on the number of shares of MBI
common stock and the number of in-the-money options for MBI
common stock outstanding as of the effective date of the
merger. Based on the exchange ratio applicable on
November , 2000, which is the most recent practicable date
for which this information could be obtained prior to the
date of this proxy statement-prospectus, you would have
received 0.0409238 shares of Alliance common stock for each
share of MBI common stock you own. You may obtain an updated
exchange ratio by calling (800) 223-2064 at any time up to
the effective date of the merger.

Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?

A: The merger is intended to constitute a tax-free
reorganization for federal income tax purposes. Generally,
MBI stockholders will not recognize taxable gain or loss on
the exchange of their stock, except that MBI stockholders
may be taxed on cash received in lieu of a fractional share.
Alliance stockholders will not recognize any taxable gain or
loss in connection with the merger. However, tax matters are
complicated and the tax consequences of the merger to you
will depend on the facts of your particular situation. You
are encouraged to contact your tax advisor to determine the
tax consequences of the merger to you.

Q: WHAT STOCKHOLDER APPROVALS ARE NEEDED?

A: The affirmative vote of the majority of the outstanding
shares of MBI common stock is required to approve the
merger. Each share of MBI common stock is entitled to one
vote. Stockholders holding approximately 3.69% of the
outstanding MBI common stock have already granted proxies to
vote their shares in favor of the merger.

Q: WILL MY RIGHTS AS AN MBI STOCKHOLDER CHANGE AS A RESULT OF
THE MERGER?

A: Yes. MBI stockholder rights are currently governed by MBI's
certificate of incorporation and bylaws, whereas Alliance
stockholder rights are currently governed by Alliance's
certificate of incorporation and bylaws. Additionally, MBI
is incorporated under the laws of Delaware, whereas Alliance
is incorporated under the laws of the State of New York.
After the merger, MBI stockholders who receive Alliance
common stock in the merger will become stockholders of
Alliance and, therefore, their rights will be governed by
Alliance's certificate of incorporation and bylaws and the
laws of the State of New York.

Q: WHO WILL MANAGE THE COMBINED COMPANY FOLLOWING THE MERGER?

A: MBI will be a wholly-owned subsidiary of Alliance and will
be managed by a board of directors elected by Alliance. Upon
consummation of the merger, Alliance's board will continue
as it exists before the merger and will consist of ten
persons. All current officers of Alliance including its
chairman, chief executive officer and president will
continue in their positions following the merger.
</TABLE>

iv
<PAGE>
<TABLE>
<S> <C>
Q: IF I AM NOT GOING TO ATTEND THE STOCKHOLDER MEETING, SHOULD
I RETURN MY PROXY CARD?

A: Yes. Please fill out and sign your proxy card and mail it to
MBI at the indicated address in the enclosed return envelope
as soon as possible. Returning your proxy card ensures that
your shares will be represented at the special meeting.

Q: SHOULD I RETURN A PROXY CARD EVEN IF I PLAN TO ATTEND THE
SPECIAL MEETING?

A: Yes. You may attend the meeting whether you vote in person
or by proxy. Returning your proxy card ensures that your
shares will be represented at the special meeting.

Q: WHAT DO I NEED TO DO NOW?

A: After carefully reading and considering the information
contained in this proxy statement-prospectus, please respond
by completing, signing and dating your proxy card or voting
instructions and returning it in the enclosed postage-paid
envelope, or, if available, by submitting your proxy or
voting instructions by facsimile telecommunication as soon
as possible so that your shares may be represented at the
special meeting.

Q: WHAT IF I DO NOT VOTE?

A: - If you fail to respond, it will have the same effect as a
vote against the merger.

- If you respond and do not indicate how you want to vote,
your proxy will be counted as a vote in favor of the merger.

- If you respond and abstain from voting, your proxy will
have the same effect as a vote against the merger.

Q: CAN I CHANGE MY VOTE AFTER I HAVE DELIVERED MY PROXY?

A: Yes. You can change your vote at any time before your proxy
is voted at the special meeting. You can do this in one of
three ways:

- You can revoke your proxy;

- You can submit a new proxy; or

- You can attend the special meeting and vote in person.

If you revoke your proxy or submit a new proxy, you must
submit your notice of revocation or your new proxy to an
officer of MBI before the special meeting.

If your shares are held in an account at a brokerage firm or
bank, you should contact your brokerage firm or bank to
change your vote.

Q: IF MY BROKER HOLDS MY SHARES IN STREET NAME, WILL MY BROKER
VOTE MY SHARES FOR ME?

A: No. Your broker will not be able to vote your shares in the
merger unless you provide your broker with instructions on
how to vote your street name shares.

Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

A: No. After the merger is completed, you will receive written
instructions from the exchange agent on how to exchange your
stock certificates for shares of Alliance common stock.
Please do not send in your stock certificates with your
proxy.

Q: WHERE WILL MY SHARES OF ALLIANCE COMMON STOCK BE LISTED?

A: Alliance common stock is listed on the Nasdaq National
Market under the symbol ALLP. Alliance intends to apply to
list the Alliance common stock issuable in the merger for
inclusion on the Nasdaq National Market.

Q: WILL I RECEIVE DIVIDENDS ON MY ALLIANCE SHARES?

A: Alliance does not currently intend to pay dividends on its
common stock.

Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
</TABLE>

v
<PAGE>
<TABLE>
<S> <C>
A: Alliance and MBI are working to complete the merger as
quickly as possible and expect to complete the merger by
, 2000.

Q: WHO CAN HELP ANSWER MY QUESTIONS?

A: If you have any questions about the merger or how to submit
your proxy, or if you need additional copies of this proxy
statement-prospectus or the enclosed proxy card or voting
instructions, you should contact:
</TABLE>

<S> <C> <C>
Georgeson Shareholder Molecular Biosystems, Inc.
Communications, Inc. Investor Relations
17 State Street, 10th Floor 10030 Barnes Canyon Road
New York, New York 10004 or San Diego, California 92121
Banks and Brokers: (212) 440-9900 (858) 625-3905
Others: (800) 223-2064 [email protected]
</TABLE>

vi
<PAGE>
PROXY STATEMENT--PROSPECTUS SUMMARY

THE FOLLOWING IS A SUMMARY OF INFORMATION CONTAINED ELSEWHERE IN THIS PROXY
STATEMENT-PROSPECTUS. THE INFORMATION CONTAINED IN THIS SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROXY STATEMENT-PROSPECTUS AND THE DOCUMENTS INCORPORATED BY
REFERENCE.

THE COMPANIES

ALLIANCE PHARMACEUTICAL CORP.

Alliance Pharmaceutical Corp., or Alliance, is a pharmaceutical research and
development company with three products in late-stage clinical development. Each
product is designed to address a different medical need. These products have
been tested in laboratory studies, animal studies and several human clinical
studies. The products are based on Alliance's expertise with perfluorochemicals,
or PFCs, and other technologies. PFCs are man-made chemicals that can dissolve
and carry oxygen throughout the body, including the lungs. PFCs have also been
shown to be useful in enhancing ultrasound images.

OXYGENT is a temporary oxygen carrier, being evaluated in a Phase 3 clinical
human trial with cardiac surgery patients. In September 2000, Alliance announced
that an initial analysis of data from a Phase 3 clinical trial in Europe
indicated that OXYGENT significantly reduced the need for donor blood in the
target population. OXYGENT is a blood substitute that uses PFCs as raw
materials, instead of human or animal blood. It is being developed to reduce or
eliminate the need for human blood transfusions during elective surgeries where
substantial blood loss is common. Phase 3 trials are typically the final human
studies required prior to requesting marketing approval from a U.S. or foreign
regulatory agency.

LIQUIVENT is a PFC liquid being evaluated in a Phase 2-3 clinical trial for
treatment of patients with acute lung injury and acute respiratory distress
syndrome that is trickled directly into the lungs of a patient who is being
supported by a mechanical ventilator. LIQUIVENT is expected to reduce the damage
resulting from prolonged use of a ventilator by opening up collapsed air sacs,
assisting in providing oxygen to and removing carbon dioxide from the lungs, and
flushing debris from the lungs. One or more additional studies may be required
prior to filing a New Drug Application, or NDA, with the U.S. Food and Drug
Administration, or FDA.

IMAVIST, formerly named IMAGENT, is a PFC-based agent intended to be used
with ultrasound, a noninvasive technique that uses sound waves to produce images
of parts of the body. IMAVIST is being developed to enhance images of the flow
of blood through blood vessels, the heart and other organs. In August 2000, the
FDA completed its review of a NDA for IMAVIST and found it to be approvable upon
Alliance's satisfactory response to issues identified in the review process.

In addition, Alliance has other products in early development. Since these
products are all in development and require regulatory approval, Alliance does
not know whether or when they will be commercially available.

Alliance has never had more than minimal commercial sales. Its current
sources of revenue are derived from product development efforts, including
licensing fees and payments to fund research and development. For Alliance's
fiscal year ended June 30, 2000, it had license and research revenue of
$16.0 million and a net loss of $46.5 million and, at June 30, 2000, Alliance
had an accumulated deficit of $373.2 million. Alliance's net loss for the three
months ended September 30, 2000 was $13.8 million.

Alliance's executive offices are located at 3040 Science Park Road, San
Diego, California 92121 and its telephone number is (858) 410-5200. Alliance's
website is located at www.allp.com. Information

1
<PAGE>
on Alliance's website is not incorporated into this proxy statement--prospectus
by reference and should not be considered as part of this proxy
statement--prospectus.

MOLECULAR BIOSYSTEMS, INC.

Molecular Biosystems, Inc., or MBI, is the developer of OPTISON, which is
the only approved intravenous ultrasound contrast agent marketed in both the
United States and Europe. MBI 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.
OPTISON is approved for use in ultrasound examinations of the heart.

In May 2000, MBI restructured its relationship with Mallinckrodt, Inc., a
global manufacturer of specialty medical products, and agreed to transfer full
control of the OPTISON business to Mallinckrodt in exchange for a 5% royalty on
sales. Under the agreement MBI will receive an additional royalty of 3% on U.S.
sales as a reimbursement of prepaid royalties until U.S. sales exceed
$66.7 million. Mallinckrodt's territory is worldwide, excluding Japan, South
Korea and Taiwan. Mallinckrodt was recently acquired by Tyco
International, Ltd.

Chugai Pharmaceutical Co. Ltd., a Japanese pharmaceutical company, is MBI's
partner for OPTISON in Japan, South Korea and Taiwan. OPTISON, known as FS-069
in Japan, is currently in Phase 3 clinical development for both cardiological
and radiological indications in Japan. Under its agreement with Chugai, MBI is
to receive a 28% royalty on product sales from Chugai plus milestone payments if
OPTISON is successfully developed by Chugai. MBI has no development,
manufacturing or marketing responsibilities under its agreements with Chugai and
Mallinckrodt.

MBI's restructuring of its relationship with Mallinckrodt relating to
OPTISON coincided with the settlement of patent litigation with MBI's
competitors, SONUS Pharmaceuticals, Inc. and Nycomed Amersham plc, which were
claiming patent rights in various ultrasound contrast agent technologies. MBI
paid Mallinckrodt $3 million in cash and transferred real and other property to
Mallinckrodt. The property is expected to be sold by Mallinckrodt. To the extent
Mallinckrodt's sale of the assets does not result in $3 million in net proceeds,
after payment of the outstanding mortgage and one-half of the sales commission,
MBI is required to pay Mallinckrodt an amount equal to the difference. MBI is
required to make an additional $1 million payment to Mallinckrodt upon MBI's
receipt of a milestone payment from Chugai.

MBI has other technologies that it is not exploiting at this time and
currently has reduced its workforce to three employees.

MBI's principal executive offices are located at 10030 Barnes Canyon Road,
San Diego, California 92121 and its telephone number is (858) 625-3900.

REASONS FOR THE MERGER
(SEE PAGE 22)

ALLIANCE

The Alliance board of directors has unanimously approved the merger. The
Alliance board believes that the merger is fair to and in the best interests of
Alliance stockholders because the merger is expected to:

- enable Alliance to broaden its technology portfolio;

- enhance the combined company's cash position and revenue potential; and

- result in financial and operational synergies.

2
<PAGE>
Disadvantages of the merger considered by the Alliance board were:

- the risk that the potential benefits sought in the acquisition might not
be fully realized, if at all; and

- the risk that unknown or contingent liabilities may be assessed after the
merger has been consummated.

MBI

The MBI Board has unanimously approved the merger and recommends a vote FOR
the merger. The MBI Board believes the merger is fair to and in the best
interests of MBI stockholders. In considering the advantages and disadvantages
of the merger, MBI's board considered other offers, but determined that the
combination with Alliance would be in the best interests of MBI's stockholders
because of:

- the benefits of a broader and later-stage drug and diagnostic product
pipeline resulting from the merger;

- the greater potential for increased stockholder value as opposed to MBI
remaining an independent company and compared to other offers received by
MBI;

- the larger public float and trading volume of Alliance common stock; and

- the premium over the price at which MBI stock is trading.

Disadvantages of the merger considered by MBI's board include the potential of
adverse findings in Alliance's ongoing clinical and regulatory development of
its products might have a negative impact on Alliance's stock price, thus
reducing the value of the consideration received by MBI stockholders in the
merger.

In connection with reaching its decision to recommend the merger, MBI's
board obtained an opinion of Prudential Securities Incorporated, its independent
financial advisor, that the exchange ratio was fair from a financial point of
view to the stockholders of MBI. However, the fairness opinion is based on an
exchange ratio of 0.0407239, which was based on 770,000 shares of Alliance
common stock expected to be received by the MBI stockholders divided by the
number of shares of MBI common stock outstanding at the time of the execution
and delivery of the merger agreement. While the aggregate number of shares of
Alliance common stock to be issued to holders of MBI common stock has not
changed since the date of the fairness opinion, the number of outstanding shares
of common stock of MBI has decreased, which has resulted in an adjustment of the
exchange ratio from 0.0407239 to 0.0409238. Prudential Securities has not opined
on the fairness of the adjusted exchange ratio.

THE SPECIAL MEETING
(SEE PAGE 19)

The special meeting of the MBI stockholders will be held on ,
2000 at 10:00 a.m., local time, at Hilton La Jolla Torrey Pines, 10950 North
Torrey Pines Road, La Jolla, California 92037.

RIGHTS OF DISSENTING STOCKHOLDERS
(SEE PAGE 31)

Under Delaware law, MBI stockholders who submit a written demand for
appraisal of their shares and who comply with the other applicable statutory
procedures under Delaware law, including not voting for the merger, will be
entitled to seek appraisal rights and to receive payment in cash for the fair
value of their shares as determined by the Delaware Chancery Court.

3
<PAGE>
MANAGEMENT OF THE COMBINED COMPANY FOLLOWING THE MERGER
(SEE PAGE 45)

Following completion of the merger, MBI will be a wholly-owned subsidiary of
Alliance and will be managed by a board of directors elected by Alliance. Upon
consummation of the merger, Alliance's board of directors will continue as it
exists before the merger and will consist of ten persons. Alliance's officers
will continue in their positions following the merger.

STRUCTURE OF THE MERGER AND CONVERSION OF MBI STOCK
(SEE PAGE 33)

Under the terms of the merger agreement, upon closing of the merger, MBI
stockholders will receive a number of shares of Alliance common stock determined
by application of the exchange ratio. Thereafter, each MBI stockholder prior to
the merger will become a stockholder of Alliance. In connection with the merger,
Alliance Merger Subsidiary, Inc., or Merger Sub, which is a wholly-owned
subsidiary of Alliance, will be merged with and into MBI, with MBI remaining as
the surviving corporation. Following the completion of the merger, MBI will be a
wholly-owned subsidiary of Alliance.

INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER
(SEE PAGE 30)

Some of the directors and executive officers of MBI have interests in the
merger that are different from, or are in addition to those of MBI's
stockholders. These interests include acceleration of options and change in
control severance payments.

TREATMENT OF MBI STOCK OPTIONS
(SEE PAGE 34)

Outstanding options in MBI's stock option plans not otherwise exercisable
will become immediately exercisable in accordance with their terms prior to the
closing of the merger. If these options are not exercised at that time they will
terminate automatically, except that outstanding options in MBI's 1993 Stock
Option Plan, 1993 Outside Directors Option Plan and 1997 Outside Directors
Option Plan that are not exercised shall be converted automatically into options
to purchase a number of shares of Alliance common stock, at an exercise price
determined by application of the exchange ratio. These options will continue to
have all other original rights and obligations.

TREATMENT OF MBI WARRANTS
(SEE PAGE 35)

Each outstanding warrant to purchase shares of MBI common stock will become
immediately exercisable prior to the closing of the merger. If not exercised at
that time, outstanding warrants will be converted automatically into a right to
purchase a number of shares of Alliance common stock, at an exercise price
determined by application of the exchange ratio.

4
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA

MOLECULAR BIOSYSTEMS, INC.

<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEARS ENDED
SEPTEMBER 30, MARCH 31,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Revenues under collaborative agreements............ $ 3,000 $ -- $ 5,498 $ 3,000
Product and royalty revenues....................... 517 630 4,083 1,525
Milestone payments................................. -- -- -- 4,000
License fees....................................... -- 41 -- --
-------- -------- -------- --------
Total revenues................................. 3,517 671 9,581 8,525
Operating expenses:
Research and development costs..................... 2,448 368 9,083 4,261
Costs of products sold............................. (529) -- 7,840 (107)
Selling, general and administrative expenses....... 4,098 1,787 14,191 10,166
Other nonrecurring charges......................... -- 2,220 -- --
Cost reduction measures:
Asset disposals.................................. -- -- 3,143 --
Severance costs.................................. -- -- 2,328 1,653
Technology transfer.............................. -- -- 265 --
Exit costs....................................... -- -- 384 --
-------- -------- -------- --------
Total operating expenses....................... 6,017 4,375 37,234 15,973
Other income (expenses):
Gain on disposal of asset held for sale.............. -- -- 6,993 --
Interest expense..................................... (234) (124) (574) (447)
Interest income...................................... 402 244 1,394 727
Foreign income tax provision......................... -- 2,800 (1,400) (400)
-------- -------- -------- --------
Total other income............................. 168 2,920 6,413 (120)
-------- -------- -------- --------
Net loss............................................. $ (2,332) $ (784) $(21,240) $ (7,568)
======== ======== ======== ========
Loss per common share--basic and diluted............. $ (0.12) $ (0.04) $ (1.14) $ (0.40)
======== ======== ======== ========
Weighted average common shares outstanding........... 18,729 18,797 18,564 18,749
======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31,
AS OF -------------------
SEPTEMBER 30, 2000 1999 2000
------------------- -------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities.......... $ 9,834 $18,038 $12,043
Working capital........................................... 6,531 10,693 3,824
Total assets.............................................. 12,147 31,849 22,644
Long-term debt............................................ -- 4,804 3,529
Total stockholders' equity................................ 8,165 16,207 8,669
</TABLE>

5
<PAGE>
ALLIANCE PHARMACEUTICAL CORP.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
------------------- ---------------------
1999 2000 1999 2000
-------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
-----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues..................................... $ 1,568 $ 14 $ 8,251 $ 16,000
Net loss applicable to common shares............... $(10,720) $(13,840) $(62,473) $(46,467)
Net loss per common share, basic and diluted....... $ (0.25) $ (0.29) $ (1.89) $ (1.03)
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, -------------------
2000 1999 2000
------------- -------- --------
(IN THOUSANDS)
(UNAUDITED)
-----------
<S> <C> <C> <C>

Balance Sheet Data:
Working capital........................................... $ 10,221 $ 11,009 $ 11,325
Total assets.............................................. $ 71,817 $ 65,984 $ 75,949
Long-term debt and other.................................. $ 27,626 $ 10,499 $ 19,013
Stockholders' equity...................................... $ 22,195 $ 42,125 $ 33,266
</TABLE>

6
<PAGE>
UNAUDITED COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

Presented below is per common share data regarding the income and book value
of Alliance and MBI on both historical and unaudited pro forma combined basis.
The unaudited pro forma combined per share information was derived from the
unaudited pro forma combined condensed financial statements presented elsewhere
in this proxy statement-prospectus. Alliance and MBI have different fiscal
years. After the merger, the fiscal year of the combined company will be the
fiscal year of Alliance. Neither Alliance nor MBI have paid cash dividends.

Alliance and MBI believe that it is meaningful to present pro forma
financial information based on the fiscal year of the combined company to
facilitate an analysis of the pro forma effects of the merger. The pro forma
combined condensed financial information is not necessarily indicative of the
operating results of future operations or the actual results that would have
occurred at the beginning of the period. You should read the information below
in conjunction with the financial statements and accompanying notes of MBI that
are contained elsewhere in this proxy statement-prospectus and, in the case of
Alliance, incorporated into this proxy statement-prospectus by reference.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
<S> <C> <C>
ALLIANCE HISTORICAL
Net loss per common share, basic and diluted:....... $(.29) $(1.03)
Book value per common share:........................ .47 .70
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 2000 MARCH 31, 2000
------------------ --------------
<S> <C> <C>
MBI HISTORICAL
Net loss per common share, basic and diluted:....... $(.03) $(.40)
Book value per common share:........................ .44 .46
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
<S> <C> <C>
PRO FORMA COMBINED
Net loss per common share, basic and diluted:....... $(.30) $(1.19)
Book value per common share:........................ .68

EQUIVALENT PRO FORMA COMBINED

Net loss per common share, basic and diluted:....... $(.01) $ (.05)

Book value per common share:........................ .03
</TABLE>

The equivalent pro forma combined amounts are calculated by multiplying the
corresponding unaudited pro forma combined per share amounts by the exchange
ratio in the merger of 0.0409238 of a share of Alliance common stock for each
share of MBI common stock.

7
<PAGE>
COMPARATIVE MARKET PRICE INFORMATION

Alliance common stock trades on the Nasdaq National Market under the symbol
ALLP. The table below provides, for the fiscal quarter indicated, the reported
high and low sale prices of Alliance common stock on the Nasdaq National Market.

<TABLE>
<CAPTION>
FISCAL YEAR ENDING
JUNE 30, 2001
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter............................................. $17.750 $10.375
Second Quarter through October 11, 2000................... 16.000 13.375
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30, 2000
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter............................................. $ 7.000 $ 2.438
Second Quarter............................................ 8.500 3.750
Third Quarter............................................. 20.750 7.125
Fourth Quarter............................................ 14.750 4.438
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30, 1999
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter............................................. $ 5.625 $ 2.781
Second Quarter............................................ 5.063 2.188
Third Quarter............................................. 3.938 2.438
Fourth Quarter............................................ 3.438 2.250
</TABLE>

Before January 5, 2000, MBI's common stock traded on the New York Stock
Exchange under the symbol MB. Effective January 5, 2000, trading on the New York
Stock Exchange or NYSE was suspended and MBI's common stock began trading on the
NASD OTC Bulletin Board, under the symbol MBIO. If the merger is consummated,
MBI stockholders will receive Nasdaq National Market-listed Alliance common
stock and MBI common stock will cease to trade.

8
<PAGE>
The table below provides, for the fiscal quarters indicated, the reported
high and low closing sale prices of MBI's common stock on the NYSE prior to
January 5, 2000 and on the NASD OTC Bulletin Board since January 5, 2000.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31, 2001
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter............................................... $0.969 0.625
Second Quarter.............................................. 0.932 0.375
Third Quarter through October 11, 2000...................... 0.531 0.375
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31, 2000
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter............................................... $2.813 $2.313
Second Quarter.............................................. 2.438 1.750
Third Quarter............................................... 1.750 0.875
Fourth Quarter.............................................. 4.000 1.000
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31, 1999
--------------------------
HIGH LOW
-------- ---------------
<S> <C> <C>
First Quarter............................................... $10.625 $ 7.000
Second Quarter.............................................. 7.375 3.625
Third Quarter............................................... 4.375 2.500
Fourth Quarter.............................................. 3.438 2.313
</TABLE>

The following table provides the closing prices per share of Alliance common
stock and MBI common stock on October 11, 2000, the date of execution and
delivery of the merger agreement and the date prior to public announcement of
the merger, and on , 2000, which is the last practicable date for which
this information could be obtained prior to the date of this proxy
statement-prospectus. The estimated equivalent per share price of MBI common
stock is calculated by multiplying the price per share of Alliance common stock
by the exchange ratio.

<TABLE>
<CAPTION>
MBI ESTIMATED
EQUIVALENT PER SHARE
DATE ALLIANCE PER SHARE PRICE MBI PER SHARE PRICE PRICE
---- ------------------------ ------------------- --------------------
<S> <C> <C> <C>
October 11, 2000..................... $13.50 $0.4531 $0.5525
, 2000......................
</TABLE>

Because the market price of Alliance common stock is subject to fluctuation,
the market value of the shares of Alliance common stock that holders of MBI
common stock will receive in the merger may increase or decrease. WE URGE
HOLDERS OF MBI COMMON STOCK TO OBTAIN A CURRENT MARKET QUOTATION FOR ALLIANCE
COMMON STOCK BEFORE VOTING ON THE MERGER AGREEMENT AND THE MERGER.

9
<PAGE>
RISK FACTORS

THE MERGER INVOLVES A HIGH DEGREE OF RISK. BY VOTING TO APPROVE THE MERGER,
YOU WILL BE CHOOSING TO INVEST IN ALLIANCE COMMON STOCK, WHICH INVOLVES A HIGH
DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
EVALUATING WHETHER TO APPROVE THE MERGER. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, THE BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF EITHER OR
BOTH OF ALLIANCE AND MBI MAY BE SERIOUSLY HARMED.

RISKS RELATING TO ALLIANCE

ALLIANCE HAS A HISTORY OF OPERATING LOSSES AND LIMITED PRODUCT REVENUE AND IT
MAY NEVER BECOME PROFITABLE.

Alliance has had net operating losses since its inception and Alliance
expects such losses to continue until it receives revenue from product sales. As
of June 30, 2000, Alliance had an accumulated deficit of $373.2 million. For the
years ended June 30, 1998, 1999 and 2000, Alliance incurred net losses of
$33 million, $62.5 million and $46.5 million. Alliance's net loss for the three
months ended September 30, 2000 was $13.8 million. Substantially all of
Alliance's revenue to date has come from sources other than product sales, such
as licensing fees, milestone payments and payments to fund research and
development activities under joint development and license agreements.

ALLIANCE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING IT WILL NEED TO
COMPLETE DEVELOPMENT AND TO INTRODUCE PRODUCTS TO THE MARKET.

The costs of Alliance's current clinical trials are high. Alliance believes
that its existing capital resources, including expected equity investments by
Baxter Healthcare Corporation, will satisfy its capital requirements through
fiscal 2001. However, Alliance will need additional financing for its business.
Alliance's future capital requirements will depend on many factors, including:

- results of its late-stage clinical trials, such as those currently being
conducted with OXYGENT and LIQUIVENT;

- development progress on FLOGEL, an anti-adhesion agent, and RODA, a
cardiovascular and hemadynamics monitoring device;

- continued scientific progress in Alliance's research and development
programs such as preclinical testing of other product candidates;

- the time and cost involved in obtaining regulatory approvals for each of
its products. For example, although Alliance completed a Phase 3 trial in
Europe and preliminary analysis indicates OXYGENT reduced the need for
donor blood, further analysis must be done prior to filing for European
approval to market the drug, and the European approval process can take up
to a year or more to complete;

- changes in existing collaborative relationships with Baxter Healthcare
Corporation, Inhale Therapeutics Systems, Inc., Schering AG or VIA Medical
Corporation;

- patent costs;

- competing technological and market developments; and

- the cost of manufacturing scale-up.

Accordingly, Alliance cannot estimate the amount of additional financing
that it will require, but Alliance knows that it will be substantial.

10
<PAGE>
FAILURE TO LICENSE ALLIANCE'S PRODUCTS COULD SERIOUSLY HINDER ITS ABILITY TO
FURTHER DEVELOP ITS PRODUCTS AND MARKET THEM SUCCESSFULLY.

If Alliance does not negotiate acceptable collaborative arrangements for its
principal products, Alliance will lack the funds to further develop them.
Alliance does not have internal marketing and sales capabilities and it will
need to rely on collaborative partners to market and sell any products that it
may successfully develop. Even if Alliance finds collaborative partners, it may
not be able to completely control the amount and timing of resources that its
collaborative partners will devote to these activities. Alliance intends to seek
a collaborative arrangement for LIQUIVENT to help cover the cost of development,
but it does not know if it will be successful. If Alliance cannot find
collaborative relationships or other sources of financing, it may not be able to
continue some of its development programs and would be forced to sell assets,
including technology, to raise capital.

ALLIANCE'S ABILITY TO FURTHER DEVELOP OXYGENT AND BRING IT TO MARKET DEPENDS ON
THE SUCCESS OF ITS MAY 2000 COLLABORATIVE ARRANGEMENT WITH BAXTER HEALTHCARE
CORPORATION.

In May 2000, in order to provide for the further development and marketing
of OXYGENT, Alliance and Baxter formed and invested $5 million each in a limited
liability company owned 50% by Baxter and 50% by Alliance. Alliance and Baxter
also entered into a series of related agreements. Baxter purchased $20 million
of Alliance's convertible preferred stock and the limited liability company paid
Alliance a $10 million prepaid royalty in May 2000. Baxter has agreed to
purchase up to an additional $30 million of Alliance's convertible redeemable
preferred stock through September 2001. Alliance needs the proceeds of these
purchases for clinical trials and to obtain regulatory approval. Baxter will
sell and distribute OXYGENT in the United States, Canada and Europe, and may
terminate the arrangement and any future funding on three to nine months notice.

A TERMINATION OF ALLIANCE'S LICENSE AGREEMENT WITH SCHERING AG COULD IMPEDE ITS
RESEARCH, DEVELOPMENT AND MARKETING OF IMAVIST AND REDUCE ITS REVENUE POTENTIAL.

Alliance depends on Schering AG for development and regulatory approvals
outside the United States and for worldwide marketing of IMAVIST. In
December 1998, Alliance and Schering AG modified their license agreement. The
modified agreement reduced ongoing development reimbursement to Alliance, added
new milestone payments to Alliance and restructured the methods for calculating
royalties to be received by Alliance. Schering AG may terminate the license
agreement on one month advance notice.

ALLIANCE CANNOT MANUFACTURE OR MARKET ITS PRODUCTS WITHOUT THE NECESSARY
APPROVALS BY THE FDA OR BY OTHER APPLICABLE REGULATORY AUTHORITIES.

All facilities and manufacturing techniques used in the manufacture of
products for clinical use or for sale in the United States must be operated in
conformity with current good manufacturing practices guidelines as established
by the FDA. Alliance does not know whether the FDA will determine that its
facilities comply with good manufacturing practices. A delay in FDA approval of
Alliance's manufacturing facilities would delay the marketing of its products.
For example, a finding that Alliance had materially violated good manufacturing
practices requirements could result in additional regulatory sanctions and, in
severe cases, could result in mandated closing of its facilities. Overall, the
process of obtaining regulatory clearances or approvals is costly and
time-consuming.

While Alliance believes that it can produce materials for clinical trials
and the initial market launch for OXYGENT and IMAVIST at its existing San Diego
facilities and for LIQUIVENT at Alliance's Otisville, New York facility,
Alliance will not be able to commercialize its products until its has acceptable
clinical trial results and regulatory approval from the FDA and foreign
regulatory authorities. The FDA and other regulatory authorities require that
the safety and efficacy of a drug be supported by results from adequate and
well-controlled clinical trials before approval for commercial

11
<PAGE>
sale. If the results of the clinical trials of Alliance's products do not
demonstrate that they are safe and effective, Alliance will not be able to
submit to the FDA a new drug application or other relevant applications for
pre-market approval. Further, the results of preclinical testing and initial
clinical trials do not necessarily predict how safe and effective a product will
be when it is evaluated in large-scale Phase 3 clinical trials. It is possible
that unacceptable side effects may be discovered at any time. A number of
companies have suffered significant setbacks in advanced clinical trials,
despite promising results in earlier trials.

Even if Alliance believes the clinical trials demonstrate the safety and
efficacy of a product, the FDA and foreign regulatory authorities may not accept
Alliance's assessment of the results. The FDA and foreign regulatory authorities
may require Alliance to conduct additional clinical trials beyond those it
currently planned in order to demonstrate the safety and efficacy of its
products.

DELAYS IN THE COMPLETION OF ALLIANCE'S CLINICAL TRIALS COULD INCREASE ITS COSTS.

Alliance cannot predict how long its preclinical and clinical trials will
take or whether they will be successful. The rate of completion of the clinical
trials for its products depends on many factors, including obtaining adequate
clinical supplies and the rate of patient recruitment. Patient recruitment is a
function of many factors, including the size of the patient population, the
proximity of patients to clinical sites and the eligibility criteria for
patients who may enroll in the trial. Alliance may experience increased costs,
program delays, or both if there are delays in patient enrollment in the
clinical trials.

IF ALLIANCE CANNOT PROTECT ITS PATENTS AND PROPRIETARY TECHNOLOGY, IT MAY BE
UNABLE TO MANUFACTURE AND MARKET ITS PRODUCTS SUCCESSFULLY.

Alliance believes that its success will depend largely on its ability to
obtain and maintain patent protection for its own inventions, to license the use
of patents owned by third parties when necessary, to protect trade secrets and
to conduct its business without infringing the proprietary rights of others.
Alliance has obtained patents covering intermediate and high-concentration PFC
emulsions, patents related to liquid ventilation and patents covering stabilized
microbubble compositions, as well as other patents. Alliance has filed, and when
appropriate will file, other patent applications with respect to its products
and processes in the United States and in foreign countries. Alliance does not
know, however, whether it will develop any additional products or processes that
will be patentable or that any additional patents will be issued to it. Alliance
also does not know whether:

- any patent applications will result in the issuance of patents;

- issued patents will provide significant proprietary protection or
commercial advantage; or

- issued patents will not be circumvented by others.

The patent positions of pharmaceutical medical products and biotechnology
firms can be uncertain and involve complex legal and factual questions. It is
possible that a party may successfully challenge any of Alliance's patents or
any of the patents licensed to Alliance. If that were to happen, Alliance would
lose the right to prevent others from using the technology. It is also possible
that Alliance may unintentionally infringe on patents of third parties. Alliance
may have to alter its products or manufacturing processes to take into account
the patents of third parties and this may cause delays in product development.
Further, Alliance may not be able to alter its products or manufacturing
processes to avoid conflicts with third-party patents. As a result, Alliance may
have to terminate the development or commercialization of a product or pay
royalties to the holders of the patents.

Alliance may be forced to litigate to enforce any patents it owns or to
determine the scope and validity of others' proprietary rights. Patent
litigation can be very expensive and the result is uncertain.

Alliance also attempts to protect its proprietary products and processes by
relying on trade secret laws and non-disclosure and confidentiality agreements.
Alliance enters into these agreements with its employees and other persons who
have access to its products or processes.

12
<PAGE>
Other parties may independently develop products or processes similar to
Alliance's proprietary products and processes. They may also obtain access to
these products or processes. If others develop or obtain products or processes
similar to those of Alliance, its competitive position will be damaged. In
particular, SONUS Pharmaceuticals, DuPont Pharmaceuticals, Nycomed and Bracco
Diagnostics, Inc. have issued patents and other patent applications in process
for ultrasound contrast imaging patents. Many of these patents overlap each
other. It will take several years to clarify which patents are valid and
enforceable. Although Alliance believes it will have the right to manufacture,
use and sell IMAVIST if it is approved by the FDA, it is possible that Alliance
may need to license rights under patents owned by others. Alliance may not be
able to obtain the license rights it needs. Other companies may find that their
current or future activities violate Alliance's patents. Alliance believes
companies have obtained patents to which they are not entitled under U.S. law,
and Alliance has requested patent interference proceedings in the U.S. Patent
Office to resolve those issues.

ALLIANCE COULD INCUR SIGNIFICANT DELAYS IN MARKETING ITS PRODUCTS IF IT IS
UNABLE TO OBTAIN THE NECESSARY RAW MATERIALS FROM ITS EXISTING SOURCES.

Alliance needs sufficient supplies of raw materials to develop and market
its products successfully. The raw materials in products that are approved by
the FDA cannot be changed without equivalency testing, or qualification, of the
new material by Alliance and approval by the FDA. Some of the raw materials for
Alliance's products are expected to be qualified from only one supplier. At
times, one or more of these qualified materials may not be available or may be
available only in limited quantities. Alliance is currently negotiating with
some of these suppliers for long-term supply contracts for raw materials;
however, Alliance does not know whether it will be able to obtain commitments
for a long-term supply of these raw materials on acceptable terms. If Alliance
is required to qualify another supplier of raw materials for any of its
products, it may be delayed from further development or marketing of the product
by up to one year or more and may incur substantial additional expense,
depending on the number of potential suppliers, the type of qualifying tests and
the cost of materials from other sources.

UNFORESEEN TECHNOLOGICAL AND SCIENTIFIC PROBLEMS OR THIRD-PARTY DEVELOPMENT MAY
DELAY OR PREVENT MARKETING OF ALLIANCE'S PRODUCTS.

Alliance or its collaborative partners may encounter unforeseen
technological or scientific problems, including adverse side effects. Unforeseen
technological or scientific problems may force Alliance to abandon or
substantially change the plan of development of a specific product or process. A
technological change or product development by others may make Alliance's
products or processes obsolete or may allow another company to develop and
manufacture much less expensive, competitive products. These problems may
adversely affect Alliance's future business prospects and operations.

THE LACK OR INADEQUACY OF THIRD-PARTY REIMBURSEMENT FOR ALLIANCE'S PRODUCTS MAY
MAKE IT MORE DIFFICULT TO MARKET ANY PRODUCTS IT DEVELOPS.

Alliance's ability to commercialize its products successfully depends in
part on the extent to which the cost of the products and related treatment will
be reimbursed by government authorities, private health insurers and other
organizations, such as HMOs. Third-party payors are increasingly challenging the
prices charged for medical products and services. The purchase of healthcare
services and products may be significantly affected by:

- the trend toward managed healthcare in the United States;

- the growth of healthcare organizations such as HMOs; and

- legislative proposals to reform healthcare and government insurance
programs.

These factors could result in lower prices and reduced demand for Alliance's
products. Healthcare providers are instituting cost containment measures. Any
cost containment measures as well as any healthcare reform could reduce or
eliminate any profit to Alliance on sales of its products. Full or

13
<PAGE>
partial reimbursement in the United States or foreign countries may not be
available for any of Alliance's products. If reimbursements are not available or
sufficient, Alliance may not be able to sell its products. Alliance cannot
forecast what additional legislation or regulation relating to the healthcare
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect the legislation or regulation would have on Alliance's business.

MANY OF ALLIANCE'S EXISTING OR POTENTIAL COMPETITORS HAVE SUBSTANTIALLY GREATER
RESOURCES AND MAY BE BETTER EQUIPPED TO DEVELOP, MANUFACTURE AND MARKET PRODUCTS
SIMILAR TO ALLIANCE'S.

Alliance may be unable to compete successfully in developing and marketing
its products. Many pharmaceutical companies, biotechnology companies, public and
private universities and research organizations are actively engaged in the
research and development of products that compete with Alliance's products. Some
of these companies, particularly the large worldwide pharmaceutical companies,
have more resources than Alliance does and may develop and introduce products
and processes competitive with or superior to those of Alliance. Other companies
that Alliance knows are developing blood substitute products are Biopure
Corporation, Northfield Laboratories, Inc. and Hemosol, Inc. Other companies
that Alliance knows are developing ultrasound contrast agents that may compete
with IMAVIST are SONUS Pharmaceuticals, DuPont Pharmaceuticals, Nycomed and
Bracco. Alliance knows of no direct liquid ventilation competitors for
LIQUIVENT.

In addition, Alliance's products and technologies may become uncompetitive
or obsolete upon the development of other technologies or products that have an
entirely different approach or means of accomplishing the same purposes.

ALLIANCE'S PRODUCTS AND THE PROCESSES IT USES COULD EXPOSE ALLIANCE TO
SUBSTANTIAL PRODUCT LIABILITY.

Claims by users of Alliance's products or of products manufactured by
processes it developed, or by manufacturers or others selling Alliance's
products, either directly or as a component of other products, could expose
Alliance to substantial product liability. Alliance's product liability
insurance coverage may be inadequate to cover the amount of any liability.

ALLIANCE MAY ISSUE ADDITIONAL PREFERRED STOCK, THE TERMS OF WHICH COULD
ADVERSELY AFFECT THE PRICE OF ITS COMMON STOCK.

Alliance's board of directors is authorized to issue up to an additional
2,972,727 shares of preferred stock. In addition, Alliance's board of directors
may determine the rights, preferences, privileges and restrictions of any shares
of preferred stock without any further vote or action by the stockholders. The
possible issuance of preferred stock could delay, defer or prevent a change in
control of Alliance. The conversion and other features of any series of
preferred stock may also limit the price that investors may be willing to pay in
the future for shares of Alliance's common stock.

THE SUBSTANTIAL NUMBER OF ALLIANCE'S SHARES THAT ARE ELIGIBLE FOR FUTURE SALE
COULD LIMIT ITS ABILITY TO FIND NEW EQUITY INVESTORS.

As of November 8, 2000, 9,437,785 shares of Alliance's common stock, 15.6%
of the total number of shares outstanding on a fully diluted basis, were
issuable upon the exercise of outstanding options and warrants. Additionally,
2,372,047 shares of Alliance common stock were issuable upon the conversion of
outstanding convertible debentures. Over a period of approximately four years,
Alliance may issue an indeterminate number of additional shares of its common
stock to the former stockholders of MDV Technologies, Inc., a company Alliance
acquired in 1996. Additionally, holders of $28.9 million in principal amount of
the outstanding subordinated convertible debentures have an option at any time
to purchase an additional $36.9 million principal amount of subordinated
convertible debentures. Of these additional debentures, $15 million principal
amount will be initially convertible into Alliance's common stock at $12.06 per
share, $12 million principal amount will be initially convertible at $16.00 per
share and $9.9 million principal amount will be initially convertible at $22.17
per share. The existence of these warrants, options and convertible securities,
as well as registration

14
<PAGE>
rights associated with these securities, may adversely affect the terms on which
Alliance may obtain additional equity financing and the after-market trading of
its stock. The holders of the outstanding warrants and options are likely to
exercise their rights to acquire Alliance common stock at a time when Alliance
would otherwise be able to obtain capital on terms more favorable than those
provided by the exercise or conversion prices of these warrants and options.

RISKS RELATING TO MBI

MBI'S LIMITED RESOURCES IMPEDE ITS ABILITY TO PRODUCE ADDITIONAL REVENUE.

In connection with the settlement of patent litigation, MBI restructured its
operations and its relationship with Mallinckrodt. MBI currently depends on a 5%
royalty from Mallinckrodt on sales of OPTISON for a significant portion of its
income from operations. OPTISON sales have been disappointing to date. MBI has
limited human and financial resources which impede its ability to obtain and
commercialize new technologies that could generate revenue. Due to its limited
resources MBI is currently not exploiting its other technologies.

IF PRODUCTS DEVELOPED USING MBI-LICENSED TECHNOLOGY FAIL IN THE MARKETPLACE, MBI
MAY NOT BE ABLE TO GENERATE ANY REVENUE.

MBI's revenue from continuing operations depends upon its manufacturing and
marketing partners' ability to sell contrast agents developed by MBI, including
particularly OPTISON. Failure of these products to gain widespread commercial
acceptance could harm MBI's business.

Among the factors which would cause OPTISON to fail in the marketplace are:

- high production costs;

- improvements in competing technologies;

- uncompetitive pricing;

- difficulties in obtaining raw materials and failure to approve alternative
raw materials; and

- failure to obtain broad reimbursement by healthcare providers.

Other factors which may impact MBI's revenues include the unwillingness or
inability of MBI's marketing partners to continue to exploit the ultrasound
market and their failure to obtain approvals for additional indications in the
United States and Europe and for any indication in Japan and other countries.

MBI HAS LIMITED CONTROL OVER ITS MARKETING PARTNERS AND THEIR ABILITY TO PRODUCE
ROYALTY INCOME FOR MBI.

MBI does not manufacture products and does not have and does not intend to
develop its own marketing organization. MBI relies instead on its corporate
partners to manufacture, market and sell OPTISON. Mallinckrodt is MBI's
principal strategic marketing partner for OPTISON. Mallinckrodt has exclusive
distribution rights for OPTISON ,except in Japan Taiwan and South Korea.
Mallinckrodt recently entered into a collaboration agreement with Nycomed to
jointly develop and market OPTISON in Mallinckrodt's territory. Chugai has
exclusive distribution rights for OPTISON in Japan, Taiwan, and South Korea.
These companies have complete control over all aspects of product development,
manufacturing and marketing of OPTISON in their territories. Therefore, MBI is
dependent on Mallinckrodt's and Chugai's product development, regulatory and
manufacturing capabilities, marketing efforts, resources and commitment to
OPTISON. Mallinckrodt and Chugai may not market the licensed products
effectively or at all. Mallinckrodt was recently acquired by Tyco
International Ltd. and there are no assurances that Tyco will continue to
support the development of ultrasound contrast products.

15
<PAGE>
IF SALES OF OPTISON DO NOT IMPROVE SIGNIFICANTLY, MBI MAY NEVER BECOME
PROFITABLE.

OPTISON is MBI's only product approved for sale. MBI has no other products
which it expects to introduce to market. For the year ended March 31, 2000,
sales of OPTISON by MBI's marketing partners were $9.1 million and for the six
months ended September 30, 2000, sales of OPTISON were $5.8 million. If MBI's
marketing partners are unable to significantly improve the market acceptance and
level of sales of OPTISON, MBI may never achieve profitability. Among the most
important factors in achieving increased sales of OPTISON are:

- continued safety and efficacy;

- maintaining competitive pricing;

- obtaining regulatory approvals of OPTISON for myocardial perfusion without
significant delay;

- obtaining reimbursement of healthcare providers by the government and
insurance companies;

- reliance on Mallinckrodt's and Chugai's success in marketing the product;
and

- acceptance and availability of harmonic imaging.

If MBI's marketing partners cannot overcome these and other obstacles to
achieving sustained sales of OPTISON, its business will be harmed.

MBI MAY NOT BE ABLE TO PROTECT ITS PATENTS OR PROPRIETARY TECHNOLOGY.

The patent position of pharmaceutical medical products and biotechnology
firms can be uncertain and involve complex legal and factual questions. It is
possible that a party may successfully challenge any of MBI's patents or any of
the patents licensed to it. If that were to happen, MBI may lose the right to
prevent others from using the technology. It is also possible that MBI may
unintentionally infringe on patents of third parties. MBI's partners may be
required to alter their products based on MBI-licensed technology or
manufacturing processes to take into account the patent rights of third parties.
If MBI's partners were not able to alter OPTISON or their manufacturing
processes to avoid conflicts with third-party patents, they would have to
terminate the commercialization of OPTISON or pay royalties to the holders of
the patents. Patent litigation can be very expensive and the result uncertain.
MBI may not have the financial resources to resolve additional patent conflicts.
In addition, patent conflicts may cause Mallinckrodt or Chugai to divert
resources away from developing and marketing OPTISON.

MBI MAY FACE LIABILITIES IN CONNECTION WITH THE RELEASE OF HAZARDOUS MATERIALS.

In 1998, MBI returned two bottle cylinders of a hazardous substance used in
its research activities to the original supplier of the material at its
Tennessee facility. In March 2000, the Tennessee facility was designated as a
Superfund site under Federal law and remediation activities were begun. Under
Federal law, MBI can be held liable for the cost of disposing of the two
cylinders. Also under Federal law, MBI could be held liable for a significantly
greater amount of the costs of remediation of this site, which is currently
estimated to be approximately $20 million. Although Federal law provides for
apportionment of liability among all parties that were connected with the site
and the materials stored or disposed of at the site, including the owner of the
facility, there is a risk that these other entities may not be subject to suit,
may not have sufficient assets to reimburse MBI for its expenditures, or may not
be solvent, in which case MBI may not be able to recover any or all of these
expenses.

PRODUCT LIABILITY CLAIMS INVOLVING ALBUNEX AND OPTISON COULD RESULT IN MAJOR
LOSSES TO MBI AND COULD EXCEED THE LIMITS OF ITS INSURANCE.

The manufacture and sale of medical diagnostic products, particularly
products designed to be administered internally, such as Albunex, MBI's first
generation ultrasound contrast agent, and OPTISON, involve risk of product
liability claims. Although MBI no longer manufactures any products, and has
discontinued all sales and marketing of Albunex, either MBI or its marketing
partners could be named as defendants in any such lawsuit, which could claim
significant damages.

16
<PAGE>
MBI EXPECTS TO BE FACED WITH COMPETITION IN OPTISON MARKETS FROM NEW PRODUCTS
AND TECHNOLOGIES. INCREASED COMPETITION MAY FURTHER REDUCE THE PROJECTED REVENUE
FROM THE SALES OF OPTISON.

MBI knows of at least two companies that have filed with the FDA for
approval to market competitive ultrasound contrast agents, including ultrasound
contrast agents for the assessment of cardiac function and myocardial perfusion
or radiological indications. MBI is not familiar with the safety or
effectiveness of these products, or how they are used. It is possible that if
and when these products are approved and marketed, they will find greater
acceptance than OPTISON based on price, safety, effectiveness, ease of use,
marketing skill, or any number of other competitive factors. Competition in the
OPTISON market may significantly harm MBI's business.

FAILURE TO OBTAIN REGULATORY APPROVAL OF OPTISON FOR MYOCARDIAL PERFUSION AND
OTHER INDICATIONS WOULD NEGATIVELY IMPACT MBI.

MBI has only one product, OPTISON, which has been approved for sale. It has
been approved for sale in the United States and Europe for only a single
indication, cardiac function. MBI and its marketing partners need additional
regulatory approvals to market OPTISON in other countries and to increase the
number of uses for which it may be sold. MBI does not know if or when it or its
marketing partners will receive any additional approvals. If MBI, Mallinckrodt
or Chugai do not receive approval to market OPTISON for myocardial perfusion,
MBI's business will be harmed.

UNLESS MBI AND ITS MARKETING PARTNERS OBTAIN RIGHTS TO HARMONIC ULTRASOUND
IMAGING TECHNOLOGY, COMMERCIAL SUCCESS OF OPTISON FOR ITS MOST DESIRABLE
INDICATION WILL BE DIFFICULT TO ACHIEVE.

The use of OPTISON is most effective in assessing myocardial perfusion, or
blood flow into the heart muscle, when used in conjunction with harmonic
ultrasound imaging, as opposed to conventional ultrasound imaging. MBI and its
marketing partners may need to obtain licenses to practice harmonic ultrasound
imaging. Even if license rights and regulatory approvals are obtained to market
OPTISON for myocardial perfusion, it will be difficult to achieve commercial
success unless harmonic imaging equipment becomes more widely available.

BECAUSE OPTISON'S ONLY APPROVED INDICATION IS TO ENHANCE THE IMAGING CAPABILITY
OF ULTRASOUND MACHINES, EMERGING AND IMPROVED ULTRASOUND AND OTHER TECHNOLOGIES
MAY RENDER OPTISON OBSOLETE.

The biopharmaceutical industry is changing rapidly. This is especially true
in the area of diagnostic imaging machines. Machine manufacturers are
continuously improving existing technologies or developing new technologies that
may render OPTISON obsolete. OPTISON may not be able to compete successfully
with products or technologies under development by others, which would harm
MBI's business.

RISKS RELATING TO THE MERGER

A DROP IN THE PRICE OF ALLIANCE COMMON STOCK WILL REDUCE THE VALUE OF THE
CONSIDERATION THAT MBI STOCKHOLDERS RECEIVE IN THE MERGER.

The merger agreement provides that if the merger is completed, MBI
stockholders will receive, in the aggregate, up to 770,000 shares of Alliance's
common stock in exchange for the shares of MBI stock currently outstanding.
Therefore, any decrease in the market price of Alliance common stock will reduce
the dollar value of the shares to be received by MBI stockholders.

THE MERGER WILL RESULT IN COSTS AND EXPENSES THAT MAY HARM THE COMBINED COMPANY.

If the benefits of the merger do not exceed the costs associated with the
merger, including the dilution to Alliance stockholders resulting from the
issuance of shares of Alliance common stock in the merger, the combined company
may be harmed. Alliance and MBI estimate that they will incur total transaction
costs of approximately $1.2 million associated with the merger and potential
related severance costs of approximately $2.27 million.

17
<PAGE>
Actual costs may substantially exceed the parties' estimates. In addition,
unanticipated expenses associated with integrating the two companies may arise.
The value of the technology acquired from MBI by Alliance will be amortized over
a period of four years, which is the estimated useful life of the technology.
The combined company may also incur additional charges in subsequent quarters to
reflect costs associated with the merger.

THE COMBINED COMPANY MAY NEED ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE.

The combined company may need to raise additional funds to finance growth
which may not be available on acceptable terms, if at all. The merger and the
integration of the companies' operations may further strain the financial
resources of the combined company. If the combined company cannot obtain
additional financing on commercially acceptable terms, or at all, the combined
company may be harmed.

THE MERGER MAY NOT BE TREATED AS A TAX-FREE REORGANIZATION.

Alliance and MBI intend that the merger be treated as a tax-free
reorganization for federal income tax purposes. MBI stockholders should not
recognize gain or loss on the exchange of their stock, other than as a result of
cash received for a fractional share or cash received upon exercise of
dissenters' rights. However, there is no assurance that the merger will qualify
as a tax-free reorganization for federal income tax purposes or that the MBI
stockholders will receive Alliance common stock without recognition of gain or
loss. Moreover, tax matters are very complicated and the tax consequences of the
merger to you will depend on the facts of your particular situation.

18
<PAGE>
THE SPECIAL MEETING

The MBI special meeting will be held at Hilton La Jolla Torrey Pines, 10950
North Torrey Pines Road, La Jolla, California, on , 2000 at
10:00 a.m., local time, and at any adjournment or postponement thereof.

At the special meeting, the stockholders will be asked to consider and vote
upon a proposal to adopt an agreement and plan of merger among Alliance, Merger
Sub and MBI. The merger agreement provides for the merger of Merger Sub with and
into MBI with MBI surviving the merger as a wholly-owned subsidiary of Alliance.
In connection with the merger, each outstanding share of MBI common stock, par
value $0.01 per share, will be exchanged for a fraction of a share of Alliance
common stock, par value $0.01 per share, determined by the following exchange
ratio:

<TABLE>
<S> <C> <C>
Exchange ratio = 770,000 minus adjustment shares
-------------------------------
MBI securities
</TABLE>

For purposes of determining the exchange ratio,

- The number of adjustment shares, if any, will be determined as of the
effective time of the merger and shall be equal to the amount by which
MBI's total assets, after deducting accumulated depreciation, amortization
and total liabilities as of the effective time, is less than $5,000,000,
divided by 32.50.

For example, the exchange ratio, if determined as of the date of this proxy
statement-prospectus, would be 0.0409238 shares of Alliance common stock for
each share of MBI common stock using the following formula, and assuming there
are no adjustment shares'.

<TABLE>
<S> <C> <C>
770,000
----------

18,815,413 = 0.0409238
</TABLE>

The MBI board of directors has unanimously approved the merger agreement and
recommends a vote FOR approval of the merger agreement.

QUORUM

The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of MBI common stock at the MBI special meeting is necessary
to constitute a quorum at the MBI special meeting. Abstentions and non-votes
will be included in determining the presence of a quorum.

VOTE REQUIRED

The affirmative vote of the holders of at least a majority of the
outstanding shares of MBI common stock, either in person or by proxy, at the MBI
special meeting is required to approve the merger agreement. The affirmative
vote of the holders of a majority of shares of MBI common stock

19
<PAGE>
present, either in person or by proxy, at the MBI special meeting is required to
approve the possible adjournment or postponement of the MBI special meeting.

In the event the merger is not approved and adopted by the stockholders of
MBI, the merger agreement may be terminated in accordance with its terms.

RECORD DATE; STOCK ENTITLED TO VOTE; BENEFICIAL OWNERS

The MBI board has established , 2000 as the date to determine those
record holders of MBI common stock entitled to notice of and to vote at the MBI
special meeting. On that date, there were 18,815,413 shares of MBI common stock
outstanding. Each share of MBI common stock is entitled to one vote with respect
to the merger agreement. As of November 6, 2000, MBI had 8,522 total beneficial
owners of its common stock, 1,482 holders of record and 7,040 holders in street
name.

VOTING OF PROXIES

At the MBI special meeting, abstentions and non-votes will have the effect
of a vote against adoption of the merger agreement. Because abstentions are
treated as shares present and entitled to vote at the MBI special meeting, they
will have the effect of a vote against approval of the possible adjournment or
postponement of the MBI special meeting. Non-votes will have no effect on the
outcome of a proposal to approve the possible adjournment or postponement of the
MBI special meeting.

MBI STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.

If a holder of MBI common stock does not return a signed proxy card or
attend the special meeting, his or her shares will not be voted. Shares not
voted will have the effect of a vote against the merger agreement at the MBI
special meeting.

REVOCATION OF PROXIES

Except for those who have executed irrevocable proxies, any holder of MBI
common stock has the unconditional right to revoke his or her proxy at any time
prior to the voting at the MBI special meeting by:

- filing a written revocation with an officer of MBI prior to the voting of
the proxy;

- giving a duly executed proxy bearing a later date; or

- attending the MBI special meeting and voting in person. Attendance by a
stockholder at the MBI special meeting will not itself revoke his or her
proxy.

SOLICITATION OF PROXIES

Solicitation of proxies for use at the MBI special meeting may be made in
person or by mail, telephone, telecopy or telegram. MBI will conduct the
solicitation of proxies for the MBI special meeting and will bear the cost of
the solicitation of the proxies from its stockholders. In addition to
solicitation by mail, the directors, officers and employees of MBI may solicit
proxies from MBI stockholders by telephone or telegram or in person. MBI's
directors, officers and employees will not be compensated for this solicitation.
MBI has requested that banking institutions, brokerage firms, custodians,
trustees, nominees and fiduciaries forward solicitation materials to the
beneficial owners of MBI common stock held of record by them and MBI will, upon
request of these record holders, reimburse reasonable forwarding expenses. MBI
has engaged Georgeson Shareholder Communications, Inc. to assist it in
soliciting proxies for use at the special meeting. MBI anticipates that the fee
for such services will be approximately $20,000, plus expenses. MBI's directors,
officers or

20
<PAGE>
other employees may also solicit proxies in person or by telephone, telegram,
mail or other means of communication. These persons will receive no additional
compensation for solicitation of proxies, but may be reimbursed for reasonable
out-of-pocket expenses in connection with the solicitation. Except as described
in this paragraph, MBI does not anticipate that it will incur any other fees in
connection with the solicitations of proxies. MBI will also arrange for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by custodians, nominees and fiduciaries. MBI will reimburse
custodians, nominees and fiduciaries for their reasonable expenses.

21
<PAGE>
THE MERGER

ALLIANCE'S REASONS FOR THE MERGER

The board of directors of Alliance considered a combination with MBI and
unanimously approved the merger agreement and the merger at a special meeting on
October 10, 2000. At the October 10, 2000 meeting, the Alliance board determined
that the merger, the merger agreement and the transactions contemplated by the
merger agreement are fair to, and in the best interests of, Alliance and its
stockholders. In approving the merger, Alliance's board considered the following
expected benefits and believes that:

- the acquisition will provide Alliance with valuable assets, including
rights to OPTISON, the only intravenous ultrasound contrast agent being
marketed in both the United States and Europe;

- the acquisition will enhance its revenue producing capabilities;

- the potential market for ultrasound contrast agents will continue to grow
and that it will benefit from having rights to both OPTISON and its own
intravenous ultrasound contrast agent, IMAVIST; and

- Alliance will benefit from the relationships with MBI's collaboration
partners.

The Alliance board also identified and considered a number of uncertainties
and risks in its deliberations concerning the merger, including, but not limited
to:

- the risk that the potential benefits sought in the acquisition might not
be fully realized, if at all;

- the risk that the costs and transaction expenses may exceed Alliance's
expected benefits;

- the dilution to Alliance stockholders resulting from the issuance of
shares of Alliance common stock pursuant to the merger;

- the risks that unknown or contingent liabilities may be asserted after the
merger has been consummated; and

- the other risks associated with the businesses of Alliance and MBI and the
merger described under Risk Factors in this proxy statement-prospectus.

The Alliance board believed that these risks were unlikely to have a
significant impact on its operations and that, overall, the risks associated
with the acquisition were outweighed by the potential benefits. The above
discussion of the information and factors considered by the Alliance board is
not intended to be exhaustive but is believed to include all significant factors
considered by it. In view of the variety of factors considered in connection
with its evaluation of the acquisition, the Alliance board did not find it
practicable to and did not quantify or otherwise assign relative or specific
weight to the factors considered in reaching its determination. In addition,
individual members of the Alliance board may have given different weight to
different factors. The above discussion of reasons for the acquisition includes
forward-looking statements about possible or assumed future results of
operations of the combined company and the performance of the combined company
after the acquisition. Future results and performance are subject to risks and
uncertainties, which could cause such results and performance to differ
significantly from those expressed in these statements.

In assessing the acquisition of MBI, the Alliance board considered a number
of sources of information, including:

- historical information concerning the respective businesses;

- financial performance condition;

22
<PAGE>
- operations and results of operations;

- technology;

- management style;

- competitive position;

- trends and prospects of Alliance and MBI; and

- information and advice based on the results of due diligence
investigations by members of Alliance's management and legal, financial
and accounting advisors concerning the business, technology, products,
operations, properties, assets, financial condition, operating results and
prospects of MBI, trends in its business and financial results.

MBI'S REASONS FOR THE MERGER

In light of the increasing challenges facing MBI, during its fiscal year
ended March 31, 1999, MBI commenced a review of strategic alternatives available
to it. The strategic alternatives reviewed by MBI included restructuring MBI to
attempt to operate indefinitely as an independent company or combining MBI with
a company whose products, technologies and strategic direction would indicate
that it may be an appropriate business combination candidate.

On August 19, 1999, MBI engaged Prudential Securities to identify potential
merger partners, analyze strategic business combination alternatives and assist
MBI in negotiating a transaction on favorable terms and in MBI stockholders'
best interests. Prudential Securities confirmed a previous consultant's analysis
with the selection of Palatin Technologies, Inc. as a potential merger
candidate. Prudential Securities also identified several other companies, but in
each case, those companies had already been considered by MBI and rejected as
potential business combination candidates or had been contacted by MBI and,
following the exchange of varying amounts of information, eliminated in favor of
Palatin.

MBI's subsequent negotiations with Palatin resulted in the execution of a
merger agreement between MBI and Palatin on November 11, 1999. On November 12,
1999, the parties issued a joint press release publicly announcing the proposed
merger. On March 13, 2000, Palatin informed MBI that it would not consummate the
proposed merger and terminated the related merger agreement.

MBI, acting on the advice of its advisors and significant stockholders,
continued to hold discussions with potential merger partners and aggressively
pursued other business development strategies. Management of MBI discussed a
business combination with more than a dozen entities in the biotechnology
industry and held extensive discussions with five of those companies, including
Alliance. In connection with their discussions regarding the pursuit of an
acceptable business combination, MBI and Alliance signed a confidentiality
agreement on April 27, 2000, and initiated an advanced level of discussions
regarding a possible combination of the two entities.

On May 24, 2000, Mr. Duane Roth, chairman and chief executive officer of
Alliance, presented an overview of Alliance's operations to MBI's board of
directors and delivered a non-binding proposal for the possible acquisition of
MBI by Alliance. MBI's board rejected Alliance's May 24, 2000 proposal but
elected to continue discussions with Alliance while simultaneously engaging in
merger discussions with other parties.

During June and July 2000, MBI and Alliance continued to discuss a possible
combination of their businesses and proceeded with due diligence efforts in
connection with the possible combination. During that time, MBI also intensified
discussions and due diligence activities with three other potential merger
partners.

23
<PAGE>
On August 17, 2000, Mr. Duane Roth contacted Mr. Bobba Venkatadri, MBI's
president and chief executive officer, and conditionally proposed a two-tiered
asset purchase by Alliance of MBI whereby payment of a portion of the
consideration would be contingent upon MBI receiving future milestone payments
under its collaboration agreement with Chugai. On September 22, 2000, at a
regularly scheduled board meeting, MBI's board discussed the Alliance proposal
and concluded that the proposed terms were unacceptable to MBI.

On September 25, 2000, Mr. Duane Roth and Mr. Theodore Roth, Alliance's
president and chief operating officer, met with Mr. Venkatadri to discuss a
revised non-binding proposal by Alliance that involved the merger of a
wholly-owned subsidiary of Alliance with and into MBI pursuant to which MBI's
stockholders would receive, in consideration for their MBI shares, either a
fixed amount of cash or a fixed number of shares of Alliance common stock, at
Alliance's election.

On October 3, 2000, Mr. Venkatadri, after consultation with members of MBI's
board, communicated to Mr. Theodore Roth MBI's preference for consideration
consisting solely of a fixed number of shares of Alliance common stock. During
the week of October 2, 2000, this structure for the transaction was more fully
developed by MBI and Alliance and advisors for the two parties conducted
extensive due diligence investigations and negotiated the terms and conditions
of the merger agreement.

The MBI board convened a special meeting by conference call on October 10,
2000 and provided in advance to each of the directors a copy of the merger
agreement. At the meeting, MBI's legal advisors reviewed the merger agreement
for the directors. Prudential Securities made a presentation to the board
regarding the fairness of the exchange ratio set forth in the merger agreement
from a financial point of view. Prudential Securities provided an oral opinion
to the MBI board to the effect that, as of October 10, 2000, and subject to
assumptions, qualifications and limitations stated, the exchange ratio was fair
from a financial point of view to holders of MBI common stock. The Prudential
Securities opinion was subsequently confirmed by the delivery of a written
opinion dated October 10, 2000. MBI's board unanimously approved the merger and
the merger agreement as presented, instructed Mr. Venkatadri to execute the
merger agreement on behalf of MBI and unanimously voted to recommend the merger
to MBI's stockholders.

The merger and the merger agreement were also unanimously approved by the
Alliance board during a special meeting of the board duly convened for that
purpose on October 10, 2000.

On October 11, MBI recirculated a revised merger agreement to its board who,
by unanimous written consent, approved changes made to the merger agreement
previously presented to the MBI board.

The agreement and plan of merger among MBI, Alliance and Merger Sub was
executed and delivered by all parties on October 11, 2000. On October 12, 2000,
the parties issued a joint press release publicly announcing the merger.

In reaching the conclusions and recommendations described above, the MBI
board consulted with MBI executive management, as well as MBI's outside legal
counsel and Prudential Securities and considered the following:

- the current and historical financial condition and results of operations
of MBI, as well as the prospects and strategic objectives of MBI, and the
risks involved in achieving those prospects and objectives;

- the larger public float and trading volume of shares of the combined
company;

- the treatment of the merger as a tax-free reorganization for federal
income tax purposes;

- the potential benefits of obtaining a broader drug and diagnostic product
pipeline;

24
<PAGE>
- reports from management and legal advisors on the specific terms of the
merger agreement;

- the receipt of Alliance common stock at a premium over the price at which
MBI common stock was trading;

- information concerning the financial condition, results of operations,
business and prospects of MBI as a separate entity and on a strategically
combined basis; and

- an assessment of possible strategic alternatives, including remaining a
separate company, and joint ventures with and acquisitions by other
parties, taking into consideration the reports and recommendations of
MBI's management and its advisors in connection with these strategic
alternatives.

MBI's board identified and considered a number of potentially negative
factors in its deliberations concerning the merger, including:

- the valuation of MBI implicit in the exchange ratio compared with
historical trading ranges for MBI's common stock;

- the possibility that MBI stockholders might not approve the merger
agreement;

- the possibility that the benefits sought in the merger might not be
achieved;

- the possibility that adverse findings in Alliance's ongoing clinical
trials might have a negative impact on Alliance's stock price, thus
reducing the value of the consideration received by MBI stockholders in
the merger; and

- the other risks described above under Risk Factors.

The MBI board believes that these risks are outweighed by the potential
benefits of the merger.

In addition, the MBI board carefully considered proposals made by competing
companies during negotiations of the merger with Alliance. The proposals
received from competing companies were rejected, generally, because of the
board's belief that MBI's strategic goal of commercializing ultrasound products
would be more likely to be realized by Alliance than by any of the competing
companies and because the consideration to be received from Alliance was more
liquid and more stable than the consideration offered by the competing
companies. In addition, the competing proposals were rejected by the MBI board
because of the following factors:

- the strength of Alliance's strategic partners as compared with those of
the other companies which made acquisition proposals;

- the board's belief that Alliance has strong management; and

- the fact that none of the other companies' products were as far advanced
through the clinical and regulatory process as Alliance's products.

In reaching its decision to approve the merger agreement and the merger, the
MBI board did not assign any relative or specific weights to the various factors
considered, and individual directors may have given differing weights to
different factors. Rather, the MBI board based its position and recommendation
upon the totality of the information presented to them.

THE MBI BOARD HAS UNANIMOUSLY CONCLUDED THAT THE MERGER IS FAIR TO AND IN
THE BEST INTERESTS OF THE STOCKHOLDERS OF MBI, HAS APPROVED THE MERGER AGREEMENT
AND THE MERGER AND RECOMMENDS THAT THE STOCKHOLDERS OF MBI VOTE FOR APPROVAL OF
THE MERGER AGREEMENT AND THE MERGER.

MBI RECEIVED TWO OFFERS FROM ONE COMPANY TO ENTER INTO A MERGER TRANSACTION
SUBSEQUENT TO ITS PUBLIC ANNOUNCEMENT OF THE MERGER. MBI'S BOARD REVIEWED EACH
OF THE OFFERS, REJECTED THEM AND REAFFIRMED ITS BELIEF THAT THE MERGER WITH
ALLIANCE IS FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF MBI.

25
<PAGE>
OPINION OF MBI'S FINANCIAL ADVISOR

On October 10, 2000, Prudential Securities delivered its oral opinion to the
MBI board, which opinion was subsequently confirmed in writing and was based
upon and subject to the assumptions, qualifications and limitations set forth in
its written opinion, to the effect that, as of that date, the exchange ratio of
0.0407239 set forth in the merger agreement was fair, from a financial point of
view, to the holders of MBI common stock. Prudential Securities also presented
the financial analysis underlying its opinion at a meeting of the MBI board on
October 10, 2000.

A copy of the Prudential Securities opinion, which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached to this proxy statement-prospectus as Appendix B and is incorporated
herein by reference. The summary of the Prudential Securities opinion set forth
below is qualified in its entirety by reference to the full text of the
Prudential Securities opinion. MBI stockholders are urged to read the Prudential
Securities opinion in its entirety.

THE PRUDENTIAL SECURITIES OPINION IS FOR THE USE OF THE MBI BOARD, IS
DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO TO THE HOLDERS OF MBI COMMON
STOCK AS OF OCTOBER 10, 2000, FROM A FINANCIAL POINT OF VIEW, AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW THE STOCKHOLDER SHOULD
VOTE IN CONNECTION WITH THE EXCHANGE OF SHARES OF MBI COMMON STOCK FOR SHARES OF
ALLIANCE COMMON STOCK PURSUANT TO THE MERGER OR AS TO ANY OTHER ACTION THE
STOCKHOLDER SHOULD TAKE REGARDING THE MERGER.

In conducting its analysis and arriving at the Prudential Securities
opinion, dated October 10, 2000, Prudential Securities reviewed materials and
considered financial data and other factors which it deemed relevant under the
circumstances, including the following:

- a draft, received by Prudential Securities on October 6, 2000, of the
merger agreement;

- certain publicly available historical financial and operating data for MBI
including, but not limited to:

- MBI's annual report on Form 10-K for the fiscal year ended March 31, 2000;

- MBI's quarterly report on Form 10-Q for the quarter ended June 30, 2000;
and

- MBI's proxy statement for the annual meeting of stockholders held on
September 22, 2000;

- historical stock prices and trading volumes for MBI common stock;

- certain publicly available historical financial and operating data for
Alliance including, but not limited to:

- Alliance's annual report on Form 10-K for the fiscal year ended June 30,
2000; and

- Alliance's proxy statement for the annual meeting of stockholders to be
held on November 8, 2000;

- historical stock prices and trading volumes for Alliance common stock;

- publicly available financial, operating and stock market data concerning
certain companies engaged in businesses that Prudential Securities deemed
reasonably similar to the businesses of MBI and Alliance;

- the financial terms of recent merger or acquisition transactions that
Prudential Securities deemed relevant to its inquiry; and

- other financial studies, analyses and investigations that Prudential
Securities deemed appropriate.

Prudential Securities assumed, with MBI's consent, that the draft of the
merger agreement which Prudential Securities reviewed would substantially
conform in all material respects to the final form and that the merger would be
consummated on the terms described in the merger agreement without any waiver of
any material terms or conditions.

Prudential Securities met with the senior management of MBI to discuss the
prospects for MBI's business and other matters that Prudential Securities deemed
relevant.

26
<PAGE>
In connection with its review and analysis and in arriving at the Prudential
Securities opinion, Prudential Securities relied upon the accuracy and
completeness of the financial and other information publicly available or
otherwise provided to Prudential Securities by MBI. Prudential Securities did
not undertake any independent verification of that information or any
independent valuation or appraisal of the assets or liabilities of MBI or
Alliance. Further, Prudential Securities was not provided with any independent
valuation or appraisal. The Prudential Securities opinion is predicated on the
merger qualifying as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended.

In connection with Prudential Securities' preparation of its opinion,
Prudential Securities was not authorized by MBI or the MBI board to solicit, nor
did Prudential Securities solicit, indications of interest from third parties
for the acquisition of all or part of MBI. The Prudential Securities opinion
does not address nor should it be construed to address the relative merits of
the merger or alternative business strategies that may be available to MBI.

The Prudential Securities opinion was based on economic, financial and
market conditions as they existed on the date of the opinion and can only be
evaluated as of the date of the Prudential Securities opinion. Prudential
Securities noted in its opinion that the exchange ratio is fixed, with no floor
or collar, and the trading price of the Alliance common stock is volatile.
Accordingly, the market value of the consideration received by MBI's
stockholders in the merger may vary significantly from the value of the
consideration as of October 10, 2000 and as of the dates used by Prudential
Securities in its analysis. In addition, the Prudential Securities opinion does
not in any manner address the prices at which Alliance common stock will trade
prior to or following consummation of the merger.

The Prudential Securities opinion, including Prudential Securities'
presentation of the opinion to the MBI board, was one of the many factors that
the MBI board took into consideration in making its determination to recommend
approval of the merger agreement. The exchange ratio was determined through
arms'-length negotiations between MBI and Alliance. Consequently, Prudential
Securities' analyses described below should not be viewed as determinative of
the opinion of the MBI board with respect to the exchange ratio.

In arriving at the Prudential Securities opinion, Prudential Securities
performed a variety of financial analyses, including those summarized below. The
summary set forth below of the analyses presented to the MBI board at the
October 10, 2000 meeting is not a complete description of the analyses
performed. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstance. Therefore, a fairness opinion is not necessarily susceptible to
partial analyses or summary description. Prudential Securities believes that its
analyses must be considered as a whole and that selecting portions of its
opinion or portions of the factors which it considered, without considering all
analyses and factors, could create an incomplete view of the evaluation process
underlying the opinion. Prudential Securities made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
MBI and Alliance. Any estimates contained in Prudential Securities' analyses are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by these analyses.
Additionally, estimates of the values of businesses and securities are not
appraisals and do not necessarily reflect the prices at which businesses or
securities may be sold. Accordingly, these analyses and estimates are inherently
subject to substantial uncertainty. Subject to the foregoing, the following is a
summary of the material financial analyses which Prudential Securities presented
to the MBI board on October 10, 2000 in connection with the delivery of the
Prudential Securities opinion.

PUBLICLY-TRADED COMPANIES ANALYSIS

Prudential Securities employed an analysis of publicly-traded companies
considered by Prudential Securities to be reasonably similar to MBI to establish
a range of implied exchange ratios. Prudential

27
<PAGE>
Securities selected these companies based on its knowledge of MBI's business and
financial and operating characteristics, its familiarity with and experience in
the industries in which MBI operates and its review and assessment of publicly
available financial data for such companies. Prudential Securities analyzed
publicly available historical financial results, including multiples of current
enterprise value (calculated as the market capitalization, using the closing
stock price of the publicly-traded companies on October 6, 2000, plus total debt
minus cash and cash equivalents as of June 30, 2000) to last twelve months, or
LTM, revenue and total assets (in each case, as of June 30, 2000) and current
equity value (the market capitalization, using the closing stock price of the
publicly-traded companies on October 6, 2000) to tangible book value (as of
June 30, 2000), of selected publicly traded companies. The companies analyzed,
or the Prudential Securities Comparable Companies, included: Advanced
Magnetics, Inc., EPIX Medical, Inc., International Isotopes Inc., Neoprobe
Corporation, Palatin Technologies, Inc. and SONUS Pharmaceuticals, Inc.

Based on an October 6, 2000 closing stock price, the Prudential Securities
Comparable Companies were found to have current enterprise values within a range
of 0.1x to 3.9x total assets and 0.6x to 2.1x LTM revenue, and current equity
values within a range of 0.9x to 5.2x tangible book value. Applying these
multiples to MBI's LTM revenue for the period ended June 30, 2000, and to MBI's
total assets and tangible book value as of June 30, 2000, resulted in implied
ranges for the exchange ratio of 0.0420 to 0.1604, with a median of 0.0854.

PRECEDENT TRANSACTIONS ANALYSIS

Prudential Securities analyzed the consideration paid in eleven recent
merger and acquisition transactions that Prudential Securities deemed to be
reasonably similar to the merger, and considered, based on publicly available
information for such transactions, the multiple of the acquired entity's equity
value, where equity value is calculated as the product of diluted shares
outstanding times the price paid per share in the transaction, to the acquired
entity's tangible book value, as of June 30, 2000, and the multiple of the
acquired entity's enterprise value, where enterprise value is calculated as the
product of fully diluted shares outstanding times the price paid per share in
the transaction plus total debt minus cash and cash equivalents, to the acquired
entity's total assets and LTM revenue (in each case, as of June 30, 2000).
Prudential Securities also considered the applicable premiums paid over the
acquired entity's public stock trading prices one day, one week and four weeks
prior to the announcement of each transaction. Prudential Securities selected
these transactions based on its knowledge of MBI's and Alliance's financial and
operating characteristics, the financial terms of the merger, its familiarity
with and experience in the industries in which MBI and Alliance operate and its
review and assessment of the publicly available financial terms of recent
acquisition transactions. The transactions considered were the combinations of:

- SunPharm Corp. and GelTex Pharmaceuticals Inc.

- CoCensys, Inc. and Purdue Pharma LP

- RiboGene, Inc. and Cypros Pharmaceutical Corp.

- RIBI ImmunoChem Research, Inc. and Corixa Corporation

- Anergen, Inc. and Corixa Corporation

- Oravax, Inc. and Peptide Therapeutics Group plc

- GeneMedicine, Inc. and Megabios Corp.

- DepoTech Corporation and SkyePharma plc

- Virus Research Institute, Inc. and T Cell Sciences Inc.

- Seragen, Inc. and Ligand Pharmaceuticals Incorporated

- Biosys, Inc. and Thermo Trilogy Corp.

These precedent transactions were found to imply for each acquired entity
equity values as a multiple of tangible book value within a range of 0.7x to
4.6x and enterprise values as a multiple of

28
<PAGE>
total assets and LTM revenue within a range of 0.4x to 5.2x and 0.5x to 5.9x,
respectively. Applying these multiples to MBI's comparable operating results for
the twelve months ended, and financial condition as of, June 30, 2000, resulted
in implied exchange ratios ranging from 0.0420 to 0.1421, with a median exchange
ratio of 0.0920.

The precedent transactions used in this analysis were found to imply for the
acquired entity a premium within a range of (12.8)% to 60.6%, (17.3)% to 69.0%
and (20.0)% to 60.5% for the one-day, one-week and four-week periods prior to
the announcements, respectively. Applying the average of the low premiums for
each period and the average of the high premiums for each period to MBI's market
capitalization on a fully diluted basis and using an Alliance closing stock
price of $15.00 on October 6, 2000, resulted in an implied range for the
exchange ratio of 0.0226 to 0.0442, with a median exchange ratio of 0.0338.

CONTRIBUTION ANALYSIS

Prudential Securities examined MBI's and Alliance's relative contributions
to the LTM (ending June 30, 2000) revenue and compared these results to the
percentage of post-merger common stock in the combined company that the
respective current MBI stockholders and Alliance stockholders would hold. In
performing its analysis, Prudential Securities relied upon publicly available
historical financial data. Prudential Securities observed that for the last
twelve months, MBI would contribute 38.5% of the combined company's pro forma
revenue.

Prudential Securities also examined MBI's and Alliance's relative
contributions of total assets and tangible book value as of June 30, 2000 to the
combined company. MBI would contribute 14.6% of the combined company's pro forma
total assets, and 27.2% of the combined company's pro forma tangible book value.

Based on the closing price for October 6, 2000 of MBI and Alliance and the
exchange ratio of 0.0407239, MBI and Alliance stockholders are estimated to hold
1.48% and 98.52%, respectively, in the combined company on a diluted, treasury
stock basis.

MBI selected Prudential Securities to provide a fairness opinion because it
is a nationally recognized investment banking firm engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions and
for other purposes and because it has substantial experience in transactions
similar to the merger. Pursuant to an engagement letter with Prudential
Securities dated August 19, 1999, as amended by letter agreement dated
October 6, 2000, Prudential Securities will receive a fee of $400,000. MBI has
agreed to reimburse all reasonable out-of-pocket expenses, including fees and
disbursements of counsel not to exceed $25,000. MBI also has agreed, under
separate agreement, to indemnify Prudential Securities, its affiliates and its
employees against specified liabilities, including liabilities under federal
securities laws.

In the past, Prudential Securities has provided financial advisory services
to MBI and has received fees for such services. In the ordinary course of
business, Prudential Securities may actively trade the shares of MBI common
stock and Alliance common stock for Prudential Securities' own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.

29
<PAGE>
EFFECTIVE TIME OF THE MERGER

Upon the terms and conditions of the merger agreement, Merger Sub will be
merged with and into MBI at the effective time. The merger will become effective
immediately when the certificate of merger is filed with the Secretary of State
and of Delaware. The filing of the certificate of merger will be made as soon as
practicable on or after the closing.

The closing shall take place on the day that all of the conditions to the
completion of the merger are satisfied or waived, including the approval of the
merger agreement by the stockholders of MBI, at the offices of Pillsbury
Madison & Sutro LLP, 11975 El Camino Real, San Diego, California 92130-1593,
unless another date or place is agreed to by the parties.

INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER

In considering the recommendation of the MBI board with respect to the
merger, MBI stockholders should be aware that members of the MBI board and the
executive officers have interests in the merger, as described below. Although
MBI believes the members of the MBI board have acted in accordance with their
fiduciary duties, the following items may provide the appearance of a possible
conflict of interest.

BENEFICIAL OWNERSHIP OF MBI COMMON STOCK BY DIRECTORS AND OFFICERS OF MBI

As of the record date, directors and executive officers of MBI and their
affiliates may be deemed to be beneficial owners of approximately % of the
outstanding MBI common stock. Stockholders of MBI common stock with the
collective power to vote approximately % of the outstanding MBI common stock
have entered into voting agreements and given their irrevocable proxies,
providing that their shares shall be voted in favor of the merger agreement.
Based upon the shares of MBI common stock outstanding as of such
date, MBI stockholders would be issued approximately shares of
Alliance common stock in the merger. If the merger is consummated, the directors
and executive officers of MBI will receive % of the shares of Alliance common
stock issued to MBI stockholders in the merger.

EMPLOYMENT AGREEMENTS

The terms of employment of MBI's two executive officers, Bobba Venkatadri
and Howard Dittrich, MD, are governed by employment agreements. There are change
of control provisions in Mr. Venkatadri's agreement which provide that if he is
actually or constructively terminated within two years after a change of control
of MBI, he will receive 300% of his base salary, plus 300% of the average of his
bonuses for the past three fiscal years. In addition, upon termination of
Mr. Venkatadri's employment, MBI is required to exchange its interest in
Mr. Venkatadri's residence for his $300,000 non-interest bearing promissory
note. The change of control provisions in Dr. Dittrich's agreement provide that
if he is actually or constructively terminated within two years after a change
of control of MBI, he will receive 200% of his base salary, plus 200% of the
average of his bonuses for the past three fiscal years. In addition, the
agreements provide for immediate vesting of all stock options, the extension of
exercisability of all stock options for a period of not less than two years and
not to exceed four years, payment of benefit premiums through COBRA for the
duration of the employee's severance period, and payment of outplacement
benefits. The change of control provisions in Mr. Venkatadri's and
Dr. Dittrich's employment agreements will be triggered by the merger.

In addition, Alliance is negotiating an employment arrangement with
Dr. Dittrich.

DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION

MBI, as the surviving corporation, agreed to purchase and maintain for a
period of six years after the effective time, directors' and officers' liability
insurance with respect to claims arising from facts or

30
<PAGE>
events that occurred on or prior to the effective time. MBI has also agreed to
indemnify all directors, officers, employees, agents and trustees of MBI against
any liability or losses any of them may incur because of any claim brought
against them prior to or within six years from the effective time as officers,
directors, employees, agents or trustees of MBI.

RIGHTS OF DISSENTING STOCKHOLDERS

The following summary of appraisal rights is qualified in its entirety by
the text of Section 262 of the Delaware General Corporation Law, which is
reproduced in Appendix C to this proxy statement-prospectus.

THIS SUMMARY DOES NOT CONSTITUTE A RECOMMENDATION THAT MBI STOCKHOLDERS
EXERCISE THEIR APPRAISAL RIGHTS, IF THEY BECOME AVAILABLE, OR OTHERWISE
CONSTITUTE ANY LEGAL OR OTHER ADVICE. IF MBI STOCKHOLDERS WISH TO EXERCISE THEIR
APPRAISAL RIGHTS, THEY ARE URGED TO CONTACT THEIR LEGAL COUNSEL OR ADVISORS.
FAILURE TO FOLLOW STRICTLY THE PROCEDURES SET FORTH IN SECTION 262 WILL RESULT
IN A LOSS OF THEIR APPRAISAL RIGHTS. IF MBI STOCKHOLDERS LOSE THEIR APPRAISAL
RIGHTS, THEY WILL BE ENTITLED TO RECEIVE ALLIANCE COMMON STOCK AS DETERMINED
UNDER THE MERGER AGREEMENT.

Appraisal rights are available only to the record holder of shares of MBI
common stock. References in Section 262 to stockholders are to record holders.
References to you in the summary below assume that you are a record holder of
MBI common stock. If you wish to exercise appraisal rights but have a beneficial
interest in shares which are held of record by or in the name of another person,
such as a broker or nominee, you should act promptly to cause the record holder
to follow the procedures set forth in Section 262 to perfect your appraisal
rights.

Section 262 requires MBI to notify you, at least 20 days prior to the MBI
special meeting, as to the availability of appraisal rights and to provide you
with a copy of the text of Section 262. This proxy statement-prospectus serves
as the required notice and text.

To claim your appraisal rights, you must do each of the following:

- deliver to MBI prior to the vote on the merger a written demand for an
appraisal of your shares;

- continuously hold your shares from the date you deliver a written demand
for an appraisal through the completion of the merger;

- not vote in favor of the merger; and

- file within 120 days after the effective time of the merger, if MBI or
another stockholder who has complied with Section 262 does not file within
that time, a petition in the Delaware Court of Chancery demanding a
determination of the fair value of all stock. MBI is under no obligation
and has no intent to file any petition.

If you sell or otherwise transfer or dispose of your shares before the
merger is completed, you will lose your appraisal rights with respect to those
shares. If neither any stockholder who has demanded appraisal rights nor MBI has
filed a petition in the Delaware Court of Chancery within 120 days after the
effective time of the merger, then all stockholders' appraisal rights will be
lost.

Voting against the merger or otherwise failing to vote for the merger will
not by itself constitute a demand for an appraisal or sufficient notice of your
election to exercise your appraisal rights. Any demand for an appraisal must be
in writing, signed and mailed or delivered to:

Molecular Biosystems, Inc.
10030 Barnes Canyon Road
San Diego, California 92121-2789
Attn: Investor Relations

A demand for appraisal should be signed by or on behalf of the stockholder
exactly as the stockholder's name appears on the stockholder's stock
certificates. If the shares are owned of record in

31
<PAGE>
a fiduciary capacity, such as by a trustee, guardian or custodian, the demand
should be executed in that capacity, and if the shares are owned of record by
more than one person, as in a joint tenancy or tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including one or more joint owners, may execute a demand for appraisal on behalf
of a record holder; however, in the demand the agent must identify the record
owner or owners and expressly disclose that the agent is executing the demand as
an agent for the record owner or owners. A record holder such as a broker who
holds shares as nominee for several beneficial owners may exercise appraisal
rights for the shares held for one or more beneficial owners and not exercise
rights for the shares held for other beneficial owners. In this case, the
written demand should state the number of shares for which appraisal rights are
being demanded. When no number of shares is stated, the demand will be presumed
to cover all shares held of record by the broker or nominee. If a stockholder
holds shares through a broker who in turn holds the shares through a central
securities depository nominee such as Cede & Co., a demand for appraisal of such
shares must be made by or on behalf of the depository nominee and must identify
the depository nominee as record holder.

If appraisal rights are available, MBI will send notice of the effective
time of the merger to each stockholder who has properly demanded appraisal
rights under Section 262 and has not voted in favor of the merger agreement. MBI
will send this notice within 10 days after the effective time of the merger.

If appraisal rights are available and if you have complied with the
requirements for claiming your appraisal rights, then during the 120 days
following the effective time of the merger, you may request from MBI a statement
as to the aggregate number of shares not voted in favor of the merger agreement
and with respect to which demands for appraisal have been received and the
number of holders of those shares. Upon any request, which must be made in
writing, MBI will mail a statement of that information to you within 10 days.

If a petition for an appraisal is filed timely, the Delaware Court of
Chancery will hold a hearing on the petition to determine the stockholders
entitled to appraisal rights and the "fair value" of their shares. The
determination of fair value will not include any element of value arising from
the accomplishment or expectation of the merger. The court will also determine a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value of the shares. The court may determine that the fair value of the
shares is more than, the same as or less than the value of the Alliance common
stock you would have received under the merger agreement. An investment banking
opinion as to fairness from a financial point of view is not necessarily an
opinion as to fair value under Section 262. The Delaware Supreme Court has
stated that "proof of value by any techniques or methods that are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered in the appraisal proceedings.

The costs of the action may be determined by the Delaware Court of Chancery
and taxed upon the parties as the court deems equitable in the circumstances.
Upon application of a stockholder, the court may order that all or a portion of
the expenses incurred by any stockholder in an appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all of the shares entitled to appraisal.

If you have duly demanded an appraisal of your shares, you will not, after
the effective time of the merger, be entitled to vote those shares for any
purpose, nor will you be entitled to the payment of dividends or other
distributions on those shares, except for dividends or other distributions
payable to stockholders as of a record date prior to the effective time of the
merger.

You may withdraw your demand for appraisal of your shares within 60 days
after the effective time of the merger. Any attempt to withdraw your demand more
than 60 days after the effective time of the merger will require the written
approval of MBI. In any case, once a petition for appraisal is filed with

32
<PAGE>
the Delaware Court of Chancery, the appraisal proceeding may not be dismissed
without court approval.

If you properly demand appraisal of your shares, but fail to perfect your
appraisal rights, otherwise lose your appraisal rights or effectively withdraw
your demand for an appraisal, your shares will be converted into the right to
receive Alliance shares as determined under the merger agreement, without
interest.

Alliance will not be obligated to close the merger if the aggregate number
of shares held by MBI stockholders demanding appraisal rights exceeds 5% of the
number of shares of MBI common stock issued and outstanding immediately prior to
the effective time of the merger.

COMPLETION AND EFFECTIVENESS OF THE MERGER

The merger will be completed when all of the conditions to completion of the
merger are satisfied or waived, including the adoption of the merger agreement
by the stockholders of MBI. The merger will become effective upon the filing of
a certificate of merger with the Secretary of State of the State of Delaware.

STRUCTURE OF THE MERGER AND CONVERSION OF MBI STOCK

STRUCTURE

To accomplish the merger, Alliance formed a new subsidiary, Merger Sub. At
the time the merger is completed, Merger Sub will be merged into MBI, and MBI
will be the surviving corporation. As a result, MBI will become a wholly-owned
subsidiary of Alliance.

CONVERSION OF MBI STOCK

When the merger is completed:

Each share of MBI common stock issued and outstanding immediately prior to
the effective time of the merger (other than shares owned by Alliance, Merger
Sub or any other direct or indirect subsidiary of Alliance or shares that are
held by stockholders exercising appraisal rights), shall be converted into the
right to receive that number of shares of Alliance common stock determined by
the exchange ratio. The exchange ratio will be determined by using the following
formula:

<TABLE>
<S> <C> <C>
Exchange ratio = 770,000 minus adjustment shares
-------------------------------
MBI securities
</TABLE>

For purposes of determining the exchange ratio,

<TABLE>
<S> <C> <C>
770,000
----------

18,815,413 = 0.0409238
</TABLE>

33
<PAGE>
The maximum number of shares of Alliance common stock which will either be
issued in the merger or become subject to outstanding in-the-money options
assumed by Alliance in the merger is 770,000. This number will be reduced by the
number of adjustment shares, if any.

The calculations of total assets accumulative depreciation or amortization
and total liabilities will be determined in accordance with accounting
principles generally accepted in the United States and in a manner consistent
with MBI's interim unaudited financial statements for the three month period
ended June 30, 2000, but including any unrecorded or unpaid severance,
accounting, legal, investment banking and other expenses as of the effective
time of the merger, including the liabilities triggered by the merger.

EXCHANGE OF MBI STOCK CERTIFICATES FOR ALLIANCE STOCK CERTIFICATES

When the merger is completed, the exchange agent will mail to you a letter
of transmittal and instructions for use in surrendering your MBI stock
certificates in exchange for statements indicating book-entry ownership of
Alliance common stock or, if requested, stock certificates. When you deliver
your stock certificates to the exchange agent along with a properly executed
letter of transmittal and any other required documents, your stock certificates
will be canceled and you will receive statements indicating book-entry ownership
of Alliance common stock or, if requested, stock certificates representing the
number of full shares of Alliance stock to which you are entitled under the
merger agreement. You will receive payment in cash, without interest, in lieu of
any fractional shares of Alliance common stock which would have been otherwise
issuable to you as a result of the merger.

YOU SHOULD NOT SUBMIT YOUR MBI STOCK CERTIFICATES FOR EXCHANGE UNTIL YOU
RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF TRANSMITTAL FROM
THE EXCHANGE AGENT.

You are not entitled to receive any dividends or other distributions on
Alliance common stock until the merger is completed and you have surrendered
your MBI stock certificates in exchange for Alliance stock certificates.

If there is any dividend or other distribution on Alliance stock with a
record date after the date on which the merger is completed and a payment date
prior to the date you surrender your MBI stock certificates in exchange for
Alliance stock certificates, you will receive the dividend or distribution with
respect to the whole shares of Alliance stock issued to you promptly after they
are issued. If there is any dividend or other distribution on Alliance stock
with a record date after the date on which the merger is completed and a payment
date after the date you surrender your MBI stock certificates in exchange for
Alliance stock certificates, you will receive the dividend or distribution with
respect to the whole shares of Alliance stock issued to you promptly after the
payment date.

Alliance will only issue an Alliance stock certificate or a check in lieu of
a fractional share in a name other than the name in which a surrendered MBI
stock certificate is registered if you present the exchange agent with all
documents required to show and effect the unrecorded transfer of ownership and
show that you paid any applicable stock transfer taxes.

TREATMENT OF MBI STOCK OPTIONS

Immediately prior to completion of the merger, each unexpired and
unexercised option to purchase shares outstanding pursuant to MBI's Pre-1984
Stock Option Plan, 1984 Incentive Stock Option Plan, 1984 Nonstatutory Stock
Option Plan, 1993 Stock Option Plan, 1993 Outside Directors Stock Option Plan,
1997 Outside Directors Stock Option Plan or 1998 Stock Option Plan or pursuant
to any separate option agreements may be exercised in full in accordance with
its terms. Each option subject to the Pre-1984 Stock Option Plan, 1984 Incentive
Stock Option Plan, 1984 Nonstatutory Stock Option Plan and 1998 Stock Option
Plan not so exercised shall be automatically terminated as of the effective time
of the merger. Each MBI option subject to the 1993 Stock Option Plan, the 1993
Outside Directors Option Plan and the 1997 Outside Directors Option Plan not so
exercised shall be

34
<PAGE>
automatically converted into an option to purchase a number of shares of
Alliance common stock equal to the number of shares of MBI common stock that
could have been purchased under the option multiplied by the exchange ratio,
with the resulting number of shares rounded down to the nearest whole share. The
price per share for the option will be equal to the option exercise price
determined pursuant to the option divided by the exchange ratio, with the
resulting exercise price rounded up to the nearest whole cent. The assumed
options shall otherwise be subject to the same terms and conditions as the
original MBI option.

TREATMENT OF MBI WARRANTS

Immediately prior to the effective time of the merger each unexpired and
unexercised warrant outstanding may be exercised in full in accordance with its
terms. Each MBI warrant not so exercised shall be automatically converted into a
warrant to purchase a number of shares of Alliance common stock equal to the
number of shares of MBI common stock that could have been purchased under the
warrant multiplied by the exchange ratio, with the resulting number of shares
rounded down to the nearest whole share. The price per share will be equal to
the warrant exercise price determined pursuant to the warrant divided by the
exchange ratio, with the resulting exercise price rounded up to the nearest
whole cent. The other terms and conditions of each MBI warrant will continue to
apply.

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

The following summary discusses the material U.S. federal income tax
consequences of the merger to U.S. holders of MBI common stock. For purposes of
this discussion, a U.S. holder means:

- a citizen or resident of the United States;

- a corporation or other entity taxable as a corporation created or
organized under the laws of the United States or any of its political
subdivisions;

- a trust, if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. fiduciaries have the
authority to control all substantial decisions of the trust; or

- an estate that is subject to U.S. federal income tax on its income
regardless of its source.

This discussion is based upon the Internal Revenue Code of 1986, as amended,
Treasury regulations, administrative rulings and judicial decisions currently in
effect, all of which are subject to change, possibly with retroactive effect.
The discussion assumes that MBI stockholders hold their MBI common stock and
will hold their Alliance common stock as a capital asset within the meaning of
Section 1221 of the Internal Revenue Code. Further, the discussion does not
address all aspects of U.S. federal income taxation that may be relevant to a
particular stockholder in light of his, her or its personal investment
circumstances or to stockholders subject to special treatment under the U.S.
federal income tax laws, including:

- insurance companies;

- tax-exempt organizations;

- dealers in securities or foreign currency;

- banks or trusts;

- persons that hold their MBI common stock as part of a straddle, a hedge
against currency risk or a constructive sale or conversion transaction;

- persons that have a functional currency other than the U.S. dollar;

- investors in pass-through entities;

35
<PAGE>
- stockholders who acquired their MBI common stock through the exercise of
options or otherwise as compensation or through a tax-qualified retirement
plan; or

- holders of options granted under any MBI benefit plan.

Furthermore, this discussion does not consider the potential effects of any
state, local or foreign tax laws.

The merger of Merger Sub into MBI is intended to constitute a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. As a result:

- no gain or loss will be recognized by Alliance, MBI, or Merger Sub as a
result of the merger;

- no gain or loss will be recognized by U.S. holders of MBI common stock on
the exchange of their MBI common stock for Alliance common stock, except
with respect to cash received by U.S. holders of MBI common stock in lieu
of fractional shares of Alliance common stock;

- the aggregate adjusted basis of the Alliance common stock received in the
merger by a U.S. holder of MBI common stock will be equal to the aggregate
adjusted basis of the U.S. holder's MBI common stock exchanged for that
Alliance common stock; and

- the holding period of the Alliance common stock received in the merger by
a U.S. holder of MBI common stock will include the holding period of the
U.S. holder's MBI common stock exchanged for that Alliance common stock.

Neither MBI nor Alliance has requested a legal opinion or a ruling from the
United States Internal Revenue Service with respect to any of the U.S. federal
income tax consequences of the merger and, as a result, there can be no
assurance that the Internal Revenue Service will not disagree with or challenge
intended tax treatment described above. Any change in currently applicable law,
which may or may not be retroactive, could affect the tax consequences of the
merger.

CASH INSTEAD OF FRACTIONAL SHARES

The receipt of cash instead of a fractional share of Alliance common stock
by a U.S. Holder of MBI common stock will result in taxable gain or loss to such
U.S. holder for U.S. federal income tax purposes based upon the difference
between the amount of cash received by such U.S. holder and the U.S. holder's
adjusted tax basis in the fractional share as set forth above. The gain or loss
will constitute capital gain or loss and will constitute long-term capital gain
or loss if the U.S. holder's holding period is greater than 12 months as of the
date of the merger. For non-corporate U.S. holders, this long-term capital gain
generally will be taxed at a maximum U.S. federal income tax rate of 20%. The
deductibility of capital losses is subject to limitations.

APPRAISAL RIGHTS

A holder of MBI common stock who exercises appraisal rights generally will
recognize taxable capital gain or loss based upon the difference between the
amount of cash received by such U.S. holder and the U.S. holder's tax basis in
the shares of MBI common stock exchanged.

BACKUP WITHHOLDING

MBI stockholders may be subject to backup withholding at a 31% rate on cash
payments received instead of fractional shares of Alliance common stock. Backup
withholding will not apply, however, to an MBI stockholder who:

- furnishes a correct taxpayer identification number and certifies that he,
she or it is not subject to backup withholding on the substitute Form W-9
or successor form included in the letter of transmittal to be delivered to
MBI stockholders following the date of completion of the merger;

- provides a certification of foreign status on Form W-8 or successor form;
or

36
<PAGE>
- is otherwise exempt from backup withholding.

REPORTING REQUIREMENTS

A U.S. holder of MBI common stock receiving Alliance common stock as a
result of the merger may be required to retain records related to his, her or
its MBI common stock and file with his, her or its federal income tax return a
statement setting forth facts relating to the merger.

THIS SUMMARY DOES NOT ADDRESS TAX CONSEQUENCES THAT MAY VARY WITH, OR ARE
CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, THE SUMMARY DOES NOT ADDRESS
ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE
MERGER. ACCORDINGLY, EACH MBI STOCKHOLDER IS STRONGLY URGED TO CONSULT WITH A
TAX ADVISOR TO DETERMINE THE PARTICULAR FEDERAL, STATE, LOCAL OR FOREIGN INCOME
OR OTHER TAX CONSEQUENCES OF THE MERGER TO THE HOLDER.

ACCOUNTING TREATMENT OF THE MERGER

Alliance and MBI intend to account for the merger under the purchase method
of accounting for business combinations.

RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF MBI

The shares of Alliance common stock to be issued in connection with the
merger will be registered under the Securities Act of 1933 and will be freely
transferable under the Securities Act, except for shares of Alliance common
stock issued to any person who is deemed to be an affiliate of MBI at the time
of the special meeting. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under the common
control of MBI and may include MBI's executive officers and directors, as well
as MBI's significant stockholders. Affiliates may not sell their shares of
Alliance common stock acquired in connection with the merger except pursuant to:

- an effective registration statement under the Securities Act covering the
resale of those shares;

- an exemption under paragraph (d) of Rule 145 under the Securities Act; or

- any other applicable exemption under the Securities Act.

Alliance's registration statement on Form S-4, of which this proxy
statement-prospectus forms a part, does not cover the resale of shares of
Alliance common stock to be received by MBI affiliates in the merger.

NASDAQ NATIONAL MARKET SYSTEM INCLUSION OF ALLIANCE COMMON STOCK TO BE ISSUED IN
THE MERGER

Alliance will use reasonable best efforts to cause the shares of Alliance
common stock to be issued in connection with the merger to be approved for
inclusion on the Nasdaq National Market System, subject to official notice of
issuance, before the completion of the merger.

DELISTING AND DEREGISTRATION OF MBI COMMON STOCK AFTER THE MERGER

When the merger is completed, MBI common stock will be delisted from the
Over-the-Counter Bulletin Board and will be deregistered under the Securities
Exchange Act of 1934.

MATERIAL TERMS OF THE MERGER AGREEMENT

The following summary of the merger agreement is qualified in its entirety
by reference to the complete text of the merger agreement, which is incorporated
by reference and attached as Appendix A to this proxy statement-prospectus. You
are urged to read the full text of the merger agreement.

37
<PAGE>
CONDITIONS TO THE MERGER

Each of MBI's and Alliance's obligations to complete the merger are subject
to the satisfaction or waiver of specified conditions before completion of the
merger, including the following:

- the adoption of the merger agreement by the affirmative vote of the
holders of a majority of the outstanding shares of MBI common stock;

- the receipt of various legal opinions and other certificates, consents,
reports and approvals from the other party to the merger agreement and
from third parties; and

- the absence of any preliminary or permanent statute, rule, regulation,
judgment, decree, injunction or other order prohibiting the consummation
of the transactions contemplated by the merger agreements or imposes
material restrictions on MBI or Alliance in connection with the
consummation of the merger or with respect to their business operations.

MBI's obligations to complete the merger are subject to the satisfaction or
waiver of the following additional conditions before completion of the merger:

- Alliance's representations and warranties that are qualified by
materiality or as to a material adverse effect on Alliance or its
business, condition (financial or otherwise), properties, prospects or
results of operations or liabilities of Alliance must be true and correct,
and each of the representations and warranties that are not so qualified
must be true and correct in all material respects, as of the effective
time of the merger as though made at and as of the effective time of the
merger, except for changes contemplated by the merger agreement; and

- Alliance must have performed all obligations required to be performed by
it under the merger agreement.

Alliance's obligations to complete the merger are subject to the
satisfaction or waiver of the following additional conditions before completion
of the merger:

- MBI's representations and warranties that are qualified by materiality or
as to a material adverse effect on MBI or its business, condition
(financial or otherwise), properties, prospects or results of operations
or liabilities must be true and correct, and each of the representations
and warranties that are not so qualified must be true and correct in all
material respects, as of the effective time of the merger as though made
at and as of the effective time of the merger, except for changes
contemplated by the merger agreement;

- MBI must have performed all obligations required to be performed by it
under the merger agreement;

- the registration statement on Form S-4, of which this proxy
statement-prospectus forms a part, must have been declared effective by
the Securities and Exchange Commission, and no stop order or threatened or
pending proceedings seeking a stop order may exist;

- there must be no material adverse change in MBI, its subsidiaries or their
respective businesses, conditions (financial or otherwise), properties,
prospects, contracts or results of operations or liabilities;

- MBI's President and Chief Executive Officer, Bobba Venkatadri must have
executed and delivered to Alliance a noncompetition agreement in a form
reasonably satisfactory to Alliance agreeing not to engage in any business
relating to the development, manufacture or sale of ultrasound contrast
imaging agents;

- the number of dissenting shares, if any, must not have exceeded 5% of the
total number of outstanding shares of MBI common stock;

38
<PAGE>
- the terms of the Cooperative Development and Marketing Agreement between
MBI and Chugai Pharmaceutical Co., Ltd. dated March 31, 1998, must not
have been terminated, amended, modified or altered; and

- the results of an environmental due diligence review of MBI by Alliance
must be acceptable to Alliance.

NO OTHER TRANSACTIONS INVOLVING MBI

The merger agreement contains detailed provisions prohibiting MBI from
seeking an alternative transaction. Under these no solicitation provisions, MBI
has agreed that it will not, and that it will use best efforts to ensure that
its officers, directors, employees, agents and representatives will not,
directly or indirectly:

- encourage, solicit, participate in or initiate discussions or negotiations
with, or provide any information to, any corporation, partnership, person
or other entity or group (other than Alliance or any of its affiliates or
representatives) concerning any Acquisition Proposal, as described below;

- withdraw or modify, or propose to withdraw or modify, in a manner adverse
to Alliance, the approval or recommendation by MBI's board of directors of
the merger;

- solicit, approve or recommend, or propose to solicit, approve or
recommend, any Acquisition Proposal; or

- approve or authorize MBI or any of its subsidiaries entering into any
agreement with respect to any Acquisition Proposal.

However, the merger agreement does not prevent MBI or its board of directors
from:

- furnishing information concerning MBI's business, properties or assets to
any corporation, partnership, person or other entity or group pursuant to
appropriate confidentiality agreements (which request is unsolicited after
the date of the merger agreement);

- negotiating and participating in discussions and negotiations with any
entity or group concerning an Acquisition Proposal:

- if the entity or group has submitted a bona fide written proposal to
the board of directors of MBI relating to any transaction which the MBI
board of directors determines represents a Superior Proposal, as
described below; and

- if, in the opinion of the board of directors of MBI, after receipt of
advice from outside legal counsel to MBI, the failure to engage in the
discussions or negotiations would cause the MBI board of directors to
violate its fiduciary duties to MBI's stockholders under applicable
law.

In addition, notwithstanding the above prohibitions, in the event the MBI
board of directors receives an Acquisition Proposal that, based on the advice of
MBI's outside counsel, the board of directors is required to consider in the
exercise of its fiduciary obligations and that the board of directors determines
is a Superior Proposal the MBI board of directors may, subject to the
limitations described below, at any time after the fifth business day following
MBI's notice to Alliance advising Alliance that the board of directors has
received a Superior Proposal and of the material terms of the structure of the
Superior Proposal:

- withdraw or adversely modify its approval or recommendation of the merger
and approve or recommend the Superior Proposal;

- approve or authorize MBI's entering into an agreement with respect to the
Superior Proposal;

- approve the solicitation of additional Acquisition Proposals; or

39
<PAGE>
- terminate the merger agreement.

MBI may take any of these actions only if an Acquisition Proposal that was a
Superior Proposal at the time of delivery of the notice to Alliance continues to
be a Superior Proposal in light of any improved transaction proposed by Alliance
before the expiration of the 5-day notice period. In addition, if the MBI board
of directors proposes to:

- withdraw or adversely modify its approval or recommendation of the merger;

- approve or recommend any Acquisition Proposal; or

- authorize MBI's entering into an agreement with respect to any Acquisition
Proposal; then,

MBI will be required to pay to Alliance, the termination fee of $500,000, plus
legal and accounting fees incurred by Alliance in connection with the merger, up
to a maximum of $500,000.

"Acquisition Proposal" means any proposal or offer with respect to, or a
transaction to effect:

- a merger, tender offer or exchange offer involving MBI or any of its
subsidiaries;

- the sale of all or a significant portion of the assets of MBI or any of
its subsidiaries;

- the sale of shares of capital stock or debt securities of MBI or any of
its subsidiaries; or

- any similar transaction involving MBI or any of its subsidiaries.

"Superior Proposal" means any bona fide Acquisition Proposal to merge with
MBI or any of its subsidiaries or to acquire, directly or indirectly, a material
equity interest in or a significant amount of voting securities or assets of MBI
or any of its subsidiaries for cash and/or securities, and otherwise on terms
which the MBI board of directors determines in its good faith reasonable
judgment, based on the advice of Prudential Securities or any other financial
advisor of nationally recognized reputation, to provide greater aggregate value
to MBI's stockholders than the merger or otherwise proposed by Alliance as
contemplated above.

TERMINATION

The merger agreement may be terminated at any time prior to the completion
of the merger, whether before or after MBI stockholder approval has been
obtained:

- by the mutual consent of the boards of directors of Alliance and MBI;

- by either Alliance or MBI if:

- any court or other governmental entity of competent jurisdiction in the
United States issues, enacts, promulgates, enforces or enters an order,
statute, decree, ruling or regulation or takes any other action
permanently restraining, enjoining or otherwise prohibiting the merger
and the order, statute, decree, ruling, regulation or other action is
final and nonappealable; or

- the merger is not consummated by March 31, 2001;

- by MBI:

- if Alliance materially breaches its representations, warranties or
covenants in the merger agreement (other than breaches which could not
reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise), properties, prospects or
results of operations or liabilities of Alliance, either individually
or in the aggregate, and the breach is not cured within 10 days of
written notice of the breach; or

- to allow MBI to enter into an agreement which the MBI board of
directors determines to be a Superior Proposal;

40
<PAGE>
- by Alliance:

- if the MBI board of directors withdraws or modifies, or proposes to
withdraw or modify, in a manner adverse to Alliance, its approval or
recommendation of the merger agreement or the merger;

- if the MBI board of directors solicits, approves or recommends, or
proposes to solicit, approve or recommend, any Acquisition Proposal;

- if the MBI board of directors approves or authorizes MBI's entering
into any agreement with respect to any Acquisition Proposal;

- if MBI materially breaches its representations, warranties or covenants
in the merger agreement, other than breaches which could not reasonably
be expected to have a material adverse effect on the business,
condition (financial or otherwise), properties, prospects or results of
operations or liabilities of MBI (either individually or in the
aggregate), and the breach is not cured within 10 days of written
notice of the breach; or

- by either Alliance or MBI:

- for any reason, provided that upon such termination, the party
terminating the merger agreement pays to the other party as liquidated
damages the termination fee described below.

EFFECT OF TERMINATION

As set forth in more detail below, the merger agreement requires MBI and
Alliance to pay to the other party, in specified circumstances, a termination
fee of $500,000 plus legal and accounting fees incurred by the other party in
connection with the merger (up to a maximum of $500,000). Except for liability
by a party to pay to the other the termination fee, if any, neither party will
have any further liability to the other party in the event of termination of the
merger agreement.

MBI must pay to Alliance the termination fee in the event:

- Alliance terminates the merger agreement because the MBI board of
directors withdraws or modifies, or proposes to withdraw or modify, in a
manner adverse to Alliance, its approval or recommendation of the merger
agreement or the merger; solicits, approves or recommends, or proposes to
solicit, approve or recommend, any Acquisition Proposal; or approves or
authorizes MBI's entering into any agreement with respect to any
Acquisition Proposal;

- Alliance terminates the merger agreement due to a material breach of MBI's
representations, warranties or covenants under the merger agreement (other
than, in the case of MBI's representations and warranties, breaches which
could not reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise), properties, prospects or
results of operations or liabilities of MBI (either individually or in the
aggregate)), and the breach is not cured within 10 days of written notice
of the breach; or

- MBI terminates the merger agreement in order to enter into an agreement
which MBI's board of directors determines to be a Superior Proposal;

- MBI terminates the merger agreement for any reason not otherwise permitted
by the merger agreement; or

- the MBI stockholders fail to approve the merger.

41
<PAGE>
Alliance must pay to MBI the termination fee in the event:

- MBI terminates the merger agreement due to a material breach of Alliance's
representations, warranties or covenants under the merger agreement (other
than, in the case of Alliance's representations and warranties, breaches
which could not reasonably be expected to have a material adverse effect
on the business, condition (financial or otherwise), properties, prospects
or results of operations or liabilities of Alliance (either individually
or in the aggregate)), and the breach is not cured within 10 days of
written notice of the breach; or

- Alliance terminates the merger agreement for any reason not otherwise
permitted by the merger agreement.

CONDUCT OF BUSINESS PENDING THE MERGER

Under the merger agreement, MBI agreed that during the period before
completion of the merger, except as expressly contemplated by the merger
agreement or to the extent that Alliance consents in writing (which consent may
not be unreasonably withheld), each of MBI and its subsidiaries will carry on
its respective business only in the ordinary and usual course and will use its
best efforts to preserve intact its business organization and maintain its
existing relationships with third parties.

In addition, MBI has agreed to some specific restrictions on itself and its
subsidiaries relating to the following:

- the declaration or payment of dividends;

- the alteration of share capital, including, among other things, stock
splits, combinations or reclassifications;

- the repurchase or redemption of common stock;

- the issuance, sale or pledge of common stock, voting debt or other equity
interests;

- the amendment of its certificate of incorporation or bylaws;

- the acquisition of assets or other entities;

- the disposition, lease or pledge of assets;

- the incurrence or the guarantee of debt;

- the creation of any subsidiaries;

- the settlement or compromise of any material claim or litigation or
waiver, release or assignment of any material right or claim;

- the amendment or termination of any contract;

- the making or amendment of any employment or severance agreement with any
director, executive officer or employee; and

- the making of tax elections or the cancellation or termination of
insurance policies.

ADDITIONAL AGREEMENTS. Each of MBI and Alliance has agreed to use its best
efforts to take all actions and do all things necessary, proper and appropriate
under applicable laws to complete the merger and the transactions contemplated
by the merger agreement as soon as practicable after October 11, 2000, which is
the date of the merger agreement.

The merger agreement contains covenants of MBI relating to the preparation
of this proxy statement-prospectus, access to information, notice of specified
matters and events, agreements from persons who are affiliates of MBI for
purposes of Rule 145 of the Securities Act of 1933 and

42
<PAGE>
agreements from Chugai and all members of MBI's management to vote in favor of
the merger. The merger agreement also contains agreements between MBI and
Alliance relating to, among other things, public announcements and
indemnification of officers, directors and employees of MBI following the
merger.

AMENDMENT, EXTENSION AND WAIVER

The merger agreement may be amended by the parties, by action taken or
authorized by their respective boards of directors, at any time before or after
approval of the merger by the MBI stockholders has been obtained. After the
approval has been obtained, no amendment may be made which reduces the amount or
changes the form of consideration to be paid in the merger or in any way
adversely affects the rights of the MBI stockholders without the further
approval of the MBI stockholders. All amendments to the merger agreement must be
in writing signed by MBI and Alliance.

At any time before the completion of the merger, the parties may, by action
taken or authorized by their respective boards of directors, to the extent
legally allowed, extend the time for the performance of any of the obligations
or other acts of the other party; waive any inaccuracies in the representations
and warranties contained in the merger agreement or in any document delivered
pursuant to the merger agreement; and waive compliance with any of the
agreements or conditions contained in the merger agreement. All extensions and
waivers must be in writing and signed by the party against whom the waiver is to
be effective.

EXPENSES. Whether or not the merger is completed, all expenses and fees
incurred in connection with the merger agreement and the merger will be paid by
the party incurring the expenses or fees, except in the event a party is
required to pay a termination fee to the other party.

REPRESENTATIONS AND WARRANTIES

The merger agreement contains customary representations and warranties of
MBI relating to, among other things:

- corporate organization and similar corporate matters;

- authorization;

- opinion of financial advisor;

- governmental filings and permits, compliance with applicable laws and
absence of conflicts;

- capital structure;

- documents filed with the SEC and financial statements included in those
documents;

- information supplied in connection with this proxy statement-prospectus
and the registration statement of which it is a part;

- absence of specified changes or events;

- litigation and liabilities;

- specified contracts and absence of conflicts and defaults;

- employee benefits;

- brokers and finders;

- board approval and applicable state takeover laws;

- intellectual property;

43
<PAGE>
- title to assets and properties;

- taxes;

- insurance;

- labor matters;

- voting agreements; and

- environmental matters.

The merger agreement also contains customary representations and warranties
of Alliance relating to, among other things:

- corporate organization and similar corporate matters;

- authorization;

- governmental filings and permits, compliance with applicable laws and
absence of conflicts;

- capital structure;

- documents filed with the SEC and financial statements included in those
documents;

- information supplied in connection with this proxy statement-prospectus
and the registration statement of which it is a part;

- absence of specified changes or events; and

- brokers and finders.

VOTING AGREEMENT

Pursuant to a voting agreement entered into with Chugai on October 23, 2000,
Chugai has granted Alliance a proxy to vote its shares of MBI common stock in
favor of the merger. As of the date of this proxy statement-prospectus, Chugai
held approximately 3.69% of the outstanding shares of common stock of MBI.

44
<PAGE>
MANAGEMENT OF THE COMBINED COMPANY FOLLOWING THE MERGER

BOARD OF DIRECTORS OF ALLIANCE FOLLOWING THE MERGER

Upon consummation of the merger, Duane J. Roth, Theodore D. Roth, Pedro
Cuatrecasas, M.D., Carroll O. Johnson, Fred M. Hershenson, Ph.D., Stephen M.
McGrath, Donald E. O'Neill, Helen M. Ranney, M.D., Jean Riess, Ph.D. and Thomas
F. Zuck, M.D., each of whom is currently a director of Alliance, will continue
to serve as directors of Alliance.

EXECUTIVE OFFICERS OF ALLIANCE FOLLOWING THE MERGER

The following table sets forth information, including the age and position
of each person as of November 8, 2000 who will serve as an executive officer of
Alliance upon consummation of the merger:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------------------------------------------------------
<S> <C> <C>
Duane J. Roth.................. 50 Chairman and Chief Executive Officer
Theodore D. Roth............... 49 President and Chief Operating Officer
Harold W. DeLong............... 52 Executive Vice President, Business Development
Artemios B. Vassos, MD......... 53 Executive Vice President and Chief Scientific Officer
David H. Klein, Ph.D........... 67 Senior Vice President, Research and Development
Keith W. Chapman............... 50 Vice President, Operations
B. Jack DeFranco............... 55 Vice President, Market Development
N. Simon Faithfull, M.D., Vice President, Medical Affairs Development
Ph.D........................... 60
Kathryn E. Flaim, Ph.D......... 50 Vice President, Clinical Products Support
Tim T. Hart, C.P.A............. 43 Vice President, Chief Financial Officer and Treasurer
H. Joerg Limmer, DVM........... 59 Vice President, Worldwide Clinical Development
Christiane O. Rockwell......... 47 Vice President, Quality Assurance
Gwen Rosenberg................. 46 Vice President, Corporate Communications
Lloyd A. Rowland, Jr........... 44 Vice President, Secretary, and General Counsel
Mark Seefeld, Ph.D., D.A.B.T... 47 Vice President, Preclinical Drug Safety and Development
</TABLE>

DUANE J. ROTH. Mr. Roth, who is 50, has been Chief Executive Officer of
Alliance since 1985 and Chairman of Alliance since October 1989. Prior to
joining Alliance, Mr. Roth served as President of Analytab Products, Inc., an
American Home Products company involved in manufacturing and marketing medical
diagnostics, pharmaceuticals and devices. For the previous ten years, he was
employed in various sales, marketing, and general management capacities by Ortho
Diagnostic Systems, Inc., a Johnson & Johnson company, which is a manufacturer
of diagnostic and pharmaceutical products. Mr. Roth's brother, Theodore D. Roth,
is President and Chief Operating Officer of Alliance.

THEODORE D. ROTH. Mr. Roth, who is 49, was Executive Vice President and
Chief Financial Officer of Alliance from November 1987 to May 1998, when he was
appointed President and Chief Operating Officer. For more than ten years prior
to joining Alliance, he was General Counsel of SAI Corporation, a company in the
business of operating manufacturing concerns, and General Manager of Holland
Industries, Inc., a manufacturing company. Mr. Roth received his J.D. from
Washburn University and an LL.M. in Corporate and Commercial Law from the
University of Missouri in Kansas City. He is the brother of Duane J. Roth, the
Chairman and Chief Executive Officer of Alliance.

HAROLD W. DELONG. Mr. DeLong, who is 52, has been Executive Vice President,
Business Development for Alliance since February 1989. Mr. DeLong has been
employed for more than 25 years in the medical diagnostics and pharmaceutical
industry in various sales, marketing, and management positions. Prior to joining
Alliance, Mr. DeLong was Vice President, Sales and Marketing for Murex
Corporation, a company participating in the infectious disease diagnostics
market. He previously served

45
<PAGE>
as Director, Sales and Marketing for Becton Dickinson's Immunocytometry Systems
division. Mr. DeLong was also employed previously by Ortho Diagnostic
Systems, Inc. for over ten years, where his last position was Director of the
Hemostasis and Chemistry Products business units.

ARTEMIOS B. VASSOS, M.D. Dr. Vassos, who is 53, joined Alliance in 1999 as
Executive Vice President and Chief Scientific Officer. For ten years prior to
joining Alliance, he served in several positions in Clinical Research and
Clinical Pharmacology at Parke Davis where his last position was Senior Director
of Clinical Pharmacology and Experimental Medicine. He received his MD degree at
the University of Illinois, and his post-graduate training in Internal Medicine
and Hematology and Medical Oncology at the University of California.

DAVID H. KLEIN, PH.D. Dr. Klein, who is 67, is Senior Vice President,
Research and Development. He originally joined Alliance in 1989, became a
consultant for Alliance in 1997, and rejoined Alliance in June 2000. For over
40 years he has carried out and directed chemical research in various academic,
research and pharmaceutical institutions. Prior to joining Alliance, Dr. Klein
worked for over four years at Sun. Inc. on medical uses of perflurocarbon
emulsions. He has served as a consultant for the National Science Foundation,
the Michigan Department of Natural Resources and the United States Senate. He
received his Ph.D. in analytical chemistry from the Case Western Reserve
University.

KEITH W. CHAPMAN. Mr. Chapman, who is 50, was appointed Vice President,
Operations for Alliance in July 1997, having joined Alliance in 1992 as
Director, Transfer Operations. For 14 years prior to joining Alliance, he was
responsible for scale-up development and production of modified hemoglobins for
the Army's Blood Substitute Program. He received training as a research
associate in dermatology, tropical medicine, and blood cell preservation at the
Letterman Army Institute of Research, Presidio of San Francisco, California.

B. JACK DEFRANCO. Mr. DeFranco, who is 55, has been Vice President, Market
Development for Alliance since January 1991. He has more than 25 years
experience in sales and marketing in the medical products industry. He was
President of Orthoconcept Inc., a private firm marketing orthopedic and
urological devices from 1986 through 1990. Prior to 1986, he was Director of
Marketing and New Business Development for Smith and Nephew Inc., which markets
orthopedic and general wound-care products, and he served in various sales and
marketing positions with Ortho Diagnostic Systems, Inc. Mr. DeFranco received
his M.B.A. from Fairleigh Dickinson University.

N. SIMON FAITHFULL, M.D., PH.D. Dr. Faithfull, who is 60, has been Vice
President, Medical Affairs Development for Alliance since September 1990.
Dr. Faithfull joined Alliance after serving as Director of Medical Research for
Delta Biotechnology Ltd. from 1989 to 1990. He has also served as Senior
Lecturer in Anesthesia at the University of Manchester (UK), and has held
various academic appointments and clinical anesthesia positions at Erasmus
University (Netherlands), Tulane University and the University of Alabama
(Birmingham) for more than 15 years. He has served as Secretary of the
International Society on Oxygen Transport to Tissue. He received his Ph.D. from
Erasmus University, Rotterdam and his M.D. from London University.

KATHRYN E. FLAIM, PH.D. Dr. Flaim, who is 50, was appointed Vice President,
Clinical Products Support for Alliance in August 1998, having joined Alliance in
1990 as Director of Clinical Research. Dr. Flaim has over 15 years of experience
in clinical trial design and regulatory submissions. For nine years before
joining Alliance, she was Associate Director of the Division of Clinical
Research and Development at SmithKline Beecham. Previously, she was an Assistant
Professor at the Milton S. Hershey Medical Center at Pennsylvania State
University. Dr. Flaim received her Ph.D. at the University of California at
Davis.

TIM T. HART, C.P.A. Mr. Hart, who is 43, was appointed Vice President in
May 1999 and Chief Financial Officer in August 1998 for Alliance. He joined
Alliance in 1991 as Controller and has also

46
<PAGE>
served as Treasurer since 1994. Prior to joining Alliance, he was employed in
various financial management positions at Cubic Corporation for over eight
years. He was also employed by Ernst & Whinney in San Diego, California as a
C.P.A.

H. JOERG LIMMER, D.V.M. Dr. Limmer, who is 59, was appointed Vice
President, Worldwide Clinical Development for Alliance in September 1996. Prior
to joining Alliance, Dr. Limmer worked six years for Boehringer Ingelheim Pharma
as Regional Director and Vice President where he was responsible for medical and
marketing affairs for Eastern European countries. For the previous 20 years he
was Director of Clinical Research at Dr. Karl Thomae GmbH, a subsidiary of
Boehringer Ingelheim GmbH in Germany. His primary focus was in the area of
diabetes mellitus, fat metabolism, atherosclerosis, and intensive care products.
Dr. Limmer received his DVM from the Freie Universitaet of Berlin, Germany.

CHRISTINE O. ROCKWELL. Ms. Rockwell, who is 47, was appointed Vice
President, Quality Assurance for Alliance in July 2000. Prior to joining
Alliance, Ms. Rockwell worked for 20 years for Allergan, Inc., where she served
in various capacities, most recently as Worldwide Quality Assurance Manager.
Ms. Rockwell received her M.B.A. from Pepperdine University and her B.S. from
University of Tours, France.

GWEN ROSENBERG. Ms. Rosenberg, who is 46, was appointed Vice President,
Corporate Communications for Alliance in May 1998. Ms. Rosenberg joined Alliance
in 1990 and has served in various capacities, most recently as Director of
Corporate Communications. For the previous eleven years, she was a research
scientist at the University of California, San Diego and at Scripps Clinic and
Research Foundation, and was concurrently a science reporter for the San Diego
Daily Transcript. Ms. Rosenberg has also taught high school chemistry and
biology in New York. She received her B.A. and M.A. degrees from Adelphi
University and The State University of New York at Stony Brook, respectively.

LLOYD A. ROWLAND, JR. Mr. Rowland, who is 44, was appointed Vice President
in May 1999 and Secretary of Alliance in May 1998, having served as General
Counsel and Assistant Secretary for Alliance since 1993. Prior to joining
Alliance, Mr. Rowland served as Vice President and Senior Counsel, Finance and
Securities, at Imperial Savings Association for four years. For the previous
eight years, he was engaged in the private practice of corporate law with the
San Diego, California law firm of Gray Cary Ames & Fry, and the Houston, Texas
law firm of Bracewell & Patterson. He received a J.D. from Emory University.

MARK SEEFELD, PH.D., D.A.B.T. Dr. Seefeld, who is 47, was appointed Vice
President, Preclinical Drug Safety and Development for Alliance in August 1998,
having joined Alliance in 1993 as Director, Toxicology. For more than ten years
prior to joining Alliance, he held positions in both general and reproductive
toxicology at Parke-Davis, Pharmaceutical Research Division of the
Warner-Lambert Company, and 3M Pharmaceuticals. Dr. Seefeld received his Ph.D.
from the University of Wisconsin-Madison and is board certified by the American
Board of Toxicology.

47
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF MBI
AND ALLIANCE COMMON STOCK

MBI is a Delaware corporation and Alliance is a New York corporation.
Accordingly, the rights of their respective stockholders are governed by
Delaware General Corporation Law or New York Business Corporation Law, as
applicable, and their certificates of incorporation and bylaws. Upon completion
of the Merger, MBI stockholders will become stockholders of Alliance, and their
rights will be governed by the certificate of incorporation and bylaws of
Alliance and by New York law. The following is a brief summary of certain
differences between the rights of MBI stockholders and Alliance stockholders and
is qualified in its entirety by reference to the relevant provisions of New York
and Delaware law, Alliance's certificate of incorporation and bylaws and MBI's
certificate of incorporation and bylaws.

AMENDMENT TO CERTIFICATE OF INCORPORATION

Under Delaware law and New York law, the board of directors must propose an
amendment to the certificate of incorporation, and then a majority of all
outstanding shares entitled to vote must approve it. In addition, under Delaware
and New York law a separate vote of a class or series of capital stock may be
required for amendments to the certificate in some cases.

AMENDMENT TO BYLAWS

Under both Delaware and New York law, a corporation's bylaws can be amended
or repealed by either the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote or the affirmative vote of a majority of the
members of the board of directors if such right is conferred on the board of
directors by the company's certificate of incorporation or, in the case of New
York law, the corporation's bylaws.

MBI's certificate of incorporation and bylaws provide its board of directors
the power to amend and repeal the bylaws and to adopt new bylaws by an
affirmative vote of a majority of the whole board. Alliance's bylaws provide
that the bylaws may be amended or repealed and new bylaws adopted by the board
or by vote of the holders of shares entitled to vote in the election of any
directors;

VOTE REQUIRED FOR MERGER AND CERTAIN OTHER TRANSACTIONS

Under Delaware law, the board of directors must approve an agreement of
merger or a sale, lease or exchange of all or substantially all of the assets of
a corporation. The holders of a majority of the outstanding shares of the
constituent corporations entitled to vote must then adopt such action taken by
the board.

Under New York law, the board of directors of each corporation participating
in a merger or consolidation must adopt a plan of merger or consolidation or
share exchange or approve a sale, lease, exchange or other disposition of all of
the assets of a corporation. The holders of two-thirds of all shares of each
constituent corporation entitled to vote must then adopt the plan. Because
Alliance is not a constituent corporation in the merger, the stockholders of
Alliance are not entitled to vote on the merger.

STOCKHOLDER APPROVAL OF STOCK PLANS

Delaware law does not require stockholder authorization of stock options or
similar incentives. Under New York law, the issuance of stock options or similar
incentives to directors, officers or employees must be authorized by a majority
of the votes cast at a stockholders' meeting by the stockholders entitled to
vote thereon.

48
<PAGE>
BOARD OF DIRECTORS

MBI's bylaws provide that the board of directors shall have six members, but
allows the number of directors to be changed by the board or by the stockholders
at the annual meeting or at a special meeting called for that purpose.
Alliance's bylaws provide that the number of board members shall be determined
from time to time by action of a majority of the board of directors but shall
not be less than three. The size of the Alliance board is currently set at ten
members.

New York and Delaware law and Alliance's and MBI's bylaws provide that any
or all directors may be removed with or without cause, by the holders of a
majority of shares then entitled to vote. New York law further allows an action
to obtain a judgment removing a director for cause to be brought by the
attorney-general or by holders of ten percent of the outstanding shares, whether
or not entitled to vote.

Under both New York and Delaware law and Alliance's and MBI's bylaws, a
vacancy on the board may be filled by a majority vote of the directors then in
office, even if less than a quorum. However, under New York law, only a vote of
the stockholders may fill board vacancies resulting from the removal of a
director by stockholders without cause.

MBI's bylaws provide that directors shall be elected by a plurality of votes
cast at stockholders' annual meetings with each director serving until his
successor is duly elected and qualified. Alliance's bylaws provide that
directors shall be elected by a plurality of the vote cast at each annual
stockholders' meeting to hold office until the next annual meeting and until
their successors are duly elected and qualified or until their earlier removal.

STOCKHOLDER SPECIAL MEETINGS

MBI's bylaws provide that special meetings of stockholders may be called for
any purpose, unless otherwise prescribed by statute by the Chairman of the board
of directors, if any, or the president or at a majority of the board's request
in writing or at the request in writing of the stockholders owning a majority of
capital stock. Alliance's bylaws provide that special meetings of stockholders
may be called for any purpose at any time by resolution of the board of
directors and shall be called when requested by at least ten percent of all
shares entitled to vote at such meeting.

LIMITATION ON DIRECTORS' LIABILITY

As permitted by Delaware law, MBI's certificate of incorporation eliminates
the personal liability of a director to the corporation or its stockholders for
money damages based on his or her breach of fiduciary duty. However, under
Delaware law, a director's liability is not eliminated for:

- any breach of the director's duty of loyalty to the corporation or its
stockholders;

- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- liability arising under Delaware law relating to unlawful payment of
dividends or unlawful stock purchase or redemption; or

- any transaction from which the director derived an improper personal
benefit.

Neither Alliance's certificate of incorporation nor its bylaws specifically
eliminate a director's personal liability to the corporation. New York law does
not allow a corporation to limit a director's liability for acts or omissions in
bad faith.

49
<PAGE>
INDEMNIFICATION

Under Delaware law, a corporation may generally indemnify its officers,
directors, employees and agents against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement of any proceedings, other than
derivative actions, if the person seeking indemnification acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in derivative actions, except that
indemnification may be made only for expenses, including attorneys' fees, and
certain amounts paid in settlement and, no indemnification shall be made in the
event the person seeking indemnification has been adjudicated liable except as
the appropriate court deems proper, fair and reasonable. Delaware law provides
that, to the extent that such persons have been successful in the defense of any
proceeding, they must be indemnified by the corporation against expenses
actually and reasonably incurred in connection therewith.

New York law provides a single standard for statutory indemnification for
third-party and derivative suits, through which a corporation may indemnify its
directors, officers and other employees if the person seeking indemnification
acted in good faith for a purpose which he or she reasonably believed to be in
the best interest of the corporation and, in criminal actions, had no reasonable
cause to believe his conduct was unlawful. No indemnification may be made under
New York law if a final adjudication establishes bad faith or active and
deliberate dishonesty were material to the cause of action or if the person
seeking indemnity received personal financial profit or advantage to which such
person was not legally entitled.

MBI's certificate of incorporation and bylaws and Alliance's bylaws require
indemnification for directors, officers, employees and agents, and persons
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture trust, or other
enterprise including an employee benefit plan. MBI's certificate of
incorporation specifies that such indemnification shall be for expenses,
including attorney's fees, judgments, fines and amounts paid in settlement for
proceedings brought by reason of such person's position at MBI or at another
enterprise at MBI's request. Alliance's bylaws specify that such indemnification
shall be to the fullest extent permitted by law. Alliance's bylaws also provide
for the benefits of indemnification to inure to the testator or intestate of any
indemnified directors, officers, employees, agents or other persons.

MBI's certificate of incorporation and Alliance's bylaws provide that the
corporation may pay the expenses of persons seeking indemnity on the terms the
board of directors considers appropriate at its discretion. Further, MBI's
certificate of incorporation provides that no amendment to the Certificate may
affect the rights and protection afforded to an indemnitee with respect to an
act, omission or expense that occurred prior to such amendment.

MBI's certificate of incorporation and Alliance's bylaws provide for an
advance of all expenses to a person seeking indemnity, that the person actually
and reasonably incurs upon receipt of the undertaking of the person seeking
indemnification to repay all amounts advanced should such person ultimately be
determined not entitled to indemnification.

ACTION BY CONSENT

Delaware law provides that, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken at any annual or
special meeting of stockholder may be taken without a meeting, without prior
notice and without a vote, by written consent of the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting. New York law also allows any
action required or permitted to be taken at a stockholders' meeting to be taken
without a meeting, but requires all of the stockholders entitled to vote to
consent to the action in writing. Under New York law and as provided

50
<PAGE>
in Alliance's bylaws, written consent of less than all of the stockholders is
permitted where not otherwise inconsistent with New York law.

Both Alliance's and MBI's bylaws permit action by written consent.

BUSINESS COMBINATIONS FOLLOWING A CHANGE IN CONTROL

Under Delaware law, an interested stockholder is defined as a holder of
fifteen or more of the outstanding voting stock. An interested stockholder may
engage in a business combination transaction with a Delaware corporation only
if:

- the board of directors approved the transaction before such stockholder
became an interested stockholder or approved the transaction in which such
stockholder became an interested stockholder;

- the interested stockholder acquired at least eighty-five percent of the
voting stock in the transaction in which it became an interested
stockholder; or

- the board of directors and the holders of shares entitled to cast
two-thirds of the votes entitled to be cast by all of the outstanding
voting shares held by all disinterested stockholders approve the
transaction.

Under New York law, an interested stockholder is defined as a holder of
twenty percent or more of the outstanding voting stock. An interested
stockholder may engage in a business combination transaction, such as a merger,
consolidation or sale of substantially all the assets of the corporation, with a
New York corporation only if:

- the board of directors approved the transaction before such stockholder
became an interested stockholder;

- the holders of a majority of the outstanding voting stock held by all
disinterested stockholders approve the transaction after a five-year
waiting period; or

- following the five-year waiting period, the transaction satisfies certain
fair price provisions.

PREFERRED STOCK

MBI's certificate of incorporation does not authorize shares of preferred
stock.

Alliance's certificate of incorporation authorizes up to 5,000,000 shares of
preferred stock, $0.01 par value of which 1,500,000 shares have been designated
Series A, none of which are outstanding or can be reissued, 500,000 shares have
been designated Series F, all of which are outstanding, 13,637 shares have been
designated Series G and 13,636 shares have been designated Series H, all of
which are reserved for future issuance. None of the designated series of
preferred stock have voting rights. The board is authorized to issue the
remaining undesignated shares of preferred stock:

- in such series, with such voting powers, designations, preferences and
relative, participating, optional or other special rights, and such
qualifications, limitations or restrictions, as are stated in a resolution
adopted by the board of directors; and

- in such number of shares in each series as the board of directors shall
fix, provided the aggregate number of preferred stock shares does not
exceed the number authorized in its certificate of incorporation.

DISSENTERS' RIGHTS

Generally, stockholders of a Delaware corporation who object to certain
mergers or a consolidation of the corporation are entitled to appraisal rights,
requiring the surviving corporation to

51
<PAGE>
pay the fair value of the dissenting shares. There are, however, no statutory
rights of appraisal with respect to stockholders of a Delaware corporation whose
shares of stock are either:

- listed on a national securities exchange or designated as a national
market system security on an inter-dealer quotation system by the National
Association of Securities Dealers, Inc. or

- held of record by more than 2,000 stockholders. However, appraisal rights
will be available to holders of shares if they are required by the merger
terms to accept anything other than shares of the survivor or are listed
or quoted shares or cash in lieu of fractional shares. In addition, no
appraisal rights are available for any shares of stock of a surviving
corporation in a merger if the merger did not require the approval of the
stockholders of such corporation. Further, Delaware law does not provide
appraisal rights to stockholders who dissent from the sale of all or
substantially all of the corporation's assets unless the certificate of
incorporation provides otherwise.

Under New York law, a stockholder who complies with prescribed statutory
procedures is entitled to dissent and to obtain payment of the fair value of its
shares in the event of consummation of:

- a plan of merger or consolidation upon which the stockholder is entitled
to vote, unless the corporation is the surviving corporation, the merger
is between parent and subsidiary corporations or the corporation's shares
are listed on a national securities exchange or quoted as a national
market system security;

- a plan of share exchange to which the corporation is a party as the
corporation whose shares will be acquired; or

- a sale, lease, exchange or other disposition of all, or substantially all,
of the corporation's property if a stockholder vote is required for such
disposition.

The meaning of fair value in payment for shares upon exercise of dissenters'
rights is different under New York law and Delaware law. Delaware law provides
that fair value does not include any element of value arising from the
completion or expectation of the transaction. New York law mandates that the
court should consider the nature of the transaction, its effect on the
corporation and its stockholders, the concepts and methods of valuation then
customary in the relevant financial and securities markets and all other
relevant factors to determine fair value.

RESTRICTIONS ON DIVIDENDS

Under Delaware law, a dividend may be paid on common stock out of either
surplus, which is defined as the excess of net assets over capital, or if no
surplus exists, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Dividends may not be paid out of net
profits if a corporation's capital is less than the aggregate amount of the
capital represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets.

Under New York law, a dividend may be paid on common stock, only out of
surplus, which is defined as the excess of net assets over stated capital,
unless, after payment of the dividend, the corporation is insolvent or would be
rendered insolvent.

The right of a holder of Alliance preferred stock to dividends varies
according to the series of preferred stock held.

52
<PAGE>
RESTRICTIONS ON STOCK REPURCHASES

Under Delaware law, a corporation may not purchase or redeem shares when its
capital is impaired or when such purchase or redemption would cause any
impairment of its capital, except that

- a corporation may purchase or redeem out of capital any shares which are
entitled to a preference over another class or series of its stock or

- if no shares entitled to a preference are outstanding, a corporation may
purchase or redeem shares out of capital. A corporation also may not
purchase any shares which are redeemable at its option for more than the
price at which they are then redeemable.

Under New York law, a corporation may not purchase or redeem shares if it is
insolvent or would be rendered insolvent.

Neither MBI's certificate of incorporation nor its bylaws address stock
repurchases or redemptions. Alliance's certificate of incorporation affords
redemption rights to certain classes of its preferred stock, which vary
according to class.

LOANS TO DIRECTORS

Delaware law provides that a corporation may make loans or provide
guarantees for its officers, including those who are also directors, if the
board of directors reasonably expects that such action will benefit the
corporation. Neither MBI's certificate of incorporation nor its bylaws address
loans to directors. New York law and Alliance's bylaws prohibit Alliance from
making a loan to a director unless the loan is authorized by vote of its
stockholders. New York law allows the board of directors of corporations
incorporated before 1998, such as Alliance, to approve specific loans,
guarantees or a general plan authorizing loans and guarantees if the board
determines the loan or guarantee benefits the corporation.

STOCKHOLDER INSPECTION OF CORPORATE RECORDS

Under Delaware law, any stockholder may inspect for any proper purpose a
corporation's stock ledger, list of stockholders and other books and records,
and may make copies or extracts from them. Under New York law, a stockholder,
upon at least five days written demand, is entitled to inspect a corporation's
minutes of stockholders' meetings and records of stockholders of the
corporation.

PREEMPTIVE RIGHTS

Under Delaware law, stockholders do not have preemptive rights unless
specifically granted in the certificate of incorporation. MBI's certificate of
incorporation does not grant preemptive rights. Under New York law, stockholder
shall not have preemptive or preferential rights, except that holders of
preferred stock may have such preemptive or preferential rights as the board of
directors may determine in its discretion. The holders of Alliance preferred
stock do not have preemptive rights.

53
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
MOLECULAR BIOSYSTEMS, INC.

54
<PAGE>
MOLECULAR BIOSYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

THE DISCUSSION AND ANALYSIS SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY,
AND SHOULD BE READ IN CONJUNCTION WITH MBI'S CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, AND THE OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN
THIS PROXY STATEMENT-PROSPECTUS.

YOU ARE CAUTIONED THAT THE STATEMENTS IN THIS PROXY STATEMENT-PROSPECTUS
THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACT MAY BE FORWARD-LOOKING STATEMENTS
INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONTAINED IN THIS SECTION AND
BUSINESS. THESE STATEMENTS REFLECT MANAGEMENT'S CURRENT VIEWS, ARE BASED ON MANY
ASSUMPTIONS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS,
INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN RISK FACTORS.

OVERVIEW

OPTISON is used to detect heart disease by assessing blood flow within the
heart chambers and by identifying the chamber borders and the movement of the
chamber walls, which we refer to as 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, which we refer to as myocardial perfusion.
The results from the Phase 2 trials formed the basis for a proposal to the FDA
for Mallinckrodt to conduct phase 3 clinical trials for myocardial perfusion.
The FDA is currently reviewing 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 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. MBI believes the information regarding perfusion will
enable cardiologists to diagnose heart attacks and coronary artery disease more
accurately and safely than is currently feasible. MBI has also conducted Phase 2
clinical studies using OPTISON to detect abnormalities in other organs, such as
the liver and kidney.

In May 2000, MBI agreed to transfer full control of the OPTISON business to
Mallinckrodt, a global manufacturer of specialty medical products, in exchange
for a 5% royalty on sales. This OPTISON Product Rights Agreement, or OPRA,
supersedes all previous agreements with Mallinckrodt. Mallinckrodt's territory
is worldwide, excluding Japan, South Korea and Taiwan. In August 2000, MBI and
Mallinckrodt amended OPRA to clarify that Mallinckrodt would continue to pay the
additional 3% royalty to MBI on sales of OPTISON in the United States until
sales reach a cumulative aggregate of $66,667,000, at which time Mallinckrodt
would pay the 3% royalty directly to the licensor, an outside party. The
amendment also clarifies that Mallinckrodt will reimburse MBI for a $450,000
credit available to Schering AG if Mallinckrodt utilizes this credit in the
event that Mallinkrodt enters into a license agreement with Schering AG.

Chugai 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.

55
<PAGE>
On June 6, 2000, MBI entered into a license agreement with Genta
Incorporated, or Genta, relating to antisense technology for therapeutic and
diagnostic applications. The license agreement includes grants of exclusive and
non-exclusive rights to Genta on a royalty-free basis in return for $400,000 in
cash and 376,470 shares of Genta common stock.

MBI 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 MBI to achieve
profitability are highly dependent on the market acceptance of OPTISON and are
therefore uncertain. There can be no assurance that MBI 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 MBI'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.

In August 1999, MBI received notice that the New York Stock Exchange (NYSE)
had revised its continued listing standards and that MBI was no longer in
compliance with the revised standards. As a result, MBI was delisted by the NYSE
effective after the close of trading on January 4, 2000. Effective January 5,
2000, trading of MBI common stock was moved to the NASD Over-The-Counter
Bulletin Board. A new trading symbol of MBIO was assigned to MBI by NASD. MBI
common stock traded on the New York Stock Exchange under the symbol MB through
the close of business January 4, 2000.

On March 30, 2000, MBI 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 development program for
a product code-named MB840. Twenty employees involved with the manufacturing of
OPTISON were transferred to Mallinckrodt. As of June 2000, MBI has three
employees, and maintains its offices in a rent-free building through May 2001.
MBI is not currently exploiting any of its other technologies.

On October 11, 2000, MBI, Alliance and Merger Sub entered into an agreement
and plan of merger pursuant to which Merger Sub will be merged into MBI and MBI
will become a wholly-owned subsidiary of Alliance. Under the merger agreement,
stockholders of MBI will receive 770,000 shares of Alliance common stock in
exchange for their shares of MBI's common stock (subject to a downward
adjustment). Closing of the merger is subject to the approval of the merger by
MBI's stockholders and to the satisfaction of other conditions precedent
described in the merger agreement. As a result of the proposed merger with
Alliance, MBI's bank facilities require payment of outstanding balance and, in
addition, MBI has agreed to other restrictions during the period prior to
closing. MBI estimates the outstanding balance of bank debt at the time of the
expected merger to be approximately $300,000, which is classified as the current
portion of long-term debt.

On October 16, 2000, MBI entered into an agreement to provide consulting
services to Alliance in contemplation of the proposed merger. Under the
agreement, which has a 120-day term, Alliance will pay MBI a fee of
approximately $8,450 per week for the services of 2 employees of MBI.

On October 17, 2000, Isis Pharmaceuticals, Inc. filed suit against MBI in
the Superior Court of the State of California seeking to reform the license
agreement entered into between MBI and Isis in September 1992 to reduce the
royalty payable to MBI to the rate payable to MBI in a license agreement entered
into in May 2000 between MBI and Genta. MBI disputes Isis's claim that MBI is
obligated to conform the Isis license to the Genta license.

On October 24, 2000, MBI received an unsolicited merger offer from CEL-SCI
Corporation. MBI's board of directors voted unanimously to reject this offer.

56
<PAGE>
REVENUE RECOGNITION

Historically MBI has earned revenue from three primary sources: revenue
under collaborative agreements, milestone payments and product revenue.

REVENUE UNDER COLLABORATIVE AGREEMENTS.

Revenue under collaborative agreements has been the primary source of
revenue for MBI in the past. It consists of payments received from Mallinckrodt
under MBI's Amended and Restated Distribution Agreement, or ARDA, to support
clinical trials, regulatory submissions and product development. Pursuant to
ARDA, 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.

MILESTONE PAYMENT REVENUE.

Milestone payment revenue is earned upon the achievement of product
development and territorial milestones. All milestone payments to date consist
of payments received from Chugai based on Chugai commencing clinical trials in
Japan.

PRODUCT AND ROYALTY REVENUE.

For fiscal year 2000, under the terms of an amendment to ARDA effective in
March 1999, which we refer to as ARDA II, MBI received a royalty rather than a
transfer price on product sales of OPTISON.

For fiscal years 1998 and 1999, product revenue was based upon MBI's
non-refundable sales to Mallinckrodt and was recognized upon shipment of the
product, at which time ownership and title to the goods passed to Mallinckrodt.
The transfer prices for MBI'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 the total number of units
shipped to end users whether paid for or shipped as samples. Consistent with
industry practice, MBI considers samples a marketing expense and as such the
cost of samples is recorded as selling, general and administrative expense.

Royalty revenue during fiscal years 1999 and 2000 was also earned pursuant
to a licensing agreement between MBI and Abbott Laboratories, Inc.

RESULTS OF OPERATIONS

FIRST SIX MONTHS OF FISCAL YEAR 2001 COMPARED TO FIRST SIX MONTHS OF FISCAL
YEAR 2000.

REVENUE UNDER COLLABORATIVE AGREEMENTS. There was no revenue from
collaborative agreements for the six months ended September 30, 2000. Revenue
under collaborative agreements was $3.0 million for the same period in 1999.
This revenue consisted solely of quarterly payments to support clinical trials,
regulatory submissions and product development received from Mallinckrodt under
ARDA.

PRODUCT AND ROYALTY REVENUE. Revenue from product royalties was $630,000
for the six months ended September 30, 2000 compared to $517,000 for the same
period in the prior year.

OTHER INCOME. Revenue for the six months ended September 30, 2000 includes
$2.8 million for the licensing of a portfolio of patents and technology to Genta
relating to antisense technology for

57
<PAGE>
therapeutic and diagnostic applications. This license agreement includes grants
of exclusive and non-exclusive rights to Genta on a royalty-free basis in return
for $400,000 in cash and 376,470 shares of Genta common stock. The Company sold
372,787 shares of Genta common stock in August 2000, realizing net proceeds of
$2,189,948. The remaining 3,684 shares of Genta common stock are reflected as
marketable securities in MBI's consolidated September 30, 2000 balance sheet.

COST OF PRODUCTS SOLD. There were no costs of product sold for the six
months ended September 30, 2000. Cost of products sold totaled ($529,000) for
the six months ended September 30, 1999. Under ARDA II, Mallinckrodt agreed to
reimburse the Company for all fully allocated manufacturing expenses, including
incremental costs related to the technology transfer. MBI accrued a receivable
from Mallinckrodt for manufacturing expenses incurred during the period
March 1, 1999 through June 30, 1999. The manufacturing expenses from March 1999
were included in the prior fiscal year. As a result, the recoupment of these
expenses was reflected as a negative expense during the six months ended
September 30, 1999.

RESEARCH AND DEVELOPMENT COSTS. For the six months ended September 30,
2000, MBI's research and development costs totaled $368,000 as compared to
$2.4 million for the same period in 1999. The decrease is due to MBI's decision
to discontinue further research and development activities.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the six months ended
September 30, 2000, MBI's selling, general and administrative costs totaled
$1.8 million, as compared to $4.1 million for the same periods in the prior
year. The decrease in the current year is due to realization of the benefits of
previously announced cost reduction measures as well as additional expense
reductions as a result of OPRA.

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. On March 30,
2000, the Company announced plans to restructure and further reduce its
workforce by 33 employees.

A summary of the six months ended September 30, 2000 activity related to the
accrual for cost reduction measures is provided below.

<S> <C>
Accrued at March 31, 2000................................... $1,659,000
Severance paid.............................................. 1,638,000
Additional severance accrued................................ 522,000
----------
Accrued at September 30, 2000............................... $ 543,000
==========
</TABLE>

The $543,000 cost reduction accrual is included in compensation accruals in
the accompanying balance sheet as of September 30, 2000.

OTHER NONRECURRING CHARGES. For the six months ended September 30, 2000,
other nonrecurring charges reflect the net effect of restructuring the agreement
between the Company and Mallinckrodt. See Note 2, "Commitments and
Contingencies" to the Consolidated Financial Statements.

INTEREST EXPENSE AND INTEREST INCOME. Interest expense for the six months
ended September 30, 2000 amounted to $124,000, compared to $234,000 for the same
period in the prior year, and consisted of mortgage interest on MBI's
manufacturing building and interest on a note payable which was secured by the
tangible assets of MBI. The mortgage on the building was transferred to
Mallinckrodt in connection with the implementation of OPRA and the transfer to
Mallinckrodt of all property, plant

58
<PAGE>
and equipment used in the manufacture of OPTISON. The note payable bears
interest at the prime rate and is payable in monthly installments of principal
plus interest over five years. The note payable was renegotiated in
September 1998 lowering the interest rate from prime plus one to the prime rate
and releasing a compensating balance requirement.

Interest income for the six months ended September 30, 2000 amounted to
$244,000, compared to $402,000 for the same period in the prior year. The
decrease in interest income in the current year is due to lower average cash and
marketable securities balances. MBI'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.

FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999.

REVENUE UNDER COLLABORATIVE AGREEMENTS. Revenue under collaborative
agreements was $3.0 million for the fiscal year ended March 31, 2000 compared to
$5.5 million for the same period in the prior year. Revenue in both years
consisted solely of quarterly payments to support clinical trials, regulatory
submissions and product development received from Mallinckrodt under 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. Revenue from milestone payments were $4.0 million for
fiscal year 2000. There were no milestone payments during the same period in the
prior year. Revenue in the current year represent two $2.0 million milestone
payments from Chugai received during the third quarter and fourth quarters for
the initiation of pivotal trials in Japan for OPTISON.

PRODUCT AND ROYALTY REVENUE. Revenue 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 revenue 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 revenue recognized by
MBI from product revenue recognized upon shipment to royalty revenue recognized
as a percentage of end-user sales. As a result, there were no product sales
revenue for the fiscal year ended March 31, 2000.

In the fiscal year ended March 31, 1999, product and royalty revenue were
$4.1 million. Royalty revenue amounted to $122,000 from Abbott Laboratories.
Product revenue came from MBI's sales of OPTISON to Mallinckrodt and was
recognized upon shipment of the product. The transfer price for MBI'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, MBI 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 revenue were $60,000 for the year ended
March 31, 2000, representing non-refundable amounts received under a license
agreement with 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 totaling $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 royalty expense. ARDA II changed the nature of revenue recognized by

59
<PAGE>
MBI from product revenue recognized upon shipment to royalty revenue 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 MBI'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. MBI'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,
MBI'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, MBI 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 MBI'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, MBI 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. As of June 2000, MBI has three
employees. The impact of the cost reduction measures on MBI'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. MBI 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

60
<PAGE>
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 year 2000
was $447,000 compared to $574,000 in fiscal year 1999. Interest expense consists
of mortgage interest on MBI's manufacturing building and interest on a note
payable that is secured by the tangible assets of MBI. 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 five
years. The note payable was renegotiated in September 1998 lowering the interest
rate from prime plus one to the prime rate and releasing MBI from a compensating
balance requirement. The interest rate on the note was 9.0% in March 2000.

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

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. MBI'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. MBI 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, MBI 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 MBI 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

REVENUE UNDER COLLABORATIVE AGREEMENTS. Revenue 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 revenue in both years consisted of quarterly payments to
support clinical trials, regulatory submissions and product development received
from Mallinckrodt under ARDA.

PRODUCT AND ROYALTY REVENUE. Product and royalty revenue were $4.1 million
for fiscal year 1999, compared to $1.2 million for the prior year. Product
revenue in fiscal 1999 was based on MBI's sales to Mallinckrodt and was
recognized upon shipment of the product. The increase in product revenue 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 revenue was pursuant to a license agreement between MBI 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 MBI'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, MBI 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. MBI'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.

61
<PAGE>
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 MBI and Schering AG in which MBI licensed rights
to Schering patents.

COST REDUCTION MEASURES. On November 10, 1998, as a result of the slower
than planned ramp-up of OPTISON sales, MBI 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 MBI'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, MBI 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. As of June 2000, MBI 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.

The impact of the cost reduction measures on MBI'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 MBI 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, MBI wrote off $1.2 million in fixed
assets through accelerated depreciation during fiscal year 1999. As of
March 31, 1999, MBI 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:

Non cash charge (in millions):

<TABLE>
<S> <C>
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 million) and other
capitalized assets ($0.3 million)......................... 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>

62
<PAGE>
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. MBI resold territory rights to
Chugai for $14.0 million, as well as a $2.4 million premium received for the
sale of MBI'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. Interest expense consisted of
mortgage interest on MBI's manufacturing building and interest related to a note
payable, secured by the tangible assets of MBI, 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, MBI 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.

FOREIGN INCOME TAX PROVISION. MBI 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 MBI 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 September 30, 2000, MBI had net working capital of $6.5 million compared
to $3.8 million at March 31, 2000. Cash, cash equivalents and marketable
securities were $9.8 million at September 30, 2000 compared to $12.0 million at
March 31, 2000.

At March 31, 2000, MBI 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, MBI has transferred all employees, facilities
and overhead related to the manufacture of OPTISON to Mallinckrodt. MBI 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. MBI anticipates that its cash and marketable securities on
hand and future cash flows will enable MBI 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 MBI 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, MBI 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. MBI granted Chugai an exclusive license to develop,
manufacture, and market these products in the subject territory, for which MBI
received $14.0 million during fiscal year 1999. With respect to licensed
products manufactured by Chugai, Chugai will pay MBI a royalty on net sales. For
licensed products manufactured by MBI, MBI 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 MBI's common stock at a premium
of 40% over the then-prevailing market price. The equity

63
<PAGE>
investment was valued at $8.3 million. MBI 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, MBI had
received $4.0 million in milestone payments from Chugai.

On September 7, 1995, MBI entered into ARDA and a related investment
agreement with Mallinckrodt which will provide MBI with between $33.0 million
and $42.5 million. Under the terms of the agreement, Mallinckrodt was obligated
to make payments to MBI 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, MBI
has received all payments under ARDA.

In April 1999, MBI 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, or 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.

In May 2000, MBI and Mallinckrodt entered into OPRA, under which MBI agreed
to transfer full control of the OPTISON business to Mallinckrodt, in exchange
for a 5% royalty on sales. MBI and Mallinckrodt amended OPRA to provide that MBI
will receive an additional royalty of 3% on U.S. sales as a reimbursement of
prepaid royalties until U.S. sales exceed $66.7 million. OPRA, as amended,
supersedes all previous agreements with Mallinckrodt. Mallinckrodt's territory
is worldwide, 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.

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 paid Mallinckrodt a total of six million
dollars as part of this intellectual property settlement ($3 million of which
was satisfied through the transfer of property owned by MBI to Mallinckrodt).
MBI is required to make an additional $1 million payment to Mallinckrodt upon
MBI's receipt of a milestone payment from Chugai.

On June 6, 2000, MBI entered into a license agreement with Genta under which
MBI granted exclusive and non-exclusive rights to MBI's antisense technology in
return for $400,000 in cash and 376,470 shares of Genta common stock. MBI sold
372,787 shares of Genta common stock in August 2000, realizing net proceeds of
$2,189,948. The remaining 3,684 Genta common stock are reflected as marketable
securities on MBI's consolidated September 30, 2000 balance sheet.

Capital expenditures for facilities, laboratory equipment, furniture and
fixtures were $13,000 and $791,000 for fiscal years 2000 and 1999 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, MBI 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 September 30, 2000 was $741,000.

MBI invests its excess cash in debt instruments of financial institutions
and corporations with strong credit ratings. MBI has established guidelines
relative to diversification and maturities that

64
<PAGE>
maintain safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretations No. ("FIN") 44, "Accounting for Certain Transactions involving
Stock Compensation: an interpretation of FASB Opinion No. 25." FIN 44 affects
awards and modifications made after December 15, 1998. Management believes that
their accounting policies comply with the applicable provisions of FIN 44.

ALLIANCE PHARMACEUTICAL CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

INTRODUCTION

On October 12, 2000, Alliance reached a definitive agreement to acquire MBI.

The unaudited pro forma combined condensed financial statements which follow
have been prepared by Alliance based upon the historical financial statements of
Alliance and MBI and may not be indicative of the results that may have actually
occurred if the combination had been in effect on the date indicated or for the
periods presented or which may be obtained in the future. The unaudited pro
forma combined condensed statements of operations includes the statements of
operations of Alliance for the year ended June 30, 2000 and the three months
ended September 30, 2000 and the statements of operations of MBI for the year
ended March 31, 2000 and the three months ended September 30, 2000. The pro
forma combined condensed financial statements should be read in conjunction with
the audited financial statements and notes of Alliance incorporated by reference
in this proxy statement-prospectus and the audited financial statements and
notes of MBI included elsewhere in this proxy statement-prospectus.

The unaudited pro forma combined condensed statements of operations for the
year ended June 30, 2000 and the three months ended September 30, 2000 assume
the purchase of MBI had been consummated on July 1, 1999. The pro forma
information is based on the historical financial statements of Alliance and MBI
giving effect to the transaction under the purchase method of accounting and the
assumptions and adjustments in the accompanying footnotes.

65
<PAGE>
ALLIANCE PHARMACEUTICAL CORP.

UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
----------------------------- PRO FORMA COMBINED
ALLIANCE MBI ADJUSTMENTS PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents...... $ 27,015,000 $ 2,930,000 $ -- $ 29,945,000
Short-term investments......... 822,000 6,904,000 -- 7,726,000
Other current assets........... 4,380,000 679,000 -- 5,059,000
------------- ------------- ------------- -------------
Total current assets......... 32,217,000 10,513,000 -- 42,730,000

Property, plant and equipment.... 19,287,000 -- -- 19,287,000
Purchased technology--net........ 9,774,000 -- 3,560,900(c) 13,334,900
Restricted cash.................. 5,000,000 -- -- 5,000,000
Investment in joint venture...... 5,000,000 -- -- 5,000,000
Other assets--net................ 539,000 1,634,000 -- 2,173,000
------------- ------------- ------------- -------------
$ 71,817,000 $ 12,147,000 $ 3,560,900 $ 87,524,900
============= ============= ============= =============

Current liabilities
Accounts payable and accrued
expenses..................... $ 7,329,000 $ 3,382,000 $ 1,200,000(d) $ 11,911,000
Deferred revenue............... 10,000,000 -- -- 10,000,000
Current portion of long-term
debt......................... 4,667,000 600,000 -- 5,267,000
------------- ------------- ------------- -------------
Total current liabilities.... 21,996,000 3,982,000 1,200,000 27,178,000

Long-term debt................... 27,626,000 -- -- 27,626,000
Stockholders equity
Preferred stock................ 5,000 -- -- 5,000
Common stock................... 480,000 186,000 (186,000)(a) 488,000
8,000 (c)
Additional paid in capital..... 408,377,000 134,288,000 (134,288,000)(a) 418,894,900
10,517,900 (c)
Accumulated comprehensive
income....................... 364,000 12,000 (12,000)(a) 364,000
Accumulated deficit............ (387,031,000) (126,321,000) 126,321,000 (b) (387,031,000)
------------- ------------- ------------- -------------
Total stockholders equity.... 22,195,000 8,165,000 2,360,900 32,720,900
------------- ------------- ------------- -------------
$ 71,817,000 $ 12,147,000 $ 3,560,900 $ 87,524,900
============= ============= ============= =============
</TABLE>

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

(a) Elimination of existing MBI common stock, additional paid-in capital and
accumulated comprehensive income.

(b) Elimination of MBI's accumulated deficit.

(c) Issuance of 770,000 shares of Alliance common stock valued at $10,525,900.
Adjustment to record the net assets of MBI at fair value with costs in
excess of net assets acquired allocated to purchased technology.

(d) Accrue estimated acquisition costs to be paid by Alliance.

SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS.

66
<PAGE>
ALLIANCE PHARMACEUTICAL CORP.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS

FOR YEAR ENDED JUNE 30, 2000

<TABLE>
<CAPTION>
PRO FORMA COMBINED
ALLIANCE MBI ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
License and research revenue............. $ 16,000,000 $ 7,000,000 $ -- $ 23,000,000
Product and royalty revenues............. -- 1,525,000 -- 1,525,000
------------ ------------ --------- ------------
16,000,000 8,525,000 -- 24,525,000
Operating expenses:
Cost of goods sold..................... -- (107,000) -- (107,000)
Research and development............... 54,605,000 4,261,000 890,225(a) 59,756,225
Selling, general and administrative.... 9,760,000 10,166,000 -- 19,926,000
Other non-recurring charges............ -- 1,653,000 -- 1,653,000
------------ ------------ --------- ------------
Operating expenses....................... (64,365,000) (15,973,000) (890,225) (81,228,225)
------------ ------------ --------- ------------
Loss from operations..................... (48,365,000) (7,448,000) (890,225) (56,703,225)
Other income (expense)................... 1,898,000 (120,000) -- 1,778,000
------------ ------------ --------- ------------
Net loss................................. $(46,467,000) $ (7,568,000) $(890,225) $(54,925,225)
============ ============ ========= ============
Net loss per share, basic and diluted.... $ (1.03) $ (1.19)
============ ============
Shares used in the calculation of net
loss per share, basic and diluted...... 45,203,000 45,973,000
============ ============
</TABLE>

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

(a) Adjustment to reflect the twelve months of amortization of purchased
technology based on the allocation of the assumed purchase price.

SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS.

67
<PAGE>
ALLIANCE PHARMACEUTICAL CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000

<TABLE>
<CAPTION>
PRO FORMA COMBINED
ALLIANCE MBI ADJUSTMENTS PRO FORMA
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
License and research revenues............... $ 14,000 $ 15,000 $ -- $ 29,000
Product and royalty revenues................ -- 323,000 -- 323,000
------------ --------- --------- ------------
14,000 338,000 -- 352,000
Operating expenses:
Research and development.................. 13,865,000 -- 223,306(a) 14,088,306
General and administrative................ 2,420,000 931,000 -- 3,351,000
------------ --------- --------- ------------
Operating expenses.......................... (16,285,000) (931,000) (223,306) (17,439,306)
------------ --------- --------- ------------
Loss from operations........................ (16,271,000) (593,000) (223,306) (17,087,306)
Other income................................ 2,431,000 91,000 -- 2,522,000
------------ --------- --------- ------------
Net loss.................................... $(13,840,000) $(502,000) $(223,306) $(14,565,306)
============ ========= ========= ============
Net loss per share, basic and diluted....... $ (0.29) $ (0.30)
============ ============
Shares used in the calculation of net loss
per share, basic and diluted.............. 47,541,000 48,311,000
============ ============
</TABLE>

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

(a) Adjustment to reflect the three months of amortization of purchased
technology based on the allocation of the assumed purchase price.

SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS.

68
<PAGE>
ALLIANCE PHARMACEUTICAL CORP.

NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

NOTE 1.

The unaudited pro forma combined condensed financial statements reflect the
acquisition of Molecular Biosystems, Inc. ("MBI") by Alliance Pharmaceutical
Corp. ("Alliance") for a purchase price of approximately $11.7 million in common
stock of Alliance.

NOTE 2.

The unaudited pro forma combined condensed balance sheet combines Alliance's
September 30, 2000 unaudited balance sheet with MBI's September 30, 2000
unaudited balance sheet.

NOTE 3.

The unaudited pro forma combined condensed statement of operations for the
three months ended September 30, 2000 combines Alliance's unaudited statement of
operations for the three months ended September 30, 2000 with MBI's unaudited
statement of operations for the three months ended September 30, 2000. The
unaudited pro forma combined condensed statement of operations for the year
ended June 30, 2000 combines Alliance's audited statement of operations for the
year ended June 30, 2000 with MBI's audited statement of operations for the year
ended March 31, 2000. The unaudited pro forma combined condensed statements of
operations have been prepared by Alliance based upon the historical financial
statements of Alliance and MBI, and may not be indicative of the results that
may be obtained in the future. The pro forma combined condensed financial
statements should be read in conjunction with the audited financial statements
and notes of Alliance and MBI.

NOTE 4.

Based upon the definitive agreement entered into, Alliance will acquire all
of the common stock of MBI in exchange for 770,000 shares of common stock of
Alliance and the assumption by Alliance of options and warrants to acquire
Alliance common stock. The purchase price includes estimated merger costs of
$1.2 million and assumed liabilities of $4.0 million. The purchase price for
purposes of the unaudited pro forma combined condensed financial statements was
allocated as follows based upon a preliminary valuation of the tangible and
intangible assets at September 30, 2000. These amounts are subject to change
upon the closing of the business combination:

<TABLE>
<S> <C>
TOTAL ACQUISITION COSTS:
Issuance of common stock, options and warrants.............. $10,525,900
Acquisition related expenses................................ 1,200,000
-----------
$11,725,900
===========
ALLOCATED TO ASSETS AND LIABILITIES AS FOLLOWS:
Tangible assets acquired.................................... $12,147,000
Assumed liabilities......................................... (3,982,000)
Purchased technology........................................ 3,560,900
-----------
$11,725,900
===========
</TABLE>

NOTE 5.

The allocation of the purchase price was applied to the historical balance
sheet and historical statements of operations of Alliance and MBI to arrive at
the unaudited pro forma combined condensed balance sheet at September 30, 2000
and statements of operations for the year ended June 30, 2000 and the three
months ended September 30, 2000.

69
<PAGE>
BUSINESS OF MBI

OVERVIEW

MBI is the developer of OPTISON, the only approved intravenous ultrasound
contrast agent marketed in both the United States and Europe. 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, MBI agreed to transfer
full control of the OPTISON business to Mallinckrodt a global manufacturer of
specialty medical products, which was recently acquired by Tyco International,
Ltd., in exchange for a 5% royalty on sales. The agreement also provides that
MBI will receive an additional royalty of 3% on U.S. sales as a reimbursement of
prepaid royalties until U.S. sales exceed $66.7 million. Mallinckrodt's
territory is worldwide, excluding Japan, South Korea and Taiwan. Chugai 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 two of its competitors claiming patent
rights in various ultrasound contrast agent technologies. MBI paid Mallinckrodt
$3 million in cash and transferred real and other property to Mallinckrodt. The
property is expected to be sold by Mallinckrodt. To the extent Mallinckrodt's
sale of the assets does not result in $3 million in net proceeds, after payment
of the outstanding mortgage and one-half of the sales commission, MBI is
required to pay Mallinckrodt an amount equal to the difference. MBI is required
to make an additional $1 million payment to Mallinckrodt upon MBI's receipt of a
milestone payment from Chugai.

MBI has developed other technologies that it is not exploiting at this time
and has reduced its workforce to three employees. MBI 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.

INDUSTRY

Since the discovery of x-rays, the medical profession has used medical
imaging 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.

NON-ULTRASOUND IMAGING TECHNIQUES

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

COMPUTED TOMOGRAPHY. Computed Tomography, or CT, employs x-rays aimed into
the body from several different angles to create a computerized static
"snapshot" image of soft tissue and bones. Physicians use CT extensively to
image the head and neck for injury and disease, and also to detect liver cancer
and other liver diseases. CT may employ injectable contrast agents, which absorb
x-rays and thereby enhance structural imaging. According to published reports,
physicians perform more than 30 million CT examinations annually in the United
States, more than 40% of which employ a contrast agent. While CT is effective in
revealing anatomic detail, it is expensive, does not generally provide real-time
images or permit the assessment of blood flow, and exposes patients to x-ray
radiation.

70
<PAGE>
CONVENTIONAL X-RAY. Familiar procedures such as chest x-rays and mammograms
use x-rays aimed from only a single angle and do not require computer
reconstruction to create an image. According to published reports, more than 4
million abdominal x-rays performed annually in the United States employed barium
as a contrast agent to examine the gastrointestinal system.

MAGNETIC RESONANCE IMAGING. MRI creates an image by exposing the body to a
radio frequency pulse to which the body's hydrogen atoms respond in a way
detectable by the MRI equipment. This information is analyzed by computer and a
cross-sectional image is produced. MRI is used primarily to image soft tissues
such as muscle and organs in order to detect tumors, lesions, and injuries. MRI
produces an accurate image, but as with CT, the images are not real-time. In
addition, MRI does not generally provide information on blood flow or perfusion
of blood into organs and tissues, and the medical profession has not yet widely
accepted it as a primary diagnostic tool for imaging of the heart. According to
published reports, physicians perform more than 15 million MRI procedures
annually in the United States, more than 20% of which use a contrast imaging
agent.

NUCLEAR IMAGING. Nuclear imaging requires the injection of radioactive
substances into the body. A special camera detects the radiation and a computer
analyzes the results, creating a static image that does not depict blood flow in
real time. Technicians must use great care in the handling and disposal of
radioactive contrast agents. Physicians use nuclear imaging primarily to detect
cardiovascular or heart disease, malignancies and soft-tissue tumors and the
physician typically requires that an ultrasound exam of the heart under stress
called a stress echocardiogram precede the nuclear exam. The medical profession
considers nuclear imaging as the current gold standard to assess myocardial
perfusion, which is bloodflow within the heart muscle. According to published
reports, physicians perform nearly 13 million nuclear imaging procedures
annually in the United States, approximately 5 million of which are cardiac
perfusion studies.

X-RAY ANGIOGRAPHY. Physicians use angiography to visualize real-time blood
flow in the body's blood vessels or vasculature in order to determine the
presence of blockages or occlusions in the vessels leading to the heart prior to
performing bypass surgery or balloon angioplasty to open a blocked blood vessel.
A technician inserts a catheter into a vessel or directly into the heart chamber
and then injects a contrast agent that is visible using special x-ray detection
equipment. This procedure requires a specially-equipped laboratory. It is
effective in locating blockages or occlusions, but it is expensive, invasive,
and exposes the patient to x-ray radiation. According to published reports,
physicians perform over one million interventional angiographic examinations and
approximately 3 million cardiac catheterization procedures annually in the
United States.

ULTRASOUND IMAGING

Ultrasound employs low-power, high-frequency sound waves which technicians
direct at the organ they want to image by placing a generating instrument called
a transducer on the body near the organ. The targeted organ or tissue reflects
sound waves back to the ultrasound machine. The ultrasound machine reads the
reflected sound waves and produces a cross-sectional real-time moving picture
image of the targeted organ or tissue. Physicians use ultrasound to image the
heart, liver, kidneys, gall bladder, pancreas, other abdominal structures, blood
vessels, and the reproductive system. Physicians are also investigating
ultrasound for use with brain and breast examinations. The medical profession
calls cardiac or heart ultrasound examinations echocardiograms. The medical
profession refers to non-cardiac diagnostic ultrasound examinations as radiology
indications or applications. External studies estimate that clinicians perform
over 60 million ultrasound imaging procedures in the United States

71
<PAGE>
each year, of which approximately 15 million are echocardiograms. The advantages
of ultrasound include:

SAFETY. Ultrasound uses sound waves that have no noticeable medical effect
on the body. Physicians may image the same organs or sections of the body
repeatedly for long periods of time with no adverse effects. Physicians
routinely use ultrasound in fetal examinations.

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

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

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

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

IMPROVEMENTS TO ULTRASOUND IMAGING

Although ultrasound is a widely used imaging modality, the visual clarity of
ultrasound images without using contrast agents is generally inferior to that
obtainable using certain of the other modalities. With each of the other
modalities, contrast agents are frequently used, and in nuclear imaging and
x-ray angiography, an imaging agent is required to create the images. OPTISON
was developed to address the problem of the poor image quality of ultrasound.

Clinicians could not perform ultrasound imaging with contrast agents to
enhance images until the approval of Albunex and the subsequent approval of
OPTISON.

Conventional ultrasound imaging sends and receives sound waves at a single
frequency called the fundamental frequency. Ultrasound contrast agents,
including OPTISON, may be tested with new ultrasound techniques which, although
currently not widely available, may find acceptance in diagnostic imaging over
the next several years. The most significant of these new techniques is harmonic
imaging. Researchers have discovered that if the ultrasound machine's transducer
is modified to read the sound waves returning from the imaged area at a multiple
or harmonic of the outgoing fundamental frequency, and if a contrast agent is
used, the resulting image will be more clear and can provide more complete
information on blood flow and structures in the scanned area than is available
with a conventional ultrasound exam.

PRODUCTS AND MARKETS

OPTISON is an ultrasound contrast imaging agent consisting of gas-filled
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

72
<PAGE>
portion of the heart that is of the greatest clinical interest in the diagnosis
of heart disease. 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 contrast
agent approved in both the United States and Europe. MBI 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 many of the injected microspheres to
pass from the right side of the heart, through the microvasculature of the
lungs, and into the left side of the heart. In the left ventricle, OPTISON can
be used to define more clearly the inside walls of the heart ("endocardial
border delineation") and to visualize 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, or
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 conducted Phase 2 clinical trials to evaluate the product's efficacy in
determining whether the heart muscle is receiving an adequate blood supply,
which is referred to as myocardial 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. MBI 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 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 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.

73
<PAGE>
Myocardial perfusion is important because it demonstrates the presence of
oxygenated blood in 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, a
condition referred to as ischemia. This finding may help cardiologists diagnose
several conditions, including coronary arterial stenosis, or blockage, and
myocardial infarction, or 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, MBI 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.

MBI 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

MBI has developed other technologies that it is currently not exploiting.
MBI may seek to develop other technologies in the future.

MARKETING AND LICENSING 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, MBI entered into an agreement with Mallinckrodt known as the OPTISON
Product Rights Agreement, or OPRA. This agreement supersedes all previous
agreements and requires Mallinckrodt to assume full control of the OPTISON
business in the Mallinckrodt territory, including responsibility for all related
intellectual property disputes, clinical development and manufacturing. Under
OPRA, MBI agreed to transfer full control of the OPTISON business to
Mallinckrodt, Inc., a global manufacturer of specialty medical products which
was recently acquired by Tyco International, Ltd. in exchange for a 5% royalty
on all sales and an additional royalty of 3% on U.S. sales as a reimbursement of
prepaid royalties until aggregate U.S. sales exceed $66.7 million.
Mallinckrodt's territory is world wide, excluding Japan, South Korea and Taiwan.

74
<PAGE>
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 paid Mallinckrodt $3 million in cash and
transferred real and other property to Mallinckrodt. The property is expected to
be sold by Mallinckrodt. To the extent Mallinckrodt's sale of the assets does
not result in $3 million in net proceeds, after payment of the outstanding
mortgage and one-half of the sales commission, MBI is required to pay
Mallinckrodt an amount equal to the difference. MBI is required to make an
additional $1 million payment to Mallinckrodt upon MBI's receipt of a milestone
payment from Chugai.

OPRA also obligates Mallinckrodt to assume financial responsibility for a
license agreement with Steven B. Feinstein, M.D., discussed below, 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.

CHUGAI PHARMACEUTICAL CO., LTD. On March 31, 1998, MBI entered into a
cooperative development and marketing agreement with Chugai Pharmaceutical Co.,
Ltd. 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. MBI granted Chugai an
exclusive license to develop, manufacture, and market these products in the
subject territory, for which MBI received $14.0 million. Chugai will pay MBI a
28% royalty on net sales of licensed products which Chugai manufactures.
Additionally, Chugai purchased 691,883 shares of MBI's common stock at a premium
of 40% over the then-prevailing market price. The equity investment was valued
at $8.3 million. MBI 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 MBI has received $4 million to date.

FEINSTEIN LICENSE. In November 1986, MBI 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. MBI 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 MBI (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 MBI 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. MBI'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, 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. MBI 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 MBI of infringing certain European
patents. Effective May 5, 2000, MBI reached a settlement in patent disputes
between MBI, Nycomed, Mallinckrodt and Sonus.

75
<PAGE>
MBI also owns certain other patents that are unrelated to OPTISON. In May
2000, MBI entered into a license with Genta Inc. on a co-exclusive basis with
Isis Pharmaceuticals, Inc. for a patent portfolio relating to antisense
molecular therapeutic technology. Genta paid MBI $2.8 million, of which $400,000
was paid in cash and $2.4 million was paid in unrestricted shares of Genta
stock. 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. On October 17,
2000, Isis filed suit against MBI in the Superior Court of the State of
California seeking to reform the Isis license on terms substantially identical
to the Genta License. MBI disputes Isis's claim that MBI is obligated to conform
the Isis license to the Genta license.

MANUFACTURING

During the fiscal year ended March 31, 2000, MBI manufactured OPTISON in its
aseptic plant at its principal San Diego facility for commercial sale and
distribution by Mallinckrodt. The plant employed MBI'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.

In May 2000, Mallinckrodt assumed full control and responsibility for the
manufacture of OPTISON and MBI subsequently transferred title to the San Diego
facility to Mallinckrodt pursuant to OPRA.

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. MBI
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 MBI'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, MBI
has no further responsibility for the manufacture of OPTISON and has no plans to
engage in any research or development activities.

MBI 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

76
<PAGE>
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.

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, MBI also
acknowledges that these payors may place certain restrictions on the
circumstances in which coverage will be available. MBI is dependent on
Mallinckrodt to secure the necessary third-party reimbursement approvals.

EMPLOYEES

As of March 31, 2000, MBI had 56 full-time employees, including 4 officers.
Approximately 16 of MBI's employees were involved directly in scientific
research and development activities. On March 30, 2000, MBI 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. As of the date of this proxy statement-prospectus, MBI has
three employees. MBI considers its relations with its employees to be good, and
none of its employees is a party to a collective bargaining agreement.

PROPERTIES

As of March 31, 2000, MBI'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, MBI agreed to
transfer title for the building to Mallinckrodt as part of MBI's $6 million
payment to Mallinckrodt under OPRA. 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.

LEGAL PROCEEDINGS

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

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 paid Mallinckrodt $3 million in cash and
transferred real and other property to Mallinckrodt. The property is expected to
be sold by Mallinckrodt. To the extent Mallinckrodt's sale of the assets does
not result in $3 million in net proceeds, after payment of the outstanding
mortgage and one-half of the sales commission. MBI is required to pay
Mallinckrodt an amount equal to the difference. MBI is required to make an
additional $1 million payment to Mallinckrodt upon MBI's receipt of a milestone
payment from Chugai.

On April 27, 2000, MBI filed suit against Palatin Technologies, Inc. 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. MBI seeks payment of a termination fee of $1.0 million and
reimbursement of its expenses in connection with the planned merger.

On October 17, 2000, Isis Pharmaceuticals, Inc. filed suit against MBI
seeking to reform its license agreement with MBI on terms substantially
identical to the terms of a license agreement entered into in June, 2000 between
MBI and Genta Incorporated. MBI disputes Isis's claim that it is obligated to
conform the Isis license to the Genta license.

77
<PAGE>
MOLECULAR BIOSYSTEMS, INC.
SECURITY OWNERSHIP OF BENEFICIAL
OWNERS AND MANAGEMENT

The following table sets forth information regarding the shares of MBI's
common stock beneficially owned as of October 31, 2000, except as noted, by:

- each director of MBI;

- each executive officer of MBI; and

- all of the directors and executive officers of MBI as a group.

<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK PERCENT OF
BENEFICIALLY OUTSTANDING
NAME OWNED COMMON STOCK
---- ------------ -------------
<S> <C> <C>
Bobba Venkatadri............................................ 941,878 4.59%

David W. Barry, M.D......................................... 26,000 *

Robert W. Brightfelt........................................ 46,000 *

Charles C. Edwards, M.D..................................... 41,000 *

Jerry T. Jackson............................................ 51,000 *

Gordon C. Luce.............................................. 43,500 *

David Rubinfien............................................. 41,000 *

Howard Dittrich, M.D........................................ 465,744 2.27%

Elizabeth Hougen............................................ 117,325 *

Joni Harvey................................................. 211,532 1.03%

directors and executive officers as a group--10 persons..... 1,985,009 9.67%
</TABLE>

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

* Represents less than 1% of MBI's outstanding common stock.

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

The shares listed for each person named or the group include shares of MBI's
common stock subject to outstanding stock options. For purposes of this table,
it is assumed that all of these options are immediately exercisable or will
become exercisable upon completion of the merger. These shares are as follows:
Mr. Venkatadri, 860,175 shares; Dr. Barry, 26,000 shares; Mr. Brightfelt,
41,000 shares; Dr. Edwards, 41,000 shares; Mr. Jackson, 41,000 shares;
Mr. Luce, 41,000 shares; Dr. Dittrich, 405,300 shares; Ms. Hougen, 86,000
shares; Ms. Harvey, 175,000 shares; and the group of all directors and executive
officers, 1,757,475 shares.

The employment of Ms. Hougen and Ms. Harvey was terminated in April 2000.
Information regarding beneficial ownership of Ms. Hougen's and Ms. Harvey's MBI
common stock is provided as of July 31, 2000, when each of Ms. Hougen and
Ms. Harvey ceased to be a reporting person for purposes of Section 16 of the
Exchange Act.

78
<PAGE>
The following table sets forth information regarding the beneficial
ownership of shares of MBI's common stock by holders of 5% or more of MBI's
common stock.

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES OUTSTANDING SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED
------------------------------------ ------------ ------------------
<S> <C> <C>
State of Wisconsin Investment Board
P.O. Box 7842
Madison, WI 53703......................................... 3,598,400 19.37%
Mallinckrodt Group, Inc.
675 McDonnell Blvd.
St. Louis, MO 63134....................................... 1,300,579 7.00%
</TABLE>

APPROVAL OF ADJOURNMENT OR POSTPONEMENT
OF SPECIAL MEETING

At the MBI Special Meeting, MBI stockholders will be asked to approve the
adjournment or postponement of the MBI Special Meeting in the event that such
adjournment or postponement is necessary in order to solicit additional votes
for adoption of the Merger Agreement.

The MBI Board recommends that you vote FOR this proposal.

LEGAL MATTERS

The MBI Board is not aware of any additional business to be acted upon at
the MBI special meeting other than as described herein. If, however, other
matters are properly brought before the special meeting, or any adjournment or
postponement thereof, the persons appointed as proxies will have discretion to
vote or act thereon according to their best judgment and applicable rules of the
Commission.

The validity of the Alliance common stock offered hereby will be passed upon
for Alliance by Pillsbury Madison & Sutro LLP, San Diego, California.

Craig P. Colmar, a member of Johnson and Colmar, MBI's general counsel, has
been granted options to purchase 67,250 shares of common stock of MBI under
MBI's 1998 Stock Option Plan.

EXPERTS

Ernst & Young LLP, independent auditors, have audited Alliance's
consolidated financial statements included in its annual report on Form 10-K for
the year ended June 30, 2000, as set forth in their report, which is
incorporated by reference in this proxy statement-prospectus. Alliance's
financial statements are incorporated by reference in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.

The audited financial statements of Molecular Biosystems, Inc. included in
this registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.

WHERE YOU CAN FIND MORE INFORMATION

Alliance is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance with the Exchange Act, files reports,
proxy statements and other information with the Securities and Exchange
Commission, or SEC. These reports, proxy statements and other information may be
inspected and copied at the offices of the SEC, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information about the

79
<PAGE>
public reference rooms. Our reports, proxy statements and other information on
file with the SEC are also available to the public over the Internet at the
SEC's Web site is located at http://www.sec.gov. Shares of Alliance common stock
are traded on the Nasdaq National Market.

Alliance has filed with the SEC a registration statement under the
Securities Act of 1933 on Form S-4 regarding the securities offered by this
proxy statement-prospectus. This proxy statement-prospectus also constitutes the
prospectus of Alliance filed as part of the registration statement and does not
contain all of the information set forth in the registration statement and the
exhibits to the registration statement, parts of which are omitted in accordance
with the rules of the SEC. Statements made in this proxy statement-prospectus as
to the contents of any contract, agreement or other document referred to are not
necessarily complete; and these statements are qualified in their entirety by
reference to the contracts, agreements or documents which are filed as exhibits
to this proxy statement-prospectus. The registration statement and any
amendments to the registration statement, including exhibits, are available for
inspection and copying at the SEC's offices as described above.

All information contained in this proxy statement-prospectus relating to
Alliance and Merger Sub has been supplied by Alliance, and all information
relating to MBI has been supplied by MBI.

The following documents, which have been filed by Alliance (File No.
0-12950) with the SEC pursuant to the Exchange Act, are incorporated by
reference in this proxy statement-prospectus:

- Alliance's annual report on Form 10-K for the fiscal year ended June 30,
2000 filed with the SEC on September 1, 2000.

- Alliance's quarterly report on Form 10-Q for the fiscal quarter ended
September 30, 2000 filed with the SEC on November 6, 2000.

- Alliance's registration statement on Form S-3 filed with the SEC on
September 29, 2000.

- Alliance's definitive proxy statement on Schedule 14A for its 2000 annual
meeting of stockholders filed with the SEC on October 6, 2000.

- Alliance's current report on Form 8-K dated August 22, 2000 filed with the
SEC on August 28, 2000.

- The description of the Alliance common stock contained in Alliance's
registration statement on Form 8-A dated October 25, 1984.

All documents and reports subsequently filed by Alliance pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy
statement-prospectus and prior to the effective date of the merger shall be
incorporated by reference in this proxy statement-prospectus and be made a part
of this proxy statement-prospectus from the date of filing of the documents or
reports.

Additionally, you may obtain copies of documents incorporated by reference
in this proxy statement-prospectus upon a written or oral request for these
documents to:

Alliance Pharmaceutical Corp.
3040 Science Park Road
San Diego, CA 92121
Attention: Lloyd A. Rowland
(858) 410-5200

To obtain timely delivery, you must request the information no later than
, 2000, which is five business days prior to the date your
investment decision should be made.

80
<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

F-1
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 2000
--------- ---------
<S> <C> <C>
ASSETS
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.

F-2
<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.

F-3
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------------- PAID-IN ACCUMULATED TREASURY COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT STOCK INCOME TOTAL
---------- -------- ---------- ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1997..................... 17,745,897 $177 $127,483 $ (75,469) $(363) $(82) $ 51,746
Comprehensive Loss
Net loss............... -- -- -- (21,260) -- -- (21,260)
Unrealized loss on
available-for-sale
securities........... -- -- -- -- -- 15 15
Exercise of stock
options................ 100,340 1 662 -- -- -- 663
---------- ---- -------- --------- ----- ---- --------
Balance at March 31,
1998..................... 17,846,237 178 128,145 (96,729) (363) (67) 31,164
Comprehensive Loss
Net loss............... -- -- -- (21,240) -- -- (21,240)
Unrealized gain on
available-for-sale
securities........... -- -- -- -- -- 73 73
Sale of common stock to
Chugai................. 691,883 7 5,922 -- -- -- 5,929
Exercise of stock
options................ 42,625 1 280 -- -- -- 281
---------- ---- -------- --------- ----- ---- --------
Balance at March 31,
1999..................... 18,580,745 186 134,347 (117,969) (363) 6 16,207
Comprehensive Loss
Net loss............... -- -- -- (7,568) -- -- (7,568)
Unrealized gain on
available-for-sale
securities........... -- -- -- -- -- 5 5
Purchase of treasury
stock.................. (1,828) -- -- -- (16) -- (16)
Issuance of stock
grants................. 279,872 -- -- -- -- --
Options issued in lieu of
salary................. -- -- 41 -- -- -- 41
---------- ---- -------- --------- ----- ---- --------
Balance at March 31,
2000..................... 18,858,789 $186 $134,388 $(125,537) $(379) $ 11 $ 8,669
========== ==== ======== ========= ===== ==== ========

COMPREHENSIVE
LOSS
--------------
<S> <C>
Balance at March 31,
1997.....................
Comprehensive Loss
Net loss............... $(21,260)
Unrealized loss on
available-for-sale
securities........... 15
Exercise of stock
options................
--------
Balance at March 31,
1998..................... (21,245)
========
Comprehensive Loss
Net loss............... (21,240)
Unrealized gain on
available-for-sale
securities........... 73
Sale of common stock to
Chugai.................
Exercise of stock
options................
--------
Balance at March 31,
1999..................... (21,167)
========
Comprehensive Loss
Net loss............... (7,568)
Unrealized gain on
available-for-sale
securities........... 5
Purchase of treasury
stock.................. --
Issuance of stock
grants.................
Options issued in lieu of
salary................. --
--------
Balance at March 31,
2000..................... $ (7,563)
========
</TABLE>

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

F-4
<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.

F-5
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

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.

F-6
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS--

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

REVENUES UNDER COLLABORATIVE AGREEMENTS--

Revenues under collaborative agreements 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.

F-7
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES--

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

CASH EQUIVALENTS--

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

MARKETABLE SECURITIES--

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

F-8
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.

F-9
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES--

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

<TABLE>
<CAPTION>
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.

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

F-10
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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

F-11
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. COST REDUCTION MEASURES (CONTINUED)
as part of its takeover of the OPTISON manufacturing 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:

<TABLE>
<CAPTION>
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.

F-12
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. COST REDUCTION MEASURES (CONTINUED)
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

F-13
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. MARKETABLE SECURITIES (CONTINUED)
investments as available-for-sale securities. The following table summarizes
available-for-sale securities at March 31, 2000 (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........................ $ 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."

F-14
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES (CONTINUED)

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

<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------
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):

<TABLE>
<CAPTION>
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):

<TABLE>
<CAPTION>
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.

F-15
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. LONG-TERM DEBT (CONTINUED)
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 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):

<TABLE>
<CAPTION>
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

F-16
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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

F-17
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.

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
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

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

COMMON SHARES RESERVED--

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

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

F-18
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY (CONTINUED)
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 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.

F-19
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY (CONTINUED)
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:

<TABLE>
<CAPTION>
EMPLOYEE OPTION PLANS DIRECTORS' OPTION PLAN
------------------------ -----------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
--------- ------------ -------- ------------
<S> <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>

F-20
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at March 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------
WEIGHTED-AVG WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 3/31/00 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).

<TABLE>
<CAPTION>
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 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

F-21
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. SIGNIFICANT RESEARCH CONTRACTS (CONTINUED)
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 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.

F-22
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. SIGNIFICANT RESEARCH CONTRACTS (CONTINUED)
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 agreement, any further
development as well as the attainment of any regulatory approvals within the
subject territory are the sole responsibility of Chugai.

F-23
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. GAIN ON DISPOSAL OF ASSETS HELD FOR SALE (CONTINUED)
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:

<TABLE>
<CAPTION>
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>

F-24
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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):

<TABLE>
<CAPTION>
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

<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.

F-25
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 2000
--------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,756 $ 2,930
Marketable securities, available-for-sale (Note 3)........ 10,287 6,904
Accounts and notes receivable............................. 1,820 664
Inventories............................................... 203 --
Prepaid expenses and other assets......................... 204 15
--------- ---------
Total current assets.................................... $ 14,270 $ 10,513
--------- ---------
Property and equipment, at cost: (Note 2)
Building and improvements................................. 11,226 --
Equipment, furniture and fixtures......................... 2,930 --
--------- ---------
14,156 --

Less: Accumulated depreciation and amortization........... 7,572 --
--------- ---------
Total property and equipment............................ 6,584 --
--------- ---------
Other assets, net (Note 4).................................. 1,790 1,634
--------- ---------
$ 22,644 $ 12,147
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,285 $ 600
Accounts payable and accrued liabilities (Note 2) 7,218 2,613
Compensation accruals..................................... 1,943 769
--------- ---------
Total current liabilities............................... 10,446 3,982
--------- ---------
Long-term debt, net of current portion...................... 3,529 --
--------- ---------
Commitments and contingencies (Note 2)

Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares
authorized, 18,858,789 and 18,766,413 shares issued and
outstanding, respectively (Note 5)...................... 186 186
Additional paid-in capital................................ 134,388 134,667
Accumulated deficit....................................... (125,537) (126,321)
Other comprehensive income................................ 11 12
Less 42,298 shares of treasury stock, at cost............. (379) (379)
--------- ---------
Total stockholders' equity.............................. 8,669 8,165
--------- ---------
$ 22,644 $ 12,147
========= =========
</TABLE>

F-26
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Revenues under collaborative agreements............... $ 1,500 $ -- $ 3,000 $ --
Product and royalty revenues.......................... 357 323 517 630
License fees.......................................... -- 15 -- 41
------- ------- ------- -------
1,857 338 3,517 671
------- ------- ------- -------
Operating expenses:
Research and development costs........................ 1,036 -- 2,448 368
Costs of products sold................................ 116 -- (529) --
Selling, general and administrative expenses.......... 1,705 931 4,098 1,787
Other nonrecurring charges............................ -- -- -- 2,220
------- ------- ------- -------
2,857 931 6,017 4,375
------- ------- ------- -------
Loss from operations.................................. (1,000) (593) (2,500) (3,704)
------- ------- ------- -------

Interest expense........................................ (114) (26) (234) (124)
Interest income......................................... 184 117 402 244
Other income (Note 3)................................... -- -- -- 2,800
------- ------- ------- -------
Other income, net..................................... 70 91 168 2,920
------- ------- ------- -------
Net loss................................................ $ (930) $ (502) $(2,332) $ (784)
======= ======= ======= =======
Loss per common share--basic and diluted (Note 6)....... $ (0.05) $ (0.03) $ (0.12) $ (0.04)
======= ======= ======= =======
Weighted average common shares outstanding.............. 18,727 18,766 18,729 18,797
======= ======= ======= =======
</TABLE>

F-27
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(2,332) $ (784)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 641 193
Non-cash gain on license of intellectual property....... -- (2,400)
Other nonrecurring charges.............................. -- 2,220
Loss on disposals of property and equipment............. 124 --
Loss on sale of marketable securities................... -- 186
Changes in operating assets and liabilities:
Accounts and notes receivable........................... (901) 1,156
Inventories............................................. 178 203
Prepaid expenses and other assets....................... 282 189
Other assets............................................ 117 156
Accounts payable and accrued liabilities................ (106) (817)
Compensation accruals................................... (781) (1,174)
Legal settlement payment to Mallinckrodt................ -- (3,000)
------- -------
Cash used in operating activities..................... (2,778) (3,872)
------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (57) --
Proceeds from sales of property and equipment............. 12 134
Purchase of license rights from Shionogi.................. (1,500) --
Purchase of marketable securities......................... -- (1,800)
Proceeds from sales of marketable securities.............. 6,306 7,397
------- -------
Cash provided by investing activities................. 4,761 5,731
------- -------
Cash flows from financing activities:
Purchase of treasury stock................................ (16) --
Principal payments on long-term debt...................... (639) (685)
------- -------
Cash used in financing activities..................... (655) (685)
------- -------
Increase in cash and cash equivalents....................... 1,328 1,174
Cash and cash equivalents, beginning of period.............. 1,056 1,756
------- -------
Cash and cash equivalents, end of period.................... $ 2,384 $ 2,930
======= =======
Supplemental cash flow disclosures:
Interest paid............................................. $ 234 $ 124
======= =======
Non-cash transactions:
Issurance of stock to employees........................... $ -- $ 279
======= =======
Receipt of stock for licensing agreement.................. $ -- $ 2,400
======= =======
Transfer of property and legal settlement payment to
Mallinckrodt............................................ $ -- $ 3,000
======= =======
</TABLE>

F-28
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

These interim consolidated financial statements of Molecular Biosystems,
Inc. and Subsidiaries (the "Company") should be read in conjunction with the
consolidated financial statements of the Company and related notes filed with
the Company's Annual Report on Form 10-K for the year ended March 31, 2000.

These interim consolidated financial statements of the Company have not been
audited by independent public accountants. However, in the opinion of the
Company, all adjustments, consisting of normal recurring accruals required for a
fair presentation of the financial position of the Company as of September 30,
2000, and the results of its operations for the three and six months ended
September 30, 1999 and 2000, and its cash flows for the six months ended
September 30, 1999 and 2000, have been made. The results of operations for these
interim periods are not necessarily indicative of operating results for the full
year.

Certain reclassifications have been made to conform prior period data to the
current presentation. These reclassifications had no effect on reported losses.

(2) COMMITMENTS AND CONTINGENCIES

In May 2000, the Company and Mallinckrodt, Inc. ("Mallinckrodt") agreed to
restructure their relationship 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
restructuring of the Company's relationship with Mallinckrodt is a result of the
settlement of patent litigation with certain competitors claiming patent rights
in various ultrasound contrast agent technologies. Under the terms of the
restructured agreement, the Company paid Mallinckrodt $3 million in cash and
transferred certain real and other property to Mallinckrodt, which is expected
to be sold for a net gain of approximately $3 million. The transfer of property
has been reflected in the accompanying consolidated balance sheet as a reduction
of "property and equipment" and as a reduction of "long-term debt." The sale of
the property by Mallinckrodt must result in the receipt of $3 million to
Mallinckrodt otherwise the Company is required to fund the difference. The
Company is required to make an additional $1 million payment to Mallinckrodt
upon the Company's receipt of a milestone payment from Chugai Pharmaceutical
Co., Ltd.

In August 2000, the Company completed the transfer of certain real and other
property to Mallinckrodt as required under the terms of the restructuring
agreement with Mallinckrodt. In August 2000, the Company and Mallinckrodt also
amended their restructuring agreement to clarify that Mallinckrodt would
continue to pay a 3% royalty to the Company on sales of OPTISON in the United
States until sales reach a cumulative aggregate of $66,667,000. The amendment
also clarifies that Mallinckrodt will reimburse the Company for a $450,000
credit available to the Company from Schering AG if Mallinckrodt utilizes this
credit in the event that Mallinkrodt enters into a license agreement with
Schering AG.

(3) OTHER INCOME

Other income for the six months ended September 30, 2000 includes $2.8
million for the licensing of a portfolio of patents and technology to Genta,
Inc. relating to antisense technology for therapeutic and diagnostic
applications. This license agreement includes grants of exclusive and
non-exclusive rights to Genta on a royalty-free basis in return for $400,000 in
cash and 376,471 shares of Genta common stock. The Company sold 372,787 shares
of Genta common stock in August 2000, realizing net

F-29
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) OTHER INCOME (CONTINUED)
proceeds of $2,189,949. The remaining 3,684 Genta common shares are reflected as
marketable securities in the accompanying consolidated balance sheet.

(4) OTHER ASSETS

A portion of the balance included in "other assets" represents the Company's
interest in the residence (the "Property") of the President and CEO (the
"Employee"), equal to $300,000. In the event of termination of the Employee, the
Company's $300,000 interest in the Property will be converted to a non-interest
bearing note receivable, the balance of which is to be paid over a period of two
years from termination according to the employment agreement amended on
September 22, 2000.

(5) COMMON STOCK OUTSTANDING

Common stock issued to the Company's employees during the fourth quarter of
fiscal year 2000, in lieu of a cash bonus, was canceled and then reissued during
fiscal year 2001 for a lower number of shares in order to reflect the bonus as
net of tax liabilities. As a result, the amount of the Company's outstanding
common stock decreased from 18,858,789 at March 31, 2000 to 18,766,413 at
September 30, 2000, a decrease of 92,376 shares.

(6) EARNINGS PER SHARE

Basic earnings per share were computed by dividing net 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
were calculated using the treasury stock method and represent incremental shares
issuable upon exercise of the Company's outstanding options and warrants. For
the three and six months ended September 30, 1999 and 2000, the diluted loss per
share calculation excludes effects of outstanding stock options as such
inclusion would be anti-dilutive.

(7) RECENT ACCOUNTING PRONOUNCEMENTS

(8) SUBSEQUENT EVENTS

On October 11, 2000, the Company, Alliance Pharmaceutical Corp. ("Alliance")
and Alliance Merger Subsidiary, Inc. ("Merger Sub"), a wholly-owned subsidiary
of Alliance, entered into an agreement and plan of merger pursuant to which
Merger Sub will be merged into the Company and the Company will become a
wholly-owned subsidiary of Alliance. Under the merger agreement, stockholders of
the Company will receive 770,000 shares of Alliance common stock in exchange for
their shares of the Company's common stock (subject to a downward adjustment in
certain circumstances). Closing of the merger is subject to the approval of the
merger by the Company's stockholders and to the satisfaction of other conditions
precedent described in the merger agreement.

F-30
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) SUBSEQUENT EVENTS (CONTINUED)
As a result of the proposed merger with Alliance, the Company's bank facilities
require payment of all outstanding balance as well as the Company has agreed to
certain other restrictions during the period prior to closing. The Company
estimates the outstanding balance at the time of the expected merger to be
approximately $300,000, which is classified as current portion of long-term
debt.

On October 16, 2000 the Company entered into an agreement to provide
consulting services to Alliance in contemplation of the proposed merger. Under
the agreement, which has a 120-day term, Alliance will pay the Company a fee of
approximately $8,450 per week for the services of 2 employees of the Company.

On October 17, 2000, Isis Pharmaceuticals, Inc. ("Isis") filed suit against
the Company in the Superior Court of the State of California seeking to reform
the license agreement entered into between the Company and Isis in September
1992 to reduce the royalty payable to the Company to the rate payable to the
Company in a license agreement entered into in May 2000 between the Company and
Genta, Inc. The Company disputes Isis's claim that the Company is obligated to
conform the Isis license to the Genta license.

On October 24, 2000, the Company received an unsolicited merger offer from
CEL-SCI Corporation. The Company's Board of Directors voted unanimously to
reject this offer.

F-31
<PAGE>
APPENDIX A

AGREEMENT AND PLAN OF MERGER
AMONG
ALLIANCE PHARMACEUTICAL CORP.,
A NEW YORK CORPORATION,
ALLIANCE MERGER SUBSIDIARY, INC.,
A DELAWARE CORPORATION,
AND
MOLECULAR BIOSYSTEMS, INC.,
A DELAWARE CORPORATION,
DATED AS OF OCTOBER 11, 2000

<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
ARTICLE I. The Merger; Closing; Effective Time....................... A-1

1.1 The Merger.................................................. A-1
1.2 Closing..................................................... A-1
1.3 Effective Time.............................................. A-1
1.4 Effects of the Merger....................................... A-2

ARTICLE II. Certificate of Incorporation and By-Laws of the Surviving A-2
Corporation...........................................................

2.1 The Certificate of Incorporation............................ A-2
2.2 The By-Laws................................................. A-2

ARTICLE III. Officers and Directors of the Surviving Corporation..... A-2

3.1 Officers and Directors...................................... A-2

ARTICLE IV. Conversion or Cancellation of Shares in the Merger....... A-2

4.1 Conversion or Cancellation of Shares........................ A-2
4.2 Allocation of Merger Consideration; Exchange Procedures..... A-3
4.3 No Fractional Shares........................................ A-4
4.4 Dissenters' Rights.......................................... A-4
4.5 Stock Option Plan........................................... A-5
4.6 Warrants.................................................... A-5
4.7 No Further Ownership Rights in Company Common Stock......... A-5
4.8 Withholding Rights.......................................... A-5
4.9 Lost, Stolen or Destroyed Certificates...................... A-5
4.10 Stock Transfer Books........................................ A-6
4.11 Further Assurances.......................................... A-6

ARTICLE V. Representations and Warranties............................ A-6

5.1 Representations and Warranties of the Company............... A-6
5.2 Representations and Warranties of Purchaser................. A-18

ARTICLE VI. Covenants................................................ A-20

6.1 Interim Operations of the Company........................... A-20
6.2 Acquisition Proposals....................................... A-22
6.3 Meetings of Company's Stockholders.......................... A-23
6.4 Filings; Other Action....................................... A-23
6.5 Access...................................................... A-23
6.6 Notification of Certain Matters............................. A-23
6.7 Publicity................................................... A-24
6.8 Takeover Statutes........................................... A-24
6.9 Affiliates Agreements....................................... A-24
6.10 Letter of the Company's Accountants......................... A-24
6.11 Registration Statement...................................... A-24
6.12 Indemnification of Directors and Officers................... A-24
6.13 No Changes in Purchaser Shares.............................. A-25
6.14 Voting Agreement............................................ A-25

ARTICLE VII. Conditions.............................................. A-25

7.1 Conditions to Obligations of Purchaser...................... A-25
7.2 Conditions to Obligations of the Company.................... A-26
</TABLE>

i
<PAGE>

<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
ARTICLE VIII. Termination, Amendment and Waiver...................... A-27

8.1 Termination................................................. A-27
8.2 Effect of Termination....................................... A-27
8.3 Amendment................................................... A-28
8.4 Waiver...................................................... A-28

ARTICLE IX. Miscellaneous and General................................ A-28

9.1 Payment of Expenses......................................... A-28
9.2 Survival.................................................... A-28
9.3 Counterparts................................................ A-29
9.4 Governing Law............................................... A-29
9.5 Notices..................................................... A-29
9.6 Entire Agreement, etc....................................... A-29
9.7 Definition of "Subsidiary".................................. A-29
9.8 Captions.................................................... A-29
</TABLE>

<TABLE>
<S> <C> <C>
EXHIBITS

Affiliates Agreement........................................ A-1
Exhibit
A

Opinion of Company's Counsel................................ B-1
Exhibit
B

Opinion of Purchaser's Counsel.............................. C-1
Exhibit
C

SCHEDULES

Government Filings; No Violations
5.1(c)(ii)
Company Reports; Financial Statements
5.1(e)
Absence of Certain Changes or Events
5.1(f)
Litigation, Investigations and Liabilities
5.1(g)
No Defaults; Contracts
5.1(h)
Employee Benefits
5.1(i)
Subsidiaries
5.1(l)
Intellectual Property
5.1(n)
Title to Property and Assets
5.1(o)
Tax Returns and Payments
5.1(p)
Insurance
5.1(q)
</TABLE>

ii
<PAGE>
AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of October 11,
2000, by and among Alliance Pharmaceutical Corp., a New York corporation (the
"PURCHASER"), Alliance Merger Subsidiary, Inc., a Delaware corporation and
wholly owned subsidiary of Purchaser (the "MERGER SUB"), and Molecular
Biosystems, Inc., a Delaware corporation (the "COMPANY").

RECITALS

WHEREAS, the Boards of Directors of the Purchaser and the Company each have
determined that it is in the best interests of each corporation and their
respective stockholders for the Purchaser and the Company to engage in a
business combination through a merger as outlined below (the "MERGER") in order
to advance the long-term strategic business interests of the Purchaser and the
Company;

WHEREAS, the respective Boards of Directors of the Company and the Purchaser
have approved the Merger, upon the terms and subject to the conditions set forth
in this Agreement, pursuant to which each share of common stock, par value $.01
per share, of the Company ("COMPANY COMMON STOCK") issued and outstanding
immediately prior to the Effective Time (as defined below), will be converted
into the right to receive shares (the "PURCHASER SHARES") of Common Stock, par
value $.01 per share, of the Purchaser (the "PURCHASER COMMON STOCK"), as set
forth herein; and

WHEREAS, the Company, the Purchaser and the Merger Sub desire to make
certain representations, warranties, covenants and agreements in connection with
this Agreement.

NOW, THEREFORE, in consideration of the premises and of the representations,
warranties, covenants and agreements contained herein, the parties hereto hereby
agree as follows:

ARTICLE I.
THE MERGER; CLOSING; EFFECTIVE TIME

1.1 THE MERGER. Subject to the terms and conditions of this Agreement, and
in accordance with the Delaware General Corporation Law (the "DGCL"), at the
Effective Time the Merger Sub shall be merged with and into the Company and the
separate corporate existence of the Merger Sub shall thereupon cease. The
Company shall be the surviving corporation in the Merger (sometimes hereinafter
referred to as the "SURVIVING CORPORATION") and shall continue to be governed by
the laws of the State of Delaware, and the separate corporate existence of the
Company with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the Merger. The Merger shall have the effects specified
in the DGCL.

1.2 CLOSING. The closing of the Merger (the "CLOSING") shall take place
(i) at the offices of Pillsbury Madison & Sutro LLP, 11975 El Camino Real,
Suite 200, San Diego, CA at 9:00 A.M. on the first business day on which the
last to be fulfilled or waived of the conditions set forth in Article VII hereof
shall be fulfilled or waived in accordance with this Agreement or (ii) at such
other place and time and/or on such other date as the Company and the Purchaser
may agree (the "CLOSING DATE"), unless this Agreement has been terminated
pursuant to its terms.

1.3 EFFECTIVE TIME. As soon as practicable following the Closing, and
provided that this Agreement shall not have been terminated or abandoned
pursuant to Article VIII hereof, the Company and the Purchaser will cause a
Certificate of Merger (the "DELAWARE CERTIFICATE OF MERGER") to be executed and
filed with the Secretary of State of Delaware as provided in Section 251 of the
DGCL. The Merger shall become effective at the time and on the date on which the
Delaware Certificate of Merger has been duly filed with the Secretary of State
of Delaware, and such time is hereinafter referred to as the "EFFECTIVE TIME."

A-1
<PAGE>
1.4 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger
will have the effects set forth in the DGCL. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time, all property, rights,
privileges, powers and franchises of the Company and the Merger Sub shall be
vested in the Surviving Corporation, and all debts, liabilities and duties of
the Company and the Merger Sub shall become the debts, liabilities and duties of
the Surviving Corporation.

ARTICLE II.
CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION

2.1 THE CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
the Surviving Corporation shall be amended and restated immediately after the
Effective Time to conform to the Certificate of Incorporation of the Merger Sub
as in effect immediately prior to the Effective Time.

2.2 THE BY-LAWS. The By-laws of the Surviving Corporation shall be amended
and restated immediately after the Effective Time to conform to the By-laws of
the Merger Sub as in effect immediately prior to the Effective Time.

ARTICLE III.
OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION

3.1 OFFICERS AND DIRECTORS. The directors and officers of the Surviving
Corporation immediately after the Effective Time shall be the respective
individuals who are directors and officers of the Merger Sub immediately prior
to the Effective Time.

ARTICLE IV.
CONVERSION OR CANCELLATION OF SHARES IN THE MERGER

4.1 CONVERSION OR CANCELLATION OF SHARES. The manner of converting or
canceling shares of the Company, the Merger Sub and the Purchaser in the Merger
shall be as follows:

(a) CONVERSION OF SHARES. Subject to Sections 4.2 and 4.3, each share of
the Company Common Stock (the "SHARES") issued and outstanding immediately prior
to the Effective Time (other than Shares owned by the Purchaser, the Merger Sub
or any other direct or indirect subsidiary of the Purchaser (collectively, the
"PURCHASER COMPANIES") or Shares ("DISSENTING SHARES") that are held by
stockholders exercising appraisal rights pursuant to Section 262 of the DGCL)
shall be converted without any action on the part of the holder thereof into the
right to receive that number of fully paid and nonassessable Purchaser Shares
determined by the Exchange Ratio (as defined below):

The Parties agree that the Exchange Ratio will be determined by using the
following formulae:

<TABLE>
<S> <C> <C>
Exchange Ratio = 770,000 minus Adjustment Shares (as defined below)
------------------------------------------------------------
Company Securities

Company Securities = The aggregate number of issued and outstanding shares of
Company Common Stock, plus 49,000 shares of Company Common
Stock subject to outstanding "in the money" Company Options
(as defined below). As of the date hereof the number of
Company Securities is 18,907,786.
</TABLE>

<TABLE>
<S> <C> <C> <C> <C> <C>
example: as of date hereof: 770,000 = .0407239
---------
18,907,786
</TABLE>

A-2
<PAGE>
Based on the above example, the Exchange Ratio is .0407239 Purchaser Shares
for each Company Share. It is further understood that the maximum number of
shares of Purchaser Common Stock which will either be issued in the Merger or
become subject to outstanding "in the money" options assumed by Purchaser in the
Merger is 770,000, subject to reduction as follows:

The 770,000 Purchaser Shares shall be reduced by the number of "ADJUSTMENT
SHARES." Adjustment Shares shall be determined by dividing: (A) the amount by
which the Company's total assets less accumulated depreciation or amortization
as of the Effective Time less total liabilities as of the Effective Time, in
each case determined in accordance with generally accepted accounting principles
and in a manner consistent with the Company's June 30, 2000 balance sheet but
including any unrecorded or unpaid severance, accounting, legal, investment
banking and other expenses as of the Effective Time (including those liabilities
triggered by the Merger), is less than $5,000,000; by (B) 32.50.

For purposes hereof, the Purchaser Shares (together with any cash in lieu of
fractional shares of Purchaser Common Stock to be paid pursuant to Section 4.3)
shall be the "MERGER CONSIDERATION." All Shares shall no longer be outstanding
and shall be canceled and retired and shall cease to exist, and each certificate
(each a "CERTIFICATE") representing any of such Shares shall thereafter
represent only the right to receive the Merger Consideration (and the right, if
any, to receive cash in lieu of fractional shares) into which such Shares have
been converted pursuant to this Article IV, or the right, if any, to receive
payment from the Surviving Corporation of the "FAIR VALUE" of such Shares as
determined in accordance with Section 262 of the DGCL.

(b) CANCELLATION OF SHARES. Each Share issued and outstanding at the
Effective Time and owned by any of the Purchaser Companies, and each Share
issued and held in the Company's treasury at the Effective Time, shall, by
virtue of the Merger and without any action on the part of the holder thereof,
cease to be outstanding, shall be canceled and retired without payment of any
consideration therefor and shall cease to exist.

(c) MERGER SUB. At the Effective Time, each share of Common Stock, par
value $.01 per share, of the Merger Sub issued and outstanding immediately prior
to the Effective Time shall be converted into one validly issued, fully paid and
non-assessable share of common stock, par value $.01 per share, of the Surviving
Corporation.

4.2 ALLOCATION OF MERGER CONSIDERATION; EXCHANGE PROCEDURES.

(a) EXCHANGE FUND. Prior to the Effective Time, the Purchaser shall
appoint a commercial bank or trust company to act as exchange agent hereunder
for the purpose of exchanging Certificates for the Merger Consideration (the
"EXCHANGE AGENT"). At or prior to the Effective Time, the Purchaser shall
deposit with the Exchange Agent, in trust for the benefit of holders of Shares,
certificates representing the Purchaser Shares issuable pursuant to
Section 4.1, in exchange for outstanding Shares. The Purchaser agrees to make
available to the Exchange Agent from time to time as needed cash sufficient to
pay cash in lieu of fractional shares pursuant to Section 4.3. Any cash and
Purchaser Shares to be deposited with the Exchange Agent shall hereinafter be
referred to as the "EXCHANGE FUND."

(b) EXCHANGE PROCEDURES. Promptly after the Effective Time, the Purchaser
shall cause the Exchange Agent to mail to each holder of a Certificate (i) a
letter of transmittal which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon proper delivery
of the Certificates to the Exchange Agent, and which letter shall be in
customary form and have such other provisions as the Purchaser may reasonably
specify and (ii) instructions for effecting the surrender of such Certificates
in exchange for the applicable Merger Consideration. Upon surrender of a
Certificate to the Exchange Agent together with such letter of transmittal, duly
executed and completed in accordance with the instructions thereto, and such
other documents as may reasonably be required by the Exchange Agent, the holder
of such Certificate shall be entitled to

A-3
<PAGE>
receive in exchange therefor: (A) one or more Purchaser Shares representing, in
the aggregate, the whole number of Purchaser Shares that such holder has the
right to receive pursuant to Section 4.1 (after taking into account all shares
of Company Common Stock then held by such holder) and (B) a check in the amount
equal to the cash that such holder has the right to receive in lieu of any
fractional Purchaser Shares pursuant to Section 4.3. No interest will be paid or
will accrue on any cash payable pursuant to Section 4.3. In the event of a
transfer of ownership of Shares which is not registered in the transfer records
of the Company, one or more Purchaser Shares evidencing, in the aggregate, the
proper number of Purchaser Shares and a check in the proper amount of cash in
lieu of fractional Purchaser Shares pursuant to Section 4.3 may be issued with
respect to such Shares to such a transferee if the Certificate representing such
Shares is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.

(c) TRANSFERS. After the Effective Time, there shall be no transfers on
the stock transfer books of the Company of the Shares that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be canceled
and exchanged for the Purchaser Shares and any cash to be paid upon the due
surrender of and in respect of such Certificates in lieu of fractional Purchaser
Shares pursuant to this Agreement in accordance with the procedures set forth in
this Article IV. Certificates surrendered for exchange by any person
constituting an "AFFILIATE" of the Company for purposes of Rule 145(c) under the
Securities Act of 1933, as amended (the "SECURITIES ACT") shall not be exchanged
until the Purchaser has received a written agreement from such person as
provided in Section 6.9 hereof.

(d) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Purchaser Shares)
that remains unclaimed by the stockholders of the Company one year after the
Effective Time shall be paid to the Purchaser. Any stockholders of the Company
who have not theretofore complied with this Article IV shall thereafter look
only to the Purchaser for payment of their Purchaser Shares and cash in lieu of
fractional Purchaser Shares payable upon due surrender of their Certificates,
and in each case, without any interest thereon. Notwithstanding the foregoing,
none of the Purchaser, the Surviving Corporation, the Exchange Agent or any
other person shall be liable to any former holder of Shares for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.

4.3 NO FRACTIONAL SHARES. No certificates or scrip representing less than
one Purchaser Share shall be issued upon the surrender for exchange of
Certificates representing Shares pursuant to Article IV. In lieu of any such
fractional shares, each holder of Shares shall be paid, upon surrender of a
Certificate or Certificates representing such Shares, an amount in cash, rounded
to the nearest cent, determined by multiplying (i) the Exchange Ratio by (ii)
the fractional interest to which such holder would otherwise be entitled (after
taking into account all Shares held of record by such holder at the Effective
Time).

4.4 DISSENTERS' RIGHTS. Any stockholder who shall have delivered a written
demand for appraisal of such stockholders' Shares, as provided in Section 262 of
the DGCL (each a "DISSENTING STOCKHOLDER"), shall not be entitled to Purchaser
Shares or cash in lieu of fractional Purchaser Shares pursuant to this
Article IV, unless and until the holder thereof shall have failed to perfect or
shall have effectively withdrawn or lost such holder's right to dissent from the
Merger under the DGCL, and shall be entitled to receive only the payment
provided by Section 262 of the DGCL with respect to such Shares. The Company
shall give the Purchaser (i) prompt notice of any written demands for appraisal
of any Dissenting Shares, attempted withdrawals of such demands, and any other
instruments served pursuant to applicable law received by the Company relating
to stockholders' rights of appraisal and (ii) the opportunity to direct all
negotiations and proceedings with respect to demand for appraisal under the
DGCL. The Company shall not, except with the prior written consent of the
Purchaser,

A-4
<PAGE>
voluntarily make any payment with respect to any demands for appraisals of
Dissenting Shares, offer to settle or settle any such demands or approve any
withdrawal of any such demands.

4.5 STOCK OPTION PLAN. Immediately prior to the Effective Time each
unexpired and unexercised option to purchase Shares (each a "COMPANY OPTION")
outstanding pursuant to the Company's Pre-1984 Stock Option Plan, 1984 Incentive
Stock Option Plan, 1984 Nonstatutory Stock Option Plan, 1993 Stock Option Plan,
1993 Outside Directors Stock Option Plan, 1997 Outside Directors Stock Option
Plan or 1998 Stock Option Plan or pursuant to any separate option agreements
(collectively, the "COMPANY STOCK OPTION PLAN") may be exercised in full in
accordance with its terms. Each Company Option subject to the Pre-1984 Stock
Option Plan, 1984 Incentive Stock Option Plan, 1984 Nonstatutory Stock Option
Plan and 1998 Stock Option Plan not so exercised shall be deemed to be
automatically terminated as of the Effective Time. Each Company Option subject
to the 1993 Stock Option Plan, the 1993 Outside Directors Option Plan and 1997
Outside Directors Option Plan not so exercised shall be deemed to be
automatically converted into an option (a "PURCHASER OPTION") to purchase a
number of Purchaser Shares equal to the number of Shares that could have been
purchased under the Company Option multiplied by the Exchange Ratio, with the
resulting number of shares rounded down to the nearest whole share, at a price
per Purchaser Share equal to the option exercise price determined pursuant to
the Company Option divided by the Exchange Ratio, with the resulting exercise
price rounded up to the nearest whole cent. Such Purchaser Option shall
otherwise be subject to the same terms and conditions as the Company Option. The
Purchaser shall reserve for issuance a sufficient number of Purchaser Shares for
issuance upon exercise of such Purchaser Options.

4.6 WARRANTS. Immediately prior to the Effective Time each unexpired and
unexercised Company Warrant (as defined below) outstanding may be exercised in
full in accordance with its terms. Each Company Warrant not so exercised shall
be deemed to be automatically converted into a warrant (a "PURCHASER WARRANT")
to purchase a number of Purchaser Shares equal to the number of Shares that
could have been purchased under the Company Warrant multiplied by the Exchange
Ratio, with the resulting number of shares rounded down to the nearest whole
share, at a price per Purchaser Share equal to the warrant exercise price
determined pursuant to the Company Warrant divided by the Exchange Ratio, with
the resulting exercise price rounded up to the nearest whole cent. Such
Purchaser Warrant shall otherwise be subject to the same terms and conditions as
the Company Warrant. The Purchaser shall reserve for issuance a sufficient
number of Purchaser Shares for issuance upon exercise of such Purchaser
Warrants.

4.7 NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All Shares issued
and outstanding immediately prior to the Effective Time shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a Certificate or instrument representing any such
Shares shall, to the extent such Certificate or instrument represents such
Shares, cease to have any rights with respect thereto, except the right to
receive the Merger Consideration upon surrender of such Certificate or
instrument in accordance with Section 4.2.

4.8 WITHHOLDING RIGHTS. Each of the Purchaser and the Surviving
Corporation shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of Shares such
amounts as the Purchaser or the Surviving Corporation is required to deduct or
withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax law. To the extent that amounts are so
withheld, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the Shares in respect of which
such deduction and withholding was made by the Purchaser or the Surviving
Corporation, as the case may be.

4.9 LOST, STOLEN OR DESTROYED CERTIFICATES. If any Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation, the posting by such person of a

A-5
<PAGE>
bond in such reasonable amount as the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will deliver in exchange for such lost, stolen
or destroyed Certificate the applicable Merger Consideration with respect to the
Shares formerly represented thereby and any cash in lieu of fractional Purchaser
Shares deliverable in respect thereof, pursuant to this Agreement.

4.10 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books
of the Company shall be closed and there shall be no further registration of
Shares thereafter on the records of the Company. On or after the Effective Time,
any Certificates presented to the Exchange Agent for any reason shall be
converted into the Merger Consideration with respect to the Shares formerly
represented thereby (including any cash in lieu of fractional Purchaser Shares
to which the holders thereof are entitled pursuant to Section 4.3).

4.11 FURTHER ASSURANCES. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purposes of this
Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, powers and franchises of
the Company and the Merger Sub, the officers and directors of the Surviving
Corporation are fully authorized in the name of the Company and the Merger Sub
to take, and will take, all such lawful and necessary action, so long as such
action is consistent with this Agreement.

ARTICLE V.
REPRESENTATIONS AND WARRANTIES

5.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Purchaser that:

(a) CORPORATE ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and is in good standing as a foreign corporation in each
jurisdiction where the properties owned, leased or operated, or the business
conducted, by it require such qualification, except for such failure to so
qualify or be in such good standing, which, when taken together with all other
such failures, could not reasonably be expected to have a material adverse
effect on the Company or its subsidiaries or their respective businesses,
condition (financial or otherwise), properties, prospects or results of
operations or Liabilities (as defined below) of the Company or its subsidiaries
(a "COMPANY MATERIAL ADVERSE EFFECT"). The Company has the requisite corporate
power and authority to carry on its business as it is now being conducted. The
Company has made available to the Purchaser a complete and correct copy of the
Company's Certificate of Incorporation and By-laws and the charter documents of
each of its subsidiaries, each as amended to date. Except as set forth in
Schedule 5.1(l), the Company's Certificate of Incorporation and By-laws and the
charter documents of each of its subsidiaries so delivered are in full force and
effect.

(b) CORPORATE AUTHORITY. Subject only to approval of this Agreement by the
holders of a majority of the outstanding Shares, the Company has the requisite
corporate power and authority and has taken all corporate action necessary in
order to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement is a valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally. As of the date of this
Agreement, the Board of Directors of the Company (i) has, without a negative
vote, approved the Merger and this Agreement and the transactions contemplated
herein and (ii) has received the opinion of its financial advisor, Prudential
Vector Healthcare Group, a unit of Prudential Securities ("PRUDENTIAL VECTOR"),
to the effect that the consideration to be received by the holders of the Shares
in the Merger is fair to such holders (other than the Purchaser and its
affiliates)

A-6
<PAGE>
from a financial point of view, and such opinion (the "FAIRNESS OPINION"), a
copy of which has been delivered to the Purchaser, has not been withdrawn,
revoked or modified.

(i) Other than the filings provided for in Section 1.3, the Securities
Act, the Securities Exchange Act of 1934 (the "EXCHANGE ACT," and all such
filings being herein referred to as the "REGULATORY FILINGS"), no notices,
reports or other filings are required to be made by the Company with, nor
are any consents, registrations, approvals, permits or authorizations
required to be obtained by the Company from, any governmental or regulatory
authority, agency, commission or other entity, domestic or foreign
("GOVERNMENTAL ENTITY"), in connection with the execution and delivery of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby, the failure to make or obtain any or all
of which is reasonably likely to have a Company Material Adverse Effect, or
could prevent, materially delay or materially burden the transactions
contemplated by this Agreement.

(ii) The execution and delivery of this Agreement by the Company do not,
and the consummation by the Company of the transactions contemplated by this
Agreement will not, constitute or result in (i) a breach or violation of, or
a default under, the Certificate of Incorporation or Bylaws of the Company,
(ii) except as set forth on Schedule 5.1(c)(ii) hereto, a breach or
violation of, a default under or the triggering of any payment or other
material obligations pursuant to, any of the Company's existing Compensation
and Benefit Plans (as defined in Section 5.1(h)) or any grant or award made
under any of the foregoing, (iii) except as set forth on
Schedule 5.1(c)(ii), a breach or violation of, or a default under, the
acceleration of or the creation of a lien, pledge, security interest or
other encumbrance on assets (with or without the giving of notice or the
lapse of time) pursuant to, any provision of any agreement, instrument,
lease, contract, note, mortgage, indenture, arrangement or other obligation
(a "CONTRACT") to which the Company is a party or by or to which the Company
or any of its properties or assets is bound or subject or any law, rule,
ordinance or regulation or judgment, decree, order, award or governmental or
non-governmental permit or license to which the Company is subject or
(iv) any change in the rights or obligations of any party under any of the
Contracts, except, in the case of clause (iii) or (iv) above, for such
breaches, violations, defaults, accelerations or changes that, alone or in
the aggregate, could not result in the creation of any lien, pledge,
security interest, charge or encumbrance of any kind ("LIEN") upon any
assets of the Company or that could not prevent, materially delay or
materially burden the transactions contemplated by this Agreement.

(iii) The Company has all licenses, franchises, permits, clearances,
consents, certificates and other evidences of authority necessary to the
conduct of the Company's business and operations as currently conducted
("PERMITS") which Permits are in full force and effect and neither the
Company nor any of its subsidiaries is in violation of any Permit in any
material respect. The business of the Company and each of its subsidiaries
has been conducted in compliance with all applicable laws, regulations,
orders and other requirements of Governmental Entities, including, without
limiting the generality of the foregoing, all laws, regulations and orders
relating to employment practices and procedures, the health and safety of
employees and export controls, except where any non compliance has not had,
or would not have, a Company Material Adverse Effect.

(iv) To the knowledge of the Company, no statute has been enacted nor
has any rule or regulation been adopted by any state where laws apply to the
business of the Company or any federal agency or authority which may
reasonably be expected to have a Company Material Adverse Effect which has
not yet been reflected in the operating results of the Company.

(d) CAPITAL STRUCTURE. The authorized capital stock of the Company
consists of 40,000,000 Shares of which 18,858,786 Shares were outstanding at the
close of business on September 30, 2000. All of the

A-7
<PAGE>
outstanding Shares have been duly authorized and are validly issued, fully paid
and nonassessable and not subject to preemptive rights. As of August 31, 2000,
the Company had 42,298 Shares held in its treasury, 50,000 Shares reserved for
issuance upon the exercise of an outstanding warrant (the "COMPANY WARRANTS")
and 4,316,270 Shares reserved for issuance pursuant to options granted under the
Company Stock Option Plan. As of the date of this Agreement, except for this
Agreement, and as disclosed in this Section 5.1(d), the Company has no Shares
reserved for issuance and there are no options, warrants, calls, rights,
commitments or agreements of any character to which the Company is a party or by
which it is bound obligating the Company to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock of the Company
or obligating the Company to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement. After the Effective Time the
Surviving Corporation will have no obligation to issue, transfer or sell any
securities of the Surviving Corporation pursuant to any Compensation and Benefit
Plan (as defined in Section 5.1(h)). Assuming conversion and exercise of all
options, warrants and other rights to acquire Company Common Stock, the Company
would have 23,255,056 shares of Company Common Stock issued and outstanding.

(e) COMPANY REPORTS; FINANCIAL STATEMENTS.

(i) The Company has filed with the Securities and Exchange Commission
(the "SEC") and delivered to the Purchaser the Company's Annual Report on
Form 10-K for the year ended March 31, 2000 (the "FORM 10-K") and any other
registration statements, schedules, reports, proxy statements or information
statements (collectively, "COMPANY REPORTS") filed or required to be filed
since March 31, 2000. As of their respective dates, the Company Reports
complied in all material respects with the requirements of the Securities
Act or the Exchange Act, as the case may be, and the rules and regulations
promulgated thereunder applicable to the Company Reports, and the Company
Reports did not, and any Company Reports filed with the SEC subsequent to
the date hereof will not, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances in which
they were made, not misleading. The financial statements of the Company
included in the Company Reports comply as to form in all material respects
with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles ("GAAP") (except,
in the case of unaudited statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly and accurately present the
financial position of the Company as of the dates thereof and its results of
operations, stockholders equity and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments) and are in all material respects in accordance with the books
of account and records of the Company. The Company has delivered to the
Purchaser a copy of the financial statements included in the Form 10-K
(including an auditor's opinion). The Company has delivered to the Purchaser
unaudited consolidated balance sheets and consolidated income statements as
of the end of the calendar months ending July 31, 2000 and August 31, 2000,
together with statements of retained earnings and cash flows for each such
period. Such financial statements have been prepared in accordance with GAAP
(subject to normal year-end adjustments and the addition of footnotes or
other explanatory material associated with its financial statements prepared
in accordance with GAAP) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly and
accurately present the financial position and results of operations of the
Company for such periods, and have been prepared in accordance with the
books and records of the Company on a consistent basis.

(ii) None of the information supplied or to be supplied by the Company
for inclusion in (A) the Company's proxy or information statement with
respect to its meeting of stockholders (the

A-8
<PAGE>
"PROXY STATEMENT/PROSPECTUS") to approve the transactions contemplated
hereby and (B) the registration statement on Form S-4 or other appropriate
registration form to be filed with the SEC by the Purchaser in connection
with the offer and issuance of the Purchaser Shares and Purchaser Warrants
in or as a result of the Merger (the "REGISTRATION STATEMENT") including the
Proxy Statement/Prospectus included therein will, in the case of the Proxy
Statement/Prospectus, at the time of mailing of the Proxy
Statement/Prospectus to stockholders of the Company and at the time of the
meeting of such stockholders to be held in connection with the Merger (the
"MEETING"), contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements made, in light of the circumstances under which they are made,
not misleading or, in the case of the Registration Statement, at the time
the Registration Statement becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Proxy Statement/Prospectus will
comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder, except that no
representation is made by the Company with respect to information supplied
by the Purchaser for inclusion in the Proxy Statement/Prospectus.

(f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as specifically disclosed
in the Company Reports (but not the exhibits or other agreements referenced
therein) or as set forth in Schedule 5.1(f), since March 31, 2000, the Company
and its subsidiaries have conducted its business only in the ordinary and usual
course of such business and there has not been:

(i) any material adverse change in the Company, its subsidiaries or
their respective businesses, conditions (financial or otherwise),
properties, prospects, Contracts or results of operations or Liabilities
("MATERIAL ADVERSE CHANGE");

(ii) any damage, destruction or loss, whether or not covered by
insurance;

(iii) any waiver by the Company of a valuable right or of a debt owed to
it;

(iv) any satisfaction, settlement or discharge of any Lien or payment of
any obligation by the Company, except in the ordinary course of business and
which is not material to the assets, properties, financial condition,
operating results or business of the Company or any subsidiary (as such
business is presently conducted);

(v) any change or amendment to a material Contract by which the Company,
its subsidiaries or any of their assets or properties are bound or subject;

(vi) any declaration, authorization, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with
respect to any of the Company's or its subsidiaries' capital stock;

(vii) any split, combination or reclassification of any of its capital
stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of their
capital stock;

(viii) any issuance, or authorization for issuance, or any commitment to
issue, any equity security, bond, note or other security of the Company or
any of its subsidiaries, except for Company Common Stock issuable upon the
exercise of the Company Warrants or options granted under the Company Stock
Option Plan;

(ix) any incurrence of debt for borrowed money;

(x) any loan to any person (including advances to employees, officers or
directors of the Company) or guarantee of any indebtedness of another
person;

A-9
<PAGE>
(xi) any purchase, redemption or other acquisition or commitment to
acquire, directly or indirectly, any share or shares of Company Common Stock
or a subsidiary's capital stock;

(xii) except as contemplated by this Agreement, any disposition of, or
agreement to dispose of, by sale, lease, license or otherwise, any asset or
property, tangible or intangible, except, in the case of such assets and
property, in the ordinary and usual course of business.

(xiii) except for short-term investment securities, any purchase or
agreement to purchase or otherwise acquire any securities of any
corporation, partnership, joint venture, firm or other entity

(xiv) any expenditure or commitment for the purchase, license,
acquisition, construction or improvement of a capital asset;

(xv) any sale, assignment, transfer or conveyance or commitment to sell,
assign, transfer or convey, any Intellectual Property (as defined below);

(xvi) any change in any compensation arrangement or agreement with any
employee, director or consultant, or any adoption or amendment of any bonus,
incentive, profit-sharing, stock option, stock purchase, pension,
retirement, deferred-compensation, severance, life insurance, medical or
other benefit plan, agreement, trust, fund, policy or arrangement for the
benefit of employees of any kind whatsoever; or

(xvii) any amendment or modification in its Certificate of Incorporation
or By-laws, or commitment to amend or modify its Certificate of
Incorporation or By-laws, except as contemplated in this Agreement.

Except as set forth on Schedule 5.1(f), since March 31, 2000, there has not been
(x) any granting by the Company or its subsidiaries to any of their officers of
any increase in compensation, (y) any granting by the Company or any of its
subsidiaries to any such officer of any increase in severance or termination pay
or (z) any entry by the Company or any of its subsidiaries into any employment,
severance or termination agreement with any such officer.

(g) LITIGATION, INVESTIGATIONS AND LIABILITIES.

(i) Except as disclosed in the Company Reports filed with the SEC prior
to the date hereof, the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999, and as set forth on Schedule 5.1(g), as of the
date of this Agreement, there is no action, suit or proceeding pending or
currently threatened (or any reasonable basis therefor known to the Company)
against the Company or any of its subsidiaries. The foregoing includes,
without limitation, actions pending or threatened (or any reasonable basis
therefor known to the Company) involving the prior employment of any of the
Company's or its subsidiaries employees, their use in connection with the
Company's business of any information or techniques allegedly proprietary to
any of their former employers, or their obligations under any agreements
with prior employers. Neither the Company nor any of its subsidiaries is a
party or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or Governmental Entity.

(ii) Except as disclosed on Schedule 5.1(g), there have been no judicial
or administrative proceedings or other investigations and, to the Company's
knowledge there are no judicial or administrative proceedings or other
investigations pending or threatened alleging violation by the Company or
any of its subsidiaries of any local, state or federal laws, regulations and
orders respecting the business of the Company or any of its subsidiaries
including, without limitation, laws, regulations and orders promulgated
under the Food and Drug Administration Act or other Governmental Entity
regulating the Company's or its subsidiaries' businesses or products which
could reasonably be expected to have a Company Material Adverse Effect
(either individually or in the aggregate); and the Company has not received
any notice of any investigation, claim or proceeding against the Company by
any such Governmental Entity; and the Company is not aware

A-10
<PAGE>
of any fact or circumstance which could involve the Company in any such
proceeding, investigation or claim or impose any such liability upon the
Company and which could reasonably be expected to have a Company Material
Adverse Effect (either individually or in the aggregate). Except as
disclosed on Schedule 5.1(g), neither the Company nor any of its
subsidiaries has received in the past twelve months any inquiries from a
Governmental Entity relating to its business practices or products, which
have not been publicly disclosed whether or not such inquiry resulted in an
investigation by such Governmental Entity.

(iii) The Company is not aware of any judicial or administrative
proceedings or other investigations by any Governmental Entity, pending or
threatened, alleging violation of any laws, regulations and orders by any
licensee of the Company or its subsidiaries relating to any product rights
licensed by the Company or a subsidiary; and the Company is not aware of any
fact or circumstance which could involve any of the Company's or its
subsidiaries' licensees in any such proceeding and investigation and which
could reasonably be expected to have a Company Material Adverse Effect
(either individually or in the aggregate). Except as disclosed on
Schedule 5.1(g), neither the Company nor the Company's subsidiaries have
received, and to the Company's knowledge no licensee of the Company or a
subsidiary has received, any inquiries from any Governmental Entity within
the past twelve (12) months relating to the manufacture or sale of the
contrast imaging agent know as OPTISON.

(iv) Except as set forth in the financial statements for the month
ending August 31, 2000, the Company and its subsidiaries have no liabilities
or obligations of any nature (whether accrued, absolute, contingent or
otherwise) ("LIABILITIES") and there exists no existing fact, condition or
circumstance which could reasonably be expected to result in a Liability,
except as set forth in item 2 of Schedule 5.1(f) or items 2, 7 and 8 of
Schedule 5.1(g) and except Liabilities incurred in the ordinary course of
business which could not reasonably be expected to have a Company Material
Adverse Effect (either individually or in the aggregate).

(h) NO DEFAULTS; CONTRACTS. Neither the Company nor any of its
subsidiaries is in violation of or default under any provisions of its
respective Certificate of Incorporation or Bylaws or charter document or any
provision of any federal or state judgment, order, writ, decree, statute, rule
or regulation applicable to the Company or any of its subsidiaries. Except as
set forth in Schedule 5.1(h) all Contracts to which the Company or any of its
subsidiaries is a party or by which it is bound are valid, binding and in full
force and effect subject to the effect of applicable bankruptcy, insolvency and
other similar laws affecting the enforceability of creditors' rights generally,
general equitable principles and the discretion of courts in granting equitable
remedies. Except as disclosed on Schedule 5.1(h), each party thereto has
performed in all material respects their obligation under the Contracts, and
neither the Company nor any of its subsidiaries, nor to the Company's knowledge
any other party thereto, is in default under any of the Contracts, nor has there
occurred any event or circumstance which with notice or lapse of time or both
would constitute a default or event of default on the part of the Company or any
of its subsidiaries, nor to the Company's knowledge any other party thereto, or
give to any other party thereto the right to terminate or modify any Company
Contracts. Except as disclosed on Schedule 5.1(h), the Company has not received
notice (written or oral) that any party to any Contracts intends to cancel,
terminate or refuse to renew (if renewable) such Contracts or to exercise or
decline to exercise any option or right thereunder. All Liabilities of the
Company under any Contracts with respect to the license, development,
manufacturing, use or sale of the product known as OPTISON in the Mallinckrodt
Territory (as defined below) have been irrevocably assumed by
Mallinckrodt, Inc. For purposes of this section "Mallinckrodt Territory" shall
mean all countries of the world excluding Japan, South Korea and Taiwan.
Schedule 5.1(h) sets forth a list of all material Contracts of the Company which
are valid and existing on the date hereof.

A-11
<PAGE>
(i) EMPLOYEE BENEFITS.

(i) To the extent required to be disclosed therein, the Company Reports
accurately describe all bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus,
stock purchase, restricted stock and stock option plans, all employment or
severance Contracts or policies, other material employee benefit plans and
any applicable "change of control" or similar provisions in any plan,
Contract or arrangement which cover employees or former employees of the
Company or any of its subsidiaries (the "COMPENSATION AND BENEFIT PLANS").
The Compensation and Benefit Plans and all other benefit plans, Contracts or
arrangements (regardless of whether they are funded or unfunded) covering
employees or former employees of the Company (the "EMPLOYEES"), including,
but not limited to, "employee benefit plans" within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") are listed in Schedule 5.1(i). True and complete copies of
all Compensation and Benefit Plans and such other benefit plans, Contracts
or arrangements, including, but not limited to, any trust instruments and/or
insurance Contracts, if any, forming a part of any such plans and
agreements, and all amendments thereto have been furnished to the Purchaser.

(ii) Except as set forth on Schedule 5.1(i), the Company and any of its
subsidiaries do not have and have not had at any time any employee benefit
plan as described in Section 3(2)(A) or Section 3(2)(B) of ERISA. Except as
disclosed on Schedule 5.1(i), all other employee benefit plans subject to
the provisions of ERISA are in material compliance with the provisions of
ERISA.

(iii) The Company and its subsidiaries do not have any obligations for
retiree health and life benefits under any Compensation and Benefit Plan,
except as set forth on Schedule 5.1(i). Except as disclosed on
Schedule 5.1(i), there are no restrictions on the rights of the Company or
any of its subsidiaries to amend or terminate any such Compensation and
Benefit Plan without incurring any liability thereunder.

(iv) Except as set forth on Schedule 5.1(i) hereto, neither the Company
nor any of its subsidiaries is a party to any oral or written
(A) agreements with any officer or other employee of the Company or any of
its subsidiaries, the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction involving
the Company of the nature contemplated by this Agreement, (B) agreements
with respect to any officer of the Company or a subsidiary providing any
term of employment or compensation guarantee extending for a period longer
than three months and for the payment of in excess of $100,000 or
(C) agreements or plans, including any stock option plan, stock appreciation
rights plan, restricted stock plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement.

(j) BROKERS AND FINDERS. Neither the Company nor any of its subsidiaries,
nor any of their officers, directors or employees has employed any broker or
finder or incurred any liability for any brokerage fees, commissions or finders,
fees in connection with the transactions contemplated herein, except that the
Company has employed Prudential Vector as its financial advisors, the
arrangements with which have been disclosed in writing to the Purchaser prior to
the date hereof.

(k) TAKEOVER STATUTES. No "fair price", "moratorium", "control share
acquisition" or other similar antitakeover statute or regulation (each a
"TAKEOVER STATUTE") is applicable to the Merger, except for any such statutes or
regulations as to which all necessary action has been taken by the Company and
its Board of Directors to permit the consummation of the Merger in accordance
with the terms hereof.

A-12
<PAGE>
(l) SUBSIDIARIES. Except as disclosed on Schedule 5.1(l), the Company does
not presently own or control, directly or indirectly, any interest in any other
corporation, association, partnership or other business entity. None of the
subsidiaries listed on Schedule 5.1(l) are deemed "Significant Subsidiaries" as
defined in Rule 1-02 of Regulation 5-x of the Securities and Exchange
Commission.

(m) INVENTION AND SECRECY. All current and former key employees and
officers of the Company and its subsidiaries have executed an Employee's
Invention and Proprietary Information Agreement in the form previously furnished
to the Purchaser. The Company, is not aware that any of such key employees or
officers is in violation thereof, and the Company will use commercially
reasonable efforts to prevent any such violation.

(n) INTELLECTUAL PROPERTY.

(i) Schedule 5.1(n) lists all Patents (as defined below), registered and
applied for Trademarks (as defined below), and material unregistered
Trademarks, service marks and trade names owned by (or registered in the
name of) the Company that are considered by the Company to be material to
its business or the business of a subsidiary as currently conducted.
Schedule 5.1(n) includes as to each Patent or Trademark or Patent and
Trademark applications listed thereon: a Patent number or Patent application
number, a Trademark registration number or Trademark application number, as
applicable for each listed Trademark and non-U.S. Patent, and a docket or
Patent number or Patent application number for each listed U.S. Patent; the
country or countries in which each Patent or Trademark is issued, registered
or applied for, as applicable; the application date or registration date for
each listed Trademark and the docket number or issue date for each listed
Patent, as applicable; and the owner of such Patent or Trademark. Except as
disclosed therein, all Patents and Trademarks listed on Schedule 5.1(n)
exist and have been maintained in good standing, including without
limitation, the timely payment of any maintenance fees and annuities
thereon. Except as disclosed in Schedule 5.1(n), the Company and its
subsidiaries have taken all actions which it considers commercially
reasonable and made all applications and filings which it considers
commercially reasonable pursuant to applicable laws to secure, perfect and
protect its rights in the Intellectual Property (as defined below); and,
neither the Company, nor to the Company's knowledge, any of its agents have
practiced inequitable conduct under the Patent laws or other applicable laws
with respect to any of the foregoing. The Company and its subsidiaries have
taken all steps which they consider commercially reasonable (including
without limitation entering into appropriate confidentiality, non-disclosure
and non-competition agreements with all officers, directors and employees of
the Company and its subsidiaries with access to or knowledge of the
Intellectual Property (as defined below) of the Company and its subsidiaries
(and the products and technology of the Company and its subsidiaries)) to
safeguard and maintain the secrecy and confidentiality of, and to assign to
the Company or its subsidiaries, all of such employee's rights in all such
Intellectual Property invented or developed by such employee within the
scope of such employee's employment and relating to the Company's or its
subsidiaries' businesses.

(ii) Except as set forth in the Schedule 5.1(n), the Company or its
subsidiaries owns, is duly licensed or otherwise has the right to use,
license or sublicense all of the Intellectual Property used by the Company
or its licensees (pursuant to a license or sublicense from the Company) in
connection with their respective businesses as presently conducted and as
proposed to be conducted through the Effective Date; and except as set forth
in Schedule 5.1(n) the Company has no reason to believe that such
Intellectual Property is not valid and enforceable against third parties.
Except as set forth in Schedule 5.1(n), the Company owns, on an exclusive
basis, free and clear of any Liens, and has the unrestricted right to use,
license, sell or dispose of, and the right to bring infringement actions
with respect to all the Intellectual Property owned by the Company. Except
as set forth in Schedule 5.1(n), the Company and its subsidiaries do not
pay, and have no obligation (whether absolute or contingent) to pay,
royalties, honoraria, fees or other payments to

A-13
<PAGE>
any person by reason of the ownership, use, license, sale or disposition of
any issued Patents by the Company or its subsidiaries. Except as set forth
in Schedule 5.1(n), neither the Company nor its subsidiaries has received
notice (written or oral) of any claim of any person asserting rights in, or
a conflict with, the Intellectual Property used or required for use in
connection with the business of the Company, its subsidiaries or their
respective licensees as presently conducted and as proposed to be conducted
(including without limitation the Patents and Trademarks listed in
Schedule 5.1(n)) and neither the Company nor any of its subsidiaries has
been informed of any reasonable basis for such a claim. Without limiting the
foregoing, to the Company's knowledge, no other person has claimed the right
to use in connection with substantially similar or closely related goods and
in the same geographic area any Trademark which is identical or confusingly
similar to any Trademark used by the Company or any of its subsidiaries,
except pursuant to written agreements with the Company or any of its
subsidiaries which are listed in Schedule 5.1(n). Except as set forth on
Schedule 5.1(n), neither the Company nor any of its subsidiaries has
provided notice (written or oral) to any person of infringement of any
Intellectual Property right held by the Company or any of its subsidiaries;
and neither the Company nor or any of its subsidiaries has been informed of
any reasonable basis for such a claim. Except as set forth on
Schedule 5.1(n), there is no Contract or understanding (written or oral)
between the Company or any of its subsidiaries and another person which
would prevent or restrict the Company, any of its subsidiaries or the
Purchaser after the Merger from using, selling, licensing or disposing of
any material Intellectual Property of the Company or any of its subsidiaries
on substantially the same terms and conditions applicable to the Company or
any of its subsidiaries immediately prior to the Merger.

(iii) The entry by the Company into this Agreement will not require the
consent of any third party (other than consents that have been obtained by
the Company or any of its subsidiaries and provided to the Purchaser) who is
a party to an agreement, arrangement or understanding described in
Schedule 5.1(n) nor otherwise adversely affect the validity of any such
agreement, arrangement or understanding, nor adversely affect the benefit
that inures to the Company or any of its subsidiaries from such agreement,
arrangement or understanding. Schedule 5.1(h) lists all material Contracts
or understandings (whether written or oral, and if oral,
Schedule 5.1(h) contains a brief description of the principal terms thereof)
pursuant to which the Company and any of its subsidiaries has either
purchased, sold, licensed, secured or disposed of rights in Intellectual
Property from or to another person or agreed to do any of the foregoing
(other than licenses to commercially available off-the-shelf computer
software acquired or entered into by the Company or any of its subsidiaries
in the ordinary course of business) ("INTELLECTUAL PROPERTY AGREEMENTS").
Except as disclosed in Schedule 5.1(h) each of the parties thereto have
performed, in all material respects, all obligations under each Intellectual
Property Agreement which are required to be performed by such party, and
there is no default (or event which with notice or lapse of time would
constitute a default) by the Company or any of its subsidiaries thereunder,
and to the Company's knowledge, there is no default (or event which with
notice or lapse of time would constitute a default) by any other party
thereunder. Except as set forth in Schedule 5.1(n), neither the Company nor
any of its subsidiaries has received notice (written or oral) that any party
to any Intellectual Property Agreement intends to cancel, terminate or
refuse to renew (if renewable) such Intellectual Property Agreement or
intends to decline to exercise any option or right thereunder.

(iv) Except as disclosed in Schedule 5.1(n), to the Company's knowledge,
the operation of the business of the Company and its subsidiaries as
presently conducted and, as proposed to be conducted through the Effective
Date (including without limitation, the manufacture, sale, use, trade dress,
packaging, license, or other exploitation of products and technology
currently marketed or in development) does not and will not infringe,
trespass or otherwise violate the valid Intellectual Property rights of any
person. Without limiting the foregoing, and except as disclosed

A-14
<PAGE>
in the Company Reports or as disclosed in Schedule 5.1(n), neither the
Company nor any of its subsidiaries has received any notice (written or
oral) of any infringement of any Intellectual Property right held by another
person; and, there is no reasonable basis for such a claim. Except as set
forth in the Intellectual Property Agreements, neither the Company nor any
of its subsidiaries is obligated to indemnify any person for any material
liability, cost or expense arising from such person's use, sale, licensing
or disposition of any Intellectual Property or such person's manufacture,
use, sale, license or other exploitation of any product or technology.
Mallinckrodt Inc. has assumed all of the Company's and its subsidiaries'
obligations and liabilities relating to or arising out of Intellectual
Property disputes involving OPTISON in the Mallinckrodt Territory.

(v) As used herein, the following capitalized terms shall have the
meanings ascribed to them as set forth below: "INTELLECTUAL PROPERTY" shall
mean any and all Patents, Trademarks, Copyrights, and Trade Secrets.
"PATENTS" shall mean patents, including U.S. and foreign patents, pending
patent applications and counterparts (whether original, reissue, reexamine,
division, continuation, continuation-in-part, or extension thereof), patent
disclosures and invention disclosures. "TRADEMARKS" shall mean trademarks,
trade names, trade dress, domain names, service marks, or copyrights (in
each case, whether registered or not) as well as any application therefor or
registration thereof and all goodwill associated therewith.

(o) TITLE TO PROPERTY AND ASSETS. Except as disclosed on Schedule 5.1(o),
the Company and each of its subsidiaries has good and valid title to, or in the
case of leased properties and assets, valid leasehold interests in, all of its
properties and assets, free and clear of all Liens, except (i) as reflected in
the financial statements included in the Form 10-K, (ii) Liens for taxes not yet
due and payable and (iii) for Liens and imperfections of title which are not
material in character, amount or extent, and which do not materially impair the
Company's ownership or use of such property or assets.

(p) TAX RETURNS AND PAYMENTS.

(i) The Company and each of its subsidiaries has timely filed, in
accordance with applicable law, all Tax Returns (as defined below) that it
was required to file, (ii) all such Tax Returns were correct and complete in
all material respects, (iii) all material Taxes due and payable by the
Company and each of its subsidiaries (whether or not shown on any Tax
Return) have been paid, (iv) neither the Company nor any of its subsidiaries
currently is the beneficiary of any extension of time within which to file
any Tax Return, (v) since December 31, 1997, no written claim has been made
with respect to the Company or any of its subsidiaries by an authority in a
jurisdiction where the Company or any of its subsidiaries does not file Tax
Returns that the Company or any of its subsidiaries is or may be subject to
taxation by that jurisdiction, and (vi) there are no security interests or
other encumbrances on any of the assets of the Company or any of its
subsidiaries that arose in connection with any failure (or alleged failure)
to pay any Tax (as defined below).

(ii) The Company and each of its subsidiaries has withheld and paid all
material Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other third party.

(iii) There is no dispute or claim concerning any Tax liability of the
Company or any of its subsidiaries either (i) claimed or raised by any
authority in writing or (ii) with respect to any potentially material Tax
liability, as to which any of the officers (and employees responsible for
Tax matters) of the Company or any of its subsidiaries has knowledge based
upon personal contact with any agent of such authority. Schedule 5.1(p)
lists all federal, all state, all material local, and all material foreign
income and franchise Tax Returns filed with respect to the Company and each
of its subsidiaries for taxable periods ended on or after December 31, 1997,
indicates those Tax Returns that have been audited, and indicates those Tax
Returns that currently are the subject of audit. The Company has delivered
to the Purchaser correct and complete copies of all federal

A-15
<PAGE>
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Company and each of its subsidiaries
since December 31, 1997.

(iv) Neither the Company nor any of its subsidiaries has waived any
statute of limitations in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency.

(v) Neither the Company nor any of its subsidiaries has filed a consent
under Code Section341(f) concerning collapsible corporations. Neither the
Company nor any of its subsidiaries has been a United States real property
holding corporation within the meaning of Code Section897(c)(2) during the
applicable period specified in Code Section897(c)(1)(A)(ii). Neither the
Company nor any of its subsidiaries (i) has been a member of an affiliated
group filing a consolidated federal income Tax Return, or any similar state,
local or foreign consolidated, combined or unitary Tax Return (other than a
group of which the Company was the common parent corporation) and (ii) has
any liability for the Taxes of any person or entity (other than the Company)
under Reg. Section1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, or otherwise.

(vi) The provision for taxes of the Company and each of its subsidiaries
as set forth in the most recent balance sheet included in the consolidated
financial statements forming a part of the Form 10-K is adequate for all
Taxes due or accrued as of the date thereof, whether or not shown as being
due on any Tax Returns or reports.

(vii) Except as set forth on Schedule 5.1(p) hereto, neither the Company
nor any of its subsidiaries has made, is obligated to make, or is a party to
any agreement that could reasonably be expected to obligate it to make, any
payments that are "excess parachute payments" within the meaning of
Section 280G of the Code (determined without regard to whether any portion
of such payment is reasonable compensation for personal services actually
rendered).

(viii) "TAX" or "TAXES" means any federal, state, local, or foreign
income, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including taxes
under Code Section59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not.

(ix) "TAX RETURN" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.

(q) INSURANCE. Schedule 5.1(q) sets forth a complete and accurate list of
all insurance policies maintained by the Company and each of its subsidiaries or
for the benefit of the Company and each of its subsidiaries, respectively. Such
policies are in full force and effect, and all premiums due thereon have been
paid. The Company and each of its subsidiaries has complied in all material
respects with the terms and provisions of such policies.

(r) LABOR AGREEMENTS AND ACTIONS. Neither the Company nor any of its
subsidiaries is bound by or subject to (and none of their respective assets or
properties is bound by or subject to) any written or oral, express or implied,
Contract or arrangement with any labor union, and no labor union has requested
or has sought to represent any of the employees of the Company or any of its
subsidiaries. There is no strike or other labor dispute involving the Company or
any of its subsidiaries pending or threatened, nor is the Company or any of its
subsidiaries aware of any labor organization activity involving their respective
employees.

A-16
<PAGE>
(s) VOTING ARRANGEMENTS. To the Company's knowledge there are no
outstanding stockholder agreements, voting trusts, proxies or other arrangements
or understandings among the stockholders of the Company or any of its
subsidiaries relating to the voting of their respective shares.

(t) ENVIRONMENTAL. (i) The businesses as presently or formerly engaged in
by the Company and each of its subsidiaries are and have been conducted in
compliance in all material respects with all applicable Environmental Laws (as
defined below), including, without limitation, having all required permits,
licenses and other approvals and authorizations, during the time the Company and
each of its subsidiaries engaged in such businesses, (ii) the properties
presently or formerly owned or operated by the Company and each of its
subsidiaries (including, without limitation, soil, groundwater or surface water
on, under or adjacent to the properties, and buildings thereon) (the
"PROPERTIES") do not contain any Hazardous Substance (as defined below) other
than as permitted under applicable Environmental Law (provided, however, that
with respect to Properties formerly owned or operated by the Company or any of
its subsidiaries, such representation is limited to the period the Company or
any of its subsidiaries owned or operated such Properties), (iii) except as
disclosed on Schedule 5.1(t), neither the Company nor any of its subsidiaries
has received any notices, demand letters or request for information from any
Governmental Entity or any third party indicating that the Company or any of its
subsidiaries may be in violation of, or liable under, any Environmental Law in
connection with the ownership or operation of the Company's or any of its
subsidiaries' businesses, (iv) there are no civil, criminal or administrative
actions, suits, demands, claims, hearings, investigations or proceedings pending
or threatened against the Company or any of its subsidiaries with respect to the
Company or any of its subsidiaries or the Properties relating to any violation,
or alleged violation, of any Environmental Law, (v) no reports have been filed,
or are required to be filed, by the Company or any of its subsidiaries
concerning the release of any Hazardous Substance or the threatened or actual
violation of any Environmental Law on or at the Properties, (vi) no Hazardous
Substance has been disposed of, transferred, released or transported from any of
the Properties during the time such Property was owned or operated by the
Company or any of its subsidiaries, other than as permitted under applicable
Environmental Law, (vii) there have been no environmental investigations,
studies, audits, tests, reviews or other analyses conducted by or which are in
the possession of the Company or any of its subsidiaries relating to the
Company, any of its subsidiaries or the Properties which have not been delivered
to the Purchaser prior to the date hereof, (viii) there are no underground
storage tanks on, in or under any of the Properties and no underground storage
tanks have been closed or removed from any Properties which are or have been in
the ownership of the Company or any of its subsidiaries (provided, however, that
with respect to Properties formerly owned or operated by the Company or any of
its subsidiaries, the representations in this subsection (viii) are limited to
the period the Company and any of its subsidiaries owned or operated such
Properties), (ix) there is no asbestos present in any Property presently owned
or operated by the Company or any of its subsidiaries, and no asbestos has been
removed from any Property while such Property was owned or operated by the
Company or any of its subsidiaries, (x) none of the Properties has been used at
any time by the Company or any of its subsidiaries as a sanitary landfill or
hazardous waste disposal site and (xi) neither the Company nor any of its
subsidiaries has incurred, and none of the Properties (provided, however, that
with respect to Properties formerly owned or operated by the Company or any of
its subsidiaries, such representation is limited to the period the Company or
any of its subsidiaries owned or operated such Properties) are presently subject
to, any material Liabilities (fixed or contingent) relating to any suit,
settlement, court order, administrative order, judgment or claim asserted or
arising under any Environmental Law.

"ENVIRONMENTAL LAW" means (i) any federal, state and local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
legal doctrine, order, judgment, decree, consent, injunction, requirement or
agreement between the Company, any of its subsidiaries and any Governmental
Entity, (x) relating to the protection, preservation or restoration of the
environment, (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface land, subsurface land, plant and
animal life or any other natural resource), or to human health

A-17
<PAGE>
or safety, or (y) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production, release
or disposal of Hazardous Substances, in each case as amended and as now or
hereafter in effect, and (ii) any common law rule that may impose liability or
obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Substance. The term Environmental Law
includes, without limitation, the federal Comprehensive Environmental Response
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
federal Clean Air Act, the federal Clean Water Act, the federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the federal Solid Waste Disposal Act and the federal Toxic
Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act,
the Federal Occupational Safety and Health Act of 1970, each as amended and as
now or hereafter in effect.

"HAZARDOUS SUBSTANCE" means any substance presently or hereafter listed,
defined, designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any substance containing any such substance as a component.
Hazardous Substance includes, without limitation, any toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste, industrial substance or petroleum or any derivative or by-product
thereof, radon, radioactive material, asbestos, asbestos containing material,
urea formaldehyde foam insulation, lead and polychlorinated biphenyl.

(u) MINUTE BOOKS. The Company and each of its subsidiaries have made
available to Purchaser all minutes of meetings of directors, committees and
stockholders which reflect all transactions referred to in such minutes
accurately in all material respects.

(v) REAL PROPERTY HOLDING COMPANY. Neither the Company nor any of its
subsidiaries is a "United States real property holding corporation" (as that
term is defined in Section 897(c)(2) of the Code).

(w) INFORMATION. Neither this Agreement, any schedule or exhibit hereto,
nor any other non-forward looking written statements or certificates delivered
in connection herewith contains any untrue statement of a material fact made by
the Company or any of its subsidiaries or omits to state a material fact
required to be stated herein or therein by the Company or any of its
subsidiaries or necessary to make the statements made by the Company or any of
its subsidiaries herein or therein, in light of the circumstances in which they
were made, not misleading.

5.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. The Purchaser represents
and warrants to the Company that:

(a) CORPORATE ORGANIZATION AND QUALIFICATION. Each of the Purchaser and
the Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York and Delaware, respectively, and
is in good standing as a foreign corporation in each jurisdiction where the
properties owned, leased or operated, or the business conducted, by it require
such qualification except for such failure to so qualify or to be in such good
standing, which, when taken together with all other such failures, could not
reasonably be expected to have a material adverse effect on the Purchaser or its
business, condition (financial or otherwise), properties, prospects or results
of operations or Liabilities of the Purchaser and its subsidiaries, taken as a
whole (a "PURCHASER MATERIAL ADVERSE EFFECT"). Each of the Purchaser and the
Merger Sub has the requisite corporate power and authority to carry on its
business as it is now being conducted. The Purchaser has made available to the
Company a complete and correct copy of the Certificate of Incorporation and
By-laws of the Purchaser and the Merger Sub, each as amended to date. The
Certificates of Incorporation and By-laws so delivered are in full force and
effect.

A-18
<PAGE>
(b) CORPORATE AUTHORITY. Each of the Purchaser and the Merger Sub has the
requisite corporate power and authority and has taken all corporate action
necessary in order to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. This Agreement is a valid and binding
agreement of each of the Purchaser and the Merger Sub, enforceable against the
Purchaser and the Merger Sub in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally.

(i) Other than the Regulatory Filings, no notices, reports or other
filings are required to be made by the Purchaser or the Merger Sub with, nor
are any consents, registrations, approvals, permits or authorizations
required to be obtained by the Purchaser or the Merger Sub from, any
Governmental Entity in connection with the execution and delivery of this
Agreement by the Purchaser and the Merger Sub and the consummation by the
Purchaser and the Merger Sub of the transactions contemplated hereby, the
failure to make or obtain any or all of which could prevent, materially
delay or materially burden the transactions contemplated by this Agreement.

(ii) The execution and delivery of this Agreement by the Purchaser and
the Merger Sub do not, and the consummation of the transactions contemplated
hereby by the Purchaser and the Merger Sub will not, constitute or result in
(i) a breach or violation of, or a default under, the Certificate of
Incorporation or By-laws of the Purchaser or the Merger Sub or (ii) a breach
or violation of, a default under, the acceleration of or the creation of a
material Lien upon the assets of the Purchaser pursuant to, any provision of
any Contract of the Purchaser or the Merger Sub or any law, ordinance,
rule or regulation or judgment, decree, order, award or governmental or
non-governmental permit or license to which the Purchaser or the Merger Sub
is subject, except, in the case of clause (ii) above, for such breaches,
violations, defaults or accelerations that, alone or in the aggregate, could
not prevent, materially delay or materially burden the transactions
contemplated by this Agreement.

(d) CAPITAL STRUCTURE; PURCHASER SHARES. The authorized capital stock of
Purchaser consists of 75,000,000 shares of Purchaser Common Stock and 5,000,000
shares of preferred stock, par value $.01 per share ("PURCHASER PREFERRED
STOCK"). At the close of business on June 30, 2000, (i) 47,233,454 shares of
Purchase Common Stock were issued and outstanding, (ii) 12,392,759 shares of
Purchaser Common Stock were reserved for issuance pursuant to stock options
plans or agreements to purchase shares of Purchaser Common Stock, and
(iii) 500,000 shares of Purchaser Preferred Stock designated as Series F
Preferred Stock were issued and outstanding. All Purchaser Shares to be issued
as part of the Merger Consideration will be, when so issued, duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. The Purchaser Shares will be approved for inclusion on the Nasdaq
National Market System.

(e) PURCHASER REPORTS.

(i) The Purchaser has filed with the SEC and delivered to the Company
its Form 10-K for the year ended June 30, 2000 and other reports, schedules,
forms, statements and other documents (collectively, "PURCHASER REPORTS")
filed or required to be filed since June 30, 2000. As of their respective
dates, the Purchaser Reports complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC promulgated thereunder applicable
to the Purchaser Reports, and the Purchaser Reports did not, and any
Purchaser Reports filed with the SEC subsequent to the date hereof will not,
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Purchaser included in
Purchaser Reports comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, have been

A-19
<PAGE>
prepared in accordance with GAAP (except, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present the consolidated financial position of the
Purchaser and its subsidiaries as of the dates thereof and their
consolidated statements of operations, stockholders equity and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments). The Purchaser has delivered to the
Company a copy of the financial statements included in the Purchaser's
Annual Report on Form 10-K for the year ended June 30, 2000 (including an
auditor's opinion). Except as set forth in the Purchaser Reports, to the
Purchaser's knowledge, the Purchaser has no Liabilities required by GAAP to
be set forth on a balance sheet of the Purchaser or in the notes thereto,
other than Liabilities incurred in the ordinary course of business
consistent with prior practice and experience since June 30, 2000.

(ii) None of the information supplied or to be supplied by the Purchaser
for inclusion in the Proxy Statement/Prospectus will at the time of mailing
of the Proxy Statement/Prospectus to stockholders of the Company or at the
time of the meeting of such stockholders to be held in connection with the
Merger, contain any untrue statement of a material fact or omits or will
omit to state any material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under
which they are made, not misleading. The Proxy Statement/Prospectus will
comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder, except that no
representation is made by the Purchaser with respect to information supplied
by the Company for inclusion therein.

(f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in Purchaser
Reports filed with the SEC and publicly available prior to the date hereof,
since June 30, 2000, the Purchaser has conducted its business only in the
ordinary course, and there has not been any change in the assets, liabilities,
financial condition, operating results or prospects of the Purchaser from that
reflected in the most recent financial statements filed with the SEC as part of
the Purchaser Reports and publicly available prior to the date hereof, except
for changes which have not had (either individually or in the aggregate), and
could not reasonably be expected to have (either individually or in the
aggregate), a Purchaser Material Adverse Effect.

(g) BROKERS AND FINDERS. Neither the Purchaser nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders, fees in connection
with the transactions contemplated herein.

(h) INFORMATION. Neither this Agreement nor any other statements or
certificates made or delivered in connection herewith contains any untrue
statement of a material fact made by the Purchaser or omits to state a material
fact required to be stated herein or therein by the Purchaser or necessary to
make the statements made by the Purchaser herein or therein not misleading.

ARTICLE VI.
COVENANTS

6.1 INTERIM OPERATIONS OF THE COMPANY. The Company covenants and agrees
that except as described on Schedule 6.1, prior to the Effective Time (unless
the Purchaser shall otherwise agree in writing (which agreement shall not be
unreasonably withheld) and except as otherwise contemplated by this Agreement):

(a) the Company shall, and shall cause each subsidiary thereof to, conduct
its respective businesses only in the ordinary and usual course and, to the
extent consistent therewith, the Company shall use its best efforts to preserve
its business organization intact and maintain its existing relations with
customers, suppliers, employees, corporate partners, licensees and business
associates;

A-20
<PAGE>
(b) the Company shall not nor shall it permit any of its subsidiaries to
(i) create any subsidiaries; (ii) amend its charter documents; (iii) split,
combine or reclassify the outstanding Shares or any other shares of capital
stock of the Company or such subsidiary; or (iv) declare, set aside or pay any
dividend payable in cash, stock or property with respect to the Shares;

(c) the Company shall not, nor shall it permit any subsidiary to,
(i) issue, sell, pledge, dispose of or encumber any additional shares of, or
securities convertible or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of its capital stock of
any class of the Company or such subsidiary or any other property or assets
other than (x) Shares issuable upon exercise of the Company Warrants outstanding
on the date hereof and (y) Shares issuable pursuant to options outstanding on
the date hereof under the Company Stock Option Plan; (ii) transfer, lease,
license, guarantee, sell, mortgage, pledge, dispose of or encumber any assets,
including, without limitation, all intellectual property and technology rights
which it owns or uses, or enter into any collaboration; (iii) incur or modify
any indebtedness or other liability, except in the ordinary course of business
consistent with past practice; (iv) acquire directly or indirectly by redemption
or otherwise any shares of the capital stock of the Company or such subsidiary
or (v) authorize capital expenditures or make any acquisition of, or investment
in, assets or stock of any other person or entity;

(d) except as otherwise provided herein, the Company shall not grant any
severance or termination pay to, or enter into any employment or severance
agreement with, any director, officer or other employee of the Company or such
subsidiary; and the Company shall not, nor shall it permit any subsidiary to,
establish, adopt, enter into, make any new grants or awards under or amend, any
collective bargaining, bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, employee stock ownership,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any directors,
officers or employees;

(e) the Company shall not, nor shall it permit any subsidiary to, settle or
compromise any material claims or litigation or modify, amend or terminate any
of its Contracts or waive, release or assign any material rights or claims;

(f) the Company shall not, nor shall it permit any subsidiary to, make any
tax election or permit any insurance policy naming it as a beneficiary or a loss
payable payee to be canceled or terminated without notice to the Purchaser;

(g) the Company shall not, nor shall it permit any subsidiary to, take any
of the actions described in Section 5.1(f);

(h) except as expressly permitted hereunder, the Company shall not, nor
shall it permit any subsidiary to, authorize or enter into an agreement to do
any of the foregoing; and

(i) the Company shall, within twenty (20) days after the end of each
calendar month, furnish to the Purchaser an unaudited consolidated balance sheet
and consolidated income statement as of the end of such month, together with
statements of retained earnings and cash flow for such period, all in detail
reasonably satisfactory to the Purchaser and furnished with a certificate signed
by the Chief Financial Officer or Chief Executive Officer stating that, to his
knowledge, such financial statements have been prepared in accordance with GAAP
(subject to normal year-end adjustments and the addition of footnotes or other
explanatory material associated with its financial statements prepared in
accordance with GAAP) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly and accurately
present the financial position and results of operations of the Company and its
subsidiaries for such periods, and have been prepared in accordance with the
books and records of the Company on a consistent basis.

A-21
<PAGE>
6.2 ACQUISITION PROPOSALS.

(a) The Company shall not, nor shall it permit any subsidiary to, (and the
Company shall use its best efforts to cause its officers, directors, employees,
representatives and agents, including, but not limited to, investment bankers,
attorneys and accountants, not to), directly or indirectly, encourage, solicit,
participate in or initiate discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity or group
(other than the Purchaser or any of its affiliates or representatives)
concerning any merger, tender offer or exchange offer, involving the Company or
any subsidiary thereof or the sale of all or a significant portion of the
assets, or the sale of shares of capital stock or debt securities of the Company
or any subsidiary thereof, or any similar transaction involving the Company or
any subsidiary thereof (an "ACQUISITION PROPOSAL"). The Company will, and will
cause each subsidiary to, immediately cease any existing activities, discussions
or negotiations with any parties conducted heretofore with respect to any of the
foregoing. Notwithstanding the foregoing, the Company may (i) furnish
information concerning its business, properties or assets to any corporation,
partnership, person or other entity or group pursuant to appropriate
confidentiality agreements (which request is unsolicited after the date of this
Agreement), and (ii) negotiate and participate in discussions and negotiations
with any such entity or group concerning an Acquisition Proposal (x) if such
entity or group has submitted a bona fide written proposal to the Board of
Directors of the Company relating to any such transaction which the Board
determines represents a Superior Proposal (as defined in Section 6.2(b)) and (y)
if, in the opinion of the Board of Directors of the Company, only after receipt
of advice from outside legal counsel to the Company, the failure to engage in
such discussions or negotiations would cause the Board of Directors to violate
its fiduciary duties to the Company's stockholders under applicable law. The
Company will promptly communicate to the Purchaser the terms of any proposal,
discussion, negotiation or inquiry (and will disclose the substance of any
written materials received by the Company in connection with such proposal,
discussion, negotiation, or inquiry) and the identity of the party making such
proposal or inquiry which it may receive in respect of any such transaction.

(b) Subject to the following sentence, the Board of Directors of the Company
shall not (i) withdraw or modify, or propose to withdraw or modify, in a manner
adverse to the Purchaser, the approval or recommendation by such Board of
Directors of the Merger, (ii) solicit, approve or recommend, or propose to
solicit, approve or recommend, any Acquisition Proposal or (iii) approve or
authorize the Company or any of its subsidiaries entering into any agreement
with respect to any Acquisition Proposal. Notwithstanding the foregoing, in the
event the Board of Directors of the Company receives an Acquisition Proposal
that, based on the advice of outside counsel, the Board of Directors is required
to consider in the exercise of its fiduciary obligations and that it determines
to be a Superior Proposal, the Board of Directors may (subject to the following
sentences) withdraw or adversely modify its approval or recommendation of the
Merger and approve or recommend any such Superior Proposal, approve or authorize
the Company's entering into an agreement with respect to such Superior Proposal,
approve the solicitation of additional Acquisition Proposals or terminate this
Agreement, in each case at any time after the fifth business day following
notice to the Purchaser (a "NOTICE OF SUPERIOR PROPOSAL") advising the Purchaser
that the Board of Directors has received a Superior Proposal, specifying the
material terms of the structure of such Superior Proposal. The Company may take
any of the foregoing actions pursuant to the preceding sentence only if an
Acquisition Proposal that was a Superior Proposal at the time of delivery of a
Notice of Superior Proposal continues to be a Superior Proposal in light of any
improved transaction proposed by the Purchaser prior to the expiration of the
five business day period specified in the preceding sentence. In addition, if
the Board of Directors proposes to withdraw or adversely modify its approval or
recommendation of the Merger or to approve or recommend any Acquisition Proposal
or to authorize the Company's entering into an agreement with respect to any
Acquisition Proposal, concurrently with withdrawing or adversely modifying such
approval or recommendation, approving or recommending such Acquisition Proposal
or authorizing or approving the Company or any of its subsidiaries entering

A-22
<PAGE>
into such agreement, the Company shall pay, or cause to be paid, to the
Purchaser the Termination Fee (as defined in Section 8.2(b)) upon the
consummation of the transaction contemplated by such agreement. For purposes of
this Agreement, a "SUPERIOR PROPOSAL" means any bona fide Acquisition Proposal
to merge with the Company or any of its subsidiaries or to acquire, directly or
indirectly, a material equity interest in or a significant amount of voting
securities or assets of the Company or any of its subsidiaries for consideration
consisting of cash and/or securities, and otherwise on terms which the Board of
Directors of the Company determines in its good faith reasonable judgment (based
on the advice of a financial advisor of nationally recognized reputation,
including, without limitation, Prudential Vector) to provide greater aggregate
value to the Company's stockholders than the Merger (or otherwise proposed by
the Purchaser as contemplated above). Nothing contained herein shall prohibit
the Company from taking and disclosing to its stockholders a position
contemplated by Rule 14d-9(e) under the Exchange Act prior to the third business
day following Purchaser's receipt of a Notice of Superior Proposal provided that
the Company does not withdraw or modify its position with respect to the Merger
or approve or recommend an Acquisition Proposal.

6.3 MEETINGS OF COMPANY'S STOCKHOLDERS. The Company will take, consistent
with applicable law and its Certificate of Incorporation and By-laws, all action
necessary to convene a meeting of holders of Shares as promptly as practicable
to consider and vote upon the approval of this Agreement and the Merger. Except
as permitted pursuant to Section 6.2 and subject to its fiduciary duties, as
advised by outside counsel, the Board of Directors of the Company shall
recommend such approval and the Company shall take all lawful action to solicit
such approval. At any such meeting of the Company all of the Shares then owned
by Purchaser Companies and any affiliates thereof will be voted in favor of this
Agreement. The Company will promptly prepare and file with the SEC, will use its
reasonable best efforts to have cleared by the SEC and will thereafter mail to
its stockholders as promptly as practicable the Proxy Statement/Prospectus.

6.4 FILINGS; OTHER ACTION. Subject to the terms and conditions herein
provided, the Company and the Purchaser shall: (a) promptly make their
respective filings and thereafter make any other required submissions under all
Regulatory Filings with respect to the Merger; and (b) use their best efforts to
promptly take, or cause to be taken, all other action and do, or cause to be
done, all other things necessary, proper or appropriate under applicable laws
and regulations to consummate and make effective the transactions contemplated
by this Agreement as soon as practicable.

6.5 ACCESS. Upon reasonable notice, the Company shall, and shall cause its
subsidiaries to, afford the Purchaser's officers, employees, counsel,
accountants and other authorized representatives ("REPRESENTATIVES") access,
during normal business hours throughout the period prior to the Effective Time,
to its properties, books, Contracts and records and, during such period, the
Company shall furnish promptly to the Purchaser all information concerning its
business, properties and personnel as the Purchaser or its representatives may
reasonably request.

6.6 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice
to the Purchaser of any notice of, or other communication relating to, any
default or event that, with notice or lapse of time or both, would become a
default, received by the Company or any of its subsidiaries subsequent to the
date of this Agreement and prior to the Effective Time, under any Contract to
which the Company or such subsidiary is a party or by which the Company or any
of its properties or assets is subject or bound. The Company shall give prompt
notice to the Purchaser of (i) any change or the occurrence of any event which,
so far as reasonably can be foreseen at the time of its occurrence, is
reasonably likely to result in a Company Material Adverse Effect (ii) any notice
or other communication from any third party alleging that the consent of such
third party is or may be required in connection with the transactions
contemplated by this Agreement and (iii) any material development which may
affect the Company, its subsidiaries or their respective business, condition
(financial or otherwise), properties, prospects or results of operations or
Liabilities, whether or not such development could be likely to result in a
Material Adverse Change.

A-23
<PAGE>
6.7 PUBLICITY. The initial press release with respect to the transactions
contemplated hereby shall be a joint press release by the Company and the
Purchaser and thereafter the Company and the Purchaser shall consult with each
other prior to issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and prior to making any
filings with any Governmental Entity or with any national securities exchange
with respect thereto.

6.8 TAKEOVER STATUTES. If any "fair price," "moratorium," "control share
acquisition" or other form of antitakeover statute or regulation shall become
applicable to the transactions contemplated hereby, the Company and the members
of the Board of Directors of the Company shall grant such approvals and take
such actions as are necessary so that the Merger and the transactions
contemplated hereby may be consummated as promptly as practicable on the terms
contemplated hereby and otherwise act to eliminate or minimize the effects of
such statute or regulation on the transactions contemplated hereby and thereby,
except, in each such case, as would not be consistent with the fiduciary
obligations of the Board of Directors as advised in writing by outside counsel.

6.9 AFFILIATES AGREEMENTS. Prior to Closing, the Company shall deliver to
the Purchaser a letter identifying all persons who are at the time this
Agreement is submitted to the stockholders of the Company for approval
"affiliates" of the Company for purposes of Rule 145 under the Securities Act.
The Company shall use its best efforts to cause each such person to deliver to
Purchaser on or prior to the Effective Time a written agreement substantially in
the form of Exhibit A hereto.

6.10 LETTER OF THE COMPANY'S ACCOUNTANTS. The Company shall cause to be
delivered to the Purchaser a letter of Arthur Andersen LLP, the Company's
independent auditors, dated a date within two business days before the date on
which the Registration Statement shall become effective and addressed to the
Purchaser, in form and substance reasonably satisfactory to the Purchaser and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement.

6.11 REGISTRATION STATEMENT. The Purchaser and the Company shall promptly
prepare and file with the SEC the Registration Statement. Each of the Company
and Purchaser shall use all reasonable efforts to have the Registration
Statement declared effective under the Securities Act as promptly as practicable
after such filing. Purchaser shall also use its reasonable effort to obtain
prior to the date the Registration Statement is declared effective all necessary
state securities law or "blue sky" permits and approvals required to consummate
the Merger and the other transactions contemplated by this Agreement.

6.12 INDEMNIFICATION OF DIRECTORS AND OFFICERS.

(a) The Surviving Corporation agrees that all rights to indemnification
existing in favor of the directors, officers or employees of the Company (with
their respective heirs and legal representatives, the "INDEMNIFIED PARTIES") as
provided in the Company's Certificate of Incorporation or By-laws, as in effect
as of the date hereof, with respect to matters occurring through the Effective
Date, shall survive the Merger and shall continue in full force and effect for a
period of six (6) years from the Effective Date. The Surviving Corporation
agrees to maintain in effect for six (6) years after the Effective Date the
current policies of directors' and officers' liability insurance maintained by
the Company with respect to matters occurring prior to the Effective Date;
provided, however, that (i) the Surviving Corporation may substitute therefor
policies with coverage limits of $5,000,000 (with carriers comparable to the
Company's existing carriers) containing terms and conditions which are no less
advantageous to the Indemnified Parties (except with respect to the $5,000,000
coverage limit) and (ii) notwithstanding the foregoing, the Purchaser shall not
be required to pay an annual premium for such insurance in excess of one and
one-half times the last annual premium paid prior to the date hereof, but in
such case the Purchaser shall purchase as much coverage as possible for such
amount. Copies of the indemnification insurance policies, policy numbers
486-56-75 (National Union) and YXB001537 (Genesis), which constitute all the
insurance policies currently maintained by the Company

A-24
<PAGE>
in connection with the indemnification of its directors, officers and employees
(the "INDEMNIFICATION POLICIES"), have been provided to the Purchaser.

(b) In the event that any action, suit, proceeding or investigation relating
hereto or to the transactions contemplated by this Agreement is commenced,
whether before or after the Effective Date, the parties hereto agree to
cooperate and use their respective commercially reasonable efforts to vigorously
defend against and respond thereto.

(c) This Section is intended to benefit the Indemnified Parties and shall be
binding on all successors and assigns of the Purchaser, the Company and the
Surviving Corporation.

6.13 NO CHANGES IN PURCHASER SHARES. If, between the date of this
Agreement and the Effective Time, the Purchaser shall effect any
reclassification, recapitalization, split-up, amendment to the terms of,
combination or readjustment of Purchaser Shares, the consideration to be
received by Company's stockholders pursuant to this Agreement shall be
appropriately adjusted.

6.14 VOTING AGREEMENT. As an inducement to the Purchaser and Merger Sub to
enter into this Agreement, the Company shall use all reasonable effort to enter
into a Voting Agreement with Mallinckrodt, Inc., Chugai Pharmaceutical Company,
Ltd., State of Wisconsin Investment Board and all members of management pursuant
to which such stockholders shall vote to approve this Agreement.

ARTICLE VII.
CONDITIONS

7.1 CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligation of the
Purchaser to consummate the Merger is subject to the fulfillment of each of the
following conditions, any or all of which may be waived in whole or in part by
the Purchaser to the extent permitted by applicable law:

(a) STOCKHOLDER APPROVAL. This Agreement shall have been duly approved by
the holders of a majority of the Shares, in accordance with applicable law and
the Certificate of Incorporation and By-laws of the Company;

(b) GOVERNMENTAL AND REGULATORY CONSENTS. Except such as would not have a
Company Material Adverse Effect or a Purchaser Material Adverse Effect, all
filings required to be made prior to the Effective Time by the Company with, and
all consents, approvals and authorizations required to be obtained prior to the
Effective Time by the Company from, any Governmental Entity in connection with
the execution and delivery of this Agreement by the Company and the consummation
of the transactions contemplated hereby by the Company and Purchaser, shall have
been made or obtained (as the case may be);

(c) OTHER CONSENTS. Any and all notices to or consents or approvals
required from third parties in order to consummate the transactions contemplated
herein relating to Contracts material to the business of the Company shall have
been given or obtained, as the case may be;

(d) LITIGATION. No court or other Governmental Entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered after
the date of this Agreement any statute, rule, regulation, judgment, decree,
injunction or other order (whether temporary, preliminary or permanent) which is
in effect and prohibits consummation of the transactions contemplated by this
Agreement or imposes material restrictions on the Purchaser or the Company or on
any subsidiaries thereof in connection with the consummation of the Merger or
with respect to their business operations, either prior to or subsequent to the
Merger (collectively, an "ORDER");

(e) REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. The
representations and warranties contained in Section 5.1 that are qualified by
materiality or as to a Company Material Adverse Effect shall be true and
correct, and each of the representations and warranties in Section 5.1 that are
not so qualified shall be true and correct in all material respects, as of the
Effective Time as

A-25
<PAGE>
though made at and as of the Effective Time, except for changes contemplated by
this Agreement, and the Company shall have performed all obligations required to
be performed by it under this Agreement at or prior to the Closing Date;

(f) REGISTRATION STATEMENT. The Registration Statement shall have become
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been initiated or be
threatened by the SEC;

(g) ABSENCE OF MATERIAL ADVERSE CHANGE. There shall have been no Material
Adverse Change of the Company prior to the Closing;

(h) NONCOMPETITION AGREEMENTS. Bobba Venkatadri shall have executed and
delivered to the Purchaser a noncompetition agreement in a form reasonably
satisfactory to Purchaser agreeing not to engage in any business relating to the
development, manufacture or sale of ultrasound contrast imaging agents.

(i) DISSENTING SHARES. The number of Dissenting Shares, if any, shall not
exceed 5% of the total number of outstanding Shares;

(j) CHUGAI AGREEMENT. The terms of the Cooperative Development and
Marketing Agreement between the Company and Chugai Pharmaceutical Co., Ltd.
dated March 31, 1998, shall not have been terminated, amended, modified or
altered;

(k) OPINION OF COUNSEL. The Purchaser shall have received a written
opinion from Johnson and Colmar, dated the Closing Date, in substantially the
form attached as Exhibit B;

(l) ENVIRONMENTAL DUE DILIGENCE. The Purchaser and/or its agents shall
have completed an environmental due diligence review of the Company and the
results of such review shall be acceptable to the Purchaser in its sole
discretion; and

(m) OFFICER'S CERTIFICATE. The Company shall have furnished the Purchaser
with a certificate of its appropriate officers as to compliance with the
conditions set forth in Sections 7.1(a), (c), (e), (g), (i), (j) and (k) dated
and effective as of the Closing Date.

7.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the
Company to consummate the Merger are subject to the fulfillment of each of the
following conditions, any or all of which may be waived in whole or in part by
the Company to the extent permitted by applicable law:

(a) STOCKHOLDER APPROVAL. This Agreement shall have been duly approved by
the holders of a majority of the Shares in accordance with applicable law and
the Certificate of Incorporation and By-laws of the Company;

(b) GOVERNMENTAL AND REGULATORY CONSENTS. Except such as would not have a
Company Material Adverse Effect or a Purchaser Material Adverse Effect, all
filings required to be made prior to the Effective Time by the Purchaser with,
and all consents, approvals, permits and authorizations required to be obtained
prior to the Effective Time by the Purchaser from, any Governmental Entity in
connection with the execution and delivery of this Agreement by the Purchaser
and the consummation of the transactions contemplated hereby by the Purchaser
and the Company shall have been made or obtained (as the case may be);

(d) REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. The
representations and warranties contained in Section 5.2 that are qualified by
materiality or as to a Purchaser Material Adverse Effect shall be true and
correct, and each of the representations and warranties in Section 5.2 that are
not so qualified shall be true and correct in all material respects, as of the
Effective Time as though made at and as of the Effective Time, except for
changes contemplated by this Agreement; and

A-26
<PAGE>
the Purchaser shall have performed all obligations required to be performed by
it under this Agreement at or prior to the Closing Date; and

(e) OPINION OF COUNSEL. The Purchaser shall have received a written
opinion from Pillsbury Madison & Sutro LLP, dated the Closing Date, in
substantially the form attached as Exhibit C; and

(f) OFFICER'S CERTIFICATE. The Purchaser shall have furnished the Company
with a certificate of its appropriate officers as to compliance with the
conditions set forth in Section 7.2(d).

ARTICLE VIII.
TERMINATION, AMENDMENT AND WAIVER

8.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the approval by holders of Shares:

(a) by the mutual consent of the Boards of Directors of the Purchaser and
the Company;

(b) by either the Purchaser or the Company (i) if any court or other
Governmental Entity of competent jurisdiction in the United States shall have
issued, enacted, promulgated, enforced or entered an order, statute, decree,
ruling or regulation or taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such order, statute, decree,
ruling, regulation or other action shall have become final and nonappealable or
(ii) if the Merger shall not have been consummated by March 31, 2001;

(c) by the Company (i) if there should be any material breach of the
Purchaser's representations, warranties or covenants hereunder (other than, in
the case of the Purchaser's representations and warranties, breaches which could
not reasonably be expected to have a Purchaser Material Adverse Effect (either
individually or in the aggregate)), which breach shall not be cured within ten
days of written notice thereof, or (ii) to allow the Company to enter into an
agreement which the Board of Directors of the Company determines to be a
Superior Proposal (provided that, upon such termination pursuant to clause
(ii)), the Company shall pay to the Purchaser the Termination Fee described in
Section 8.2(b);

(d) by the Purchaser if the Board of Directors of the Company shall have
(i) withdrawn or modified, or proposed to withdraw or modify, in a manner
adverse to the Purchaser, its approval or recommendation of this Agreement or
the Merger, (ii) solicited, approved or recommended, or proposed to solicit,
approve or recommend, any Acquisition Proposal or (iii) approved or authorized
the Company's entering into any agreement with respect to any Acquisition
Proposal;

(e) by the Purchaser if (i) there should be any material breach of the
Company's representations, warranties or covenants hereunder (other than, in the
case of the Company's representations and warranties, breaches which could not
reasonably be expected to have a Company Material Adverse Effect (either
individually or in the aggregate)), which breach shall not be cured within ten
days of written notice thereof or (ii) the Company and Mallinckrodt, Inc. (or
its successor) fails to terminate the Investment Agreement dated December 7,
1988, between the parties; or

(f) by either the Purchaser or the Company, for any reason, provided that
upon such termination, the party terminating the Agreement shall pay the other
party as liquidated damages the Termination Fee described in
Section 8.2(b) together with such other party's legal and accounting fees costs
in connection with the Merger (the total of which amounts shall not exceed
$500,000).

8.2 EFFECT OF TERMINATION.

(a) In the event of termination of this Agreement as provided above, this
Agreement shall forthwith become void and there shall be no liability on the
part of any of the Purchaser or the Company (except as set forth in
Section 8.2(b) hereof or their respective directors and officers.

A-27
<PAGE>
(b) If after the date hereof and during the term of this Agreement (i) the
Purchaser shall have terminated this Agreement pursuant to Sections 8.1(d) or
8.1(e) or (ii) the Company shall have terminated this Agreement pursuant to
Sections 8.1(c)(ii) or 8.1(f) or (iii) the stockholders of the Company shall
have failed to approve the Merger, as applicable then, in any such case, the
Company, if requested by the Purchaser, shall promptly, but in no event later
than two days after the date of such request, pay the Purchaser a fee of
$500,000 (the "TERMINATION FEE"), together with the Purchaser's legal and
accounting fees costs in connection with the Merger (the total of which amounts
shall not exceed $500,000), which amounts shall be payable in same day funds. If
after the date hereof and during the term of this Agreement (i) the Company
shall have terminated this Agreement pursuant to Section 8.1(c)(i) or (ii) the
Purchaser shall have terminated this Agreement pursuant to Section 8.1(f), then
the Purchaser, if requested by the Company, shall promptly, but in no event
later than two days after the date of such request, pay the Company a fee of
$500,000 (also a "TERMINATION FEE"), together with the Company's legal and
accounting fees in connection with the Merger (the total of which amounts shall
not exceed $500,000). The parties acknowledge that the agreements contained in
this Section 8.2(b) are an integral part of the transactions contemplated in
this Agreement, and that, without these agreements, the parties would not enter
into this Agreement; accordingly, if a party fails to promptly pay the amount
that it is required to pay pursuant to this Section 8.2(b), and, in order to
obtain such payment, the other party commences a suit which results in a
judgment against the defaulting party for the fee and expenses set forth in this
paragraph (b), the defaulting party shall pay to the other party its costs and
expenses (including attorneys' fees) in connection with such suit, together with
interest on the amount of the fee at the prime rate of Bank of America NT&SA on
the date such payment was required to be made.

8.3 AMENDMENT. This Agreement may be amended by the parties hereto by
action taken on behalf of their respective Boards of Directors at any time
before or after approval hereof by the stockholders of the Company, but, after
any such approval, no amendment shall be made which reduces the amount or
changes the form of consideration to be paid in the Merger or in any way
adversely affects the rights of holders of the Shares without the further
approval of such holders. This Agreement may not be amended except by an
instrument in writing signed by or on behalf of each of the parties hereto.

8.4 WAIVER. At any time prior to the Effective Date, the parties hereto,
by action taken by their respective Boards of Directors may (a) extend the time
for performance of any of the obligations or other acts of the other parties
hereto, (b) waive any inaccuracies in the representations and warranties
contained herein or in any other document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.

ARTICLE IX.
MISCELLANEOUS AND GENERAL

9.1 PAYMENT OF EXPENSES. Whether or not the Merger shall be consummated,
each party hereto shall pay its own expenses incident to preparing for, entering
into and carrying out this Agreement and the consummation of the Merger (except
as provided in Section 8.2(b)).

9.2 SURVIVAL. The agreements of the Company and the Purchaser contained in
Sections 4.2 (but only to the extent that such Section expressly relates to
actions to be taken after the Effective Time) and 6.12 shall survive the
consummation of the Merger. The agreements of the Company and the Purchaser
contained in Sections 6.7, 8.2 and 9.1 shall survive the termination of this
Agreement. All other representations, warranties, agreements and covenants in
this Agreement shall not survive the consummation of the Merger or the
termination of this Agreement.

A-28
<PAGE>
9.3 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, but all of which, taken together, shall
constitute one and the same agreement.

9.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.

9.5 NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, IF TO THE
PURCHASER, addressed to the Purchaser at 9333 Genesee Avenue, San Diego,
California 92121 Attn: General Counsel (with a copy to John M. Dunn, Esq.,
Pillsbury Madison & Sutro LLP, 11975 El Camino Real, Suite 200, San Diego,
California 92130; and IF TO THE COMPANY, addressed to the Company at
10030 Barnes Canyon, San Diego, California 92121, Attention: President (with a
copy to Craig P. Colmar, Esq. Johnson and Colmar, 300 South Wacker Drive,
Suite 1000, Chicago, Illinois 60606, or to such other persons or addresses as
may be designated in writing by the party to receive such notice.

9.6 ENTIRE AGREEMENT, ETC. This Agreement (including any exhibits,
schedules or Annexes hereto) (a) constitutes the entire agreement, and
supersedes all other prior agreements, understandings, representations and
warranties both written and oral, between the parties with respect to the
subject matter hereof, and (b) shall not be assignable by operation of law or
otherwise and, except for the Indemnified Parties as provided in Section 6.12 is
not intended to create any obligations to, or rights in respect of, any persons
other than the parties hereto.

9.7 DEFINITION OF "SUBSIDIARY". When a reference is made in this Agreement
to a subsidiary of a party, the word "SUBSIDIARY" means any corporation or other
organization whether incorporated or unincorporated of which at least a majority
of the securities or interests having by the terms thereof ordinary voting power
to elect at least a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such party or by any one or more
of its subsidiaries, or by such party and one or more of its subsidiaries.

9.8 CAPTIONS. The Article, Section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.

A-29
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the day and year first
above written.

<TABLE>
<S> <C> <C>
ALLIANCE PHARMACEUTICAL CORP.

By: /s/ DUANE J. ROTH
--------------------------------------
Name: Duane J. Roth
--------------------------------------
Title: CHAIRMAN AND CHIEF EXECUTIVE OFFICER
--------------------------------------

ALLIANCE MERGER SUBSIDIARY, INC.

MOLECULAR BIOSYSTEMS, INC.

By: /s/ BOBBA VENKATADRI
--------------------------------------
Name: Bobba Venkatadri
--------------------------------------
Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
--------------------------------------
</TABLE>

A-30
<PAGE>
APPENDIX B
OPINION OF PRUDENTIAL SECURITIES

CONFIDENTIAL

October 10, 2000

The Board of Directors
Molecular Biosystems, Inc.
10030 Barnes Canyon Road
San Diego, California 92121

Members of the Board of Directors:

You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders of Molecular Biosystems, Inc. (the "Company"), of the
Exchange Ratio (as defined below) set forth in the Agreement and Plan of Merger
(the "Agreement") by and among Alliance Pharmaceutical Corp. ("Parent"),
Alliance Merger Subsidiary Inc., a wholly-owned subsidiary of Parent ("Merger
Sub"), and the Company.

Pursuant to the Agreement, the Company will be merged with and into Merger
Sub and the Company will be the surviving corporation (the "Merger"). In the
Merger, each share of the Company's common stock, par value $.01 per share (the
"Company Common Stock"), issued and outstanding immediately prior to the
effective time of the Merger (the "Effective Time") will be converted into the
right to receive that fraction of a share of Parent common stock, par value $.01
per share (the "Parent Common Stock"), equal to the "Exchange Ratio" as set
forth in the Agreement.

The Agreement provides that the Exchange Ratio will be calculated by
dividing (1) 770,000 minus the Adjustment Shares (as defined in the Agreement)
by (2) the Company Securities (as defined in the Agreement). The Agreement
calculates the Exchange Ratio as of the date of the Agreement to be, and we
assume for purposes of our opinion that the Exchange Ratio will remain,
0.0407239 shares of Parent Common Stock for each share of Company Common Stock.

In conducting our analysis and arriving at the opinion expressed herein, we
have reviewed such materials and considered such financial and other factors as
we deemed relevant under the circumstances, including:

(i) a draft, received by us on October 6, 2000, of the Agreement;

(ii) certain publicly available historical financial and operating data for
the Company, including, but not limited to: (a) the Company's Annual Report on
Form 10-K for the fiscal year ended March 31,2000; (b) the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000; and (c) the Company's
Proxy Statement for the Annual Meeting of Stockholders held on September 22,
2000;

(iii) historical stock prices and trading volumes for Company Common Stock;

(iv) certain publicly available historical financial and operating data for
Parent, including, but not limited to: (a) Parent's Annual Report on Form 10-K
for the fiscal year ended June 30, 2000; and (b) Parent's Proxy Statement for
the Annual Meeting of Stockholders to be held on November 8, 2000;

(v) historical stock prices and trading volumes for Parent Common Stock;

(vi) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses we deemed reasonably similar
to that of the Company and Parent;

(vii) the financial terms of certain recent merger or acquisition
transactions we deemed relevant to our inquiry; and

B-1
<PAGE>
(viii) such other financial studies, analyses and investigations that we
deemed appropriate.

We have assumed, with your consent, that the draft of the Agreement that we
reviewed (and referred to above) will conform in all material respects to that
document when in final form and that the Merger will be consummated on the terms
described in the Agreement without any waiver of any material terms or
conditions.

We have met with senior management of the Company to discuss the prospects
for the Company's business and such other matters that we deemed relevant.

In connection with our review and analysis and in arriving at our opinion,
we have relied upon the accuracy and completeness of the financial and other
information that is publicly available or was provided to us by the Company and
we have not undertaken any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of the
Company or Parent. Further, we have hot been provided with any such valuation or
appraisal. Our opinion is predicated on the Merger qualifying as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended.

In connection with the preparation of this opinion, we have not been
authorized by the Company or the board of directors to solicit, nor have we
solicited, third party indications of interest for the acquisition of all or any
part of the Company. Our opinion does not address nor should it be construed to
address the relative merits of the Merger or alternative business strategies
that may be available to the Company.

Our opinion is necessarily based on economic, financial and market
conditions as they exist and can be evaluated as of the date hereof. We note
that the Exchange Ratio is fixed, with no floor or collar, and the trading price
of the Parent Common Stock is volatile. Accordingly, the market value of the
consideration received by the Company's stockholders in the Merger may vary
significantly from the value of such consideration as of the date hereof and as
of the dates used by us in our analysis. This opinion does not in any manner
address the prices at which the Parent Common Stock will trade prior to or
following consummation of the Merger. We assume no responsibility to update or
revise our opinion based upon events or circumstances occurring after the date
hereof.

As you know, we have been retained by the Company to render this opinion in
connection with the Merger and will receive an advisory fee for such services.
In the past, we have provided financial advisory services to the Company and
have received fees for such services. In the ordinary course of business, we may
actively trade the shares of Company Common Stock and Parent Common Stock for
our own account and for the accounts of customers and, accordingly, we may at
any time hold a long or short position in such securities.

This letter and the opinion expressed herein are for the use of the board of
directors of the Company. This opinion does not constitute a recommendation to
the stockholders of the Company as to how such stockholders should vote (or
agree to vote) or as to any other action such stockholders should take regarding
the Merger. This opinion may not be reproduced, summarized, excerpted from or
otherwise publicly referred to or disclosed in any manner, without our prior
written consent; except that the Company may include this opinion in its
entirety in any proxy statement or information statement relating to the Merger
sent to the Company's stockholders.

Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Exchange Ratio is fair, from a financial point of view, to
the holders of Company Common Stock.

Very truly yours
PRUDENTIAL SECURITIES INCORPORATED

B-2
<PAGE>
APPENDIX C
DELAWARE GENERAL CORPORATION SECTION 262

SECTION 262. APPRAISAL RIGHTS.

(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one (1) or more shares, or fractions thereof, solely
of stock of a corporation, which stock is deposited with the depository.

(b) Appraisal rights shall be available for the shares of any class of stock
of a constituent corporation in a merger or consolidation to be effected
pursuant to Section251 (other than a merger effected pursuant to Section251(g)
of this title), Section252; Section254, Section257, Section258; Section263 or
Section264 of this title:

(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section251 of this title.

(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:

a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;

b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;

c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or

d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a, b and c of this paragraph.

C-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (!) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.

(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.

(d) Appraisal rights shall be perfected as follows:

(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was. such on the record date for,
such meeting with respect to shares for which appraisal rights are
available, pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on a merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or

(2) If the merger or consolidation was approved pursuant to Section228
or Section253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten 10 days
thereafter, shall notify each of the holders of any class or series of stock
of such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the effective
date of the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and; if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the
effective date of the merger of consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the effective
date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of. any class or
series of stock of such constituent corporation that are entitled to
appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be
sent

C-2
<PAGE>
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent
of the corporation that is required to give either notice that such notice
has been given shall, in the absence of fraud, be prima facie evidence of
the facts stated therein. For purposes of determining the stockholders
entitled to receive either notice, each constituent corporation may fix, in
advance, a record date that shall be not more than 10 days prior to the date
the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to
the effective date, the record date shall be the close of business on the
day. next preceding the day on which the notice is given.

(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.

(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be ma a upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.

(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.

(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all

C-3
<PAGE>
relevant factors, including the rate of interest which the surviving or
resulting corporation would have had to pay to borrow money during the pendency
of the proceeding. Upon application by the surviving or resulting corporation or
by any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings and
may proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not entitled
to appraisal rights under this section.

(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced, as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.

(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the-shares entitled to an appraisal.

(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.

(1) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been convened had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.

C-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Reference is made to Section 6.03 of the bylaws of the Registrant (filed as
Exhibit 3(b) to the Registrant's annual report on Form 10-K for the fiscal year
ended June 30, 1989) and to Sections 721-726 of the New York Business
Corporation Law, which, among other things and subject to certain conditions,
authorize the Registrant to indemnify each of its officers and directors against
certain liabilities and expenses incurred by such persons in connection with
claims made by reason of their being such officers or directors.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following exhibits are filed herewith or incorporated herein by
reference:

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of October 11, 2000,
by and between Alliance Pharmaceutical Corp., Alliance
Merger Subsidiary, Inc. and Molecular Biosystems, Inc.*
3.1 Certificate of Incorporation of Registrant**
3.2 By-laws of Registrant**
5.1 Opinion of Pillsbury Madison & Sutro LLP+
9.1 Voting Agreement with respect to MBI stockholders
23.1 Consent of Independent Auditors
23.2 Consent of Independent Public Accountants
23.3 Consent of Prudential Securities Incorporated++
</TABLE>

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

* See Appendix A to proxy statement-prospectus.

** Filed by incorporation by reference.

+ To be filed by amendment.

++ See Appendix C to the proxy statement-prospectus.

ITEM 22. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) that, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;

(2) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;

(3) that every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in

II-1
<PAGE>
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof;

(4) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of any such request, and to send
the incorporated documents by first class mail or other equally prompt
means, including information contained in documents filed after the
effective date of this registration statement through the date of responding
to such request; and

(5) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in this registration statement when
it became effective.

Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. If a claim of
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in a successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

II-2
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed by the undersigned, thereunto
duly authorized in the city of San Diego, State of California, on the 9th day of
November, 2000.

<TABLE>
<S> <C> <C>
ALLIANCE PHARMACEUTICAL CORP.

By: /s/ THEODORE D. ROTH
----------------------------------------
Theodore D. Roth
PRESIDENT AND CHIEF OPERATING OFFICER
</TABLE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Duane J. Roth and Theodore D. Roth, and each of
them, his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement and to file the same with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof. This power of
attorney may be executed in counterparts.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ DUANE J. ROTH Chairman and Chief Executive November 9, 2000
------------------------------------ Officer
Duane J. Roth

/s/ THEODORE D. ROTH President, Chief Operating November 9, 2000
------------------------------------ Officer and Director
Theodore D. Roth

/s/ TIM T. HART, C.P.A. Chief Financial Officer, November 9, 2000
------------------------------------ Treasurer and Chief Accounting
Tim T. Hart, C.P.A. Officer

/s/ PEDRO CUATRECASAS, M.D. Director November 9, 2000
------------------------------------
Pedro Cuatrecasas, M.D.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ FRED M. HERSHENSON, PH.D. Director November 9, 2000
------------------------------------
Fred M. Hershenson, Ph.D.

/s/ CARROLL O. JOHNSON Director November 9, 2000
------------------------------------
Carroll O. Johnson

/s/ STEPHEN M. MCGRATH Director November 9, 2000
------------------------------------
Stephen M. McGrath

/s/ DONALD E. O'NEILL Director November 9, 2000
------------------------------------
Donald E. O'Neill

/s/ HELEN M. RANNEY, M.D. Director November 9, 2000
------------------------------------
Helen M. Ranney, M.D.

/s/ JEAN RIESS, PH.D. Director November 9, 2000
------------------------------------
Jean Riess, Ph.D.

/s/ THOMAS F. ZUCK, M.D. Director November 9, 2000
------------------------------------
Thomas F. Zuck, M.D.
</TABLE>

II-4
<PAGE>
EXHIBIT INDEX

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

* See Appendix A to proxy statement-prospectus.

** Filed by incorporation by reference.

+ To be filed by amendment.

++ See Appendix C to the proxy statement-prospectus.