ADVANCED MAGNETICS INC, 10-Q, 1999-05-14

ADVANCED MAGNETICS INC
10-Q, 1999-05-14
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.

For the quarterly period ended March 31, 1999
----------------------------

[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.

For the transition period from ___________________ to ___________________

Commission File #0-14732

ADVANCED MAGNETICS, INC.
(Exact name of registrant as specified in its charter)

Delaware 04-2742593
(State or other jurisdiction (IRS Employer Incorporation
of organization) or Identification No.)

61 Mooney Street
Cambridge, MA 02138
(Address of principal executive offices)

Registrant's telephone number, including area code: (617) 497-2070

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

Yes |X| No
---------- ----------

At May 7, 1999, 6,767,660 shares of registrant's common stock (par value, $.01)
were outstanding.

Page 1 of 26
<PAGE> 2

ADVANCED MAGNETICS, INC.

FORM 10-Q

QUARTER ENDED MARCH 31, 1999

PART I. FINANCIAL INFORMATION

Item 1 -- Financial Statements

Page 2 of 26
<PAGE> 3

ADVANCED MAGNETICS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
---------

<TABLE>
<CAPTION>
ASSETS MARCH 31, SEPTEMBER 30,
------ --------- -------------
1999 1998
---- ----

<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 12,925,979 $ 7,704,245
Marketable securities (Note B)...................................... 9,502,501 19,096,942
Accounts receivable................................................. 1,172,871 995,010
Inventories......................................................... 345,384 448,630
Prepaid expenses.................................................... 140,193 228,985
------------------ -------------------
Total current assets.............................................. 24,086,928 28,473,812

Property, plant and equipment:
Land................................................................ 360,000 360,000
Building............................................................ 4,702,080 4,497,005
Laboratory equipment................................................ 8,100,338 8,065,834
Furniture and fixtures.............................................. 763,368 745,560
------------------
-------------------
13,925,786 13,668,399
Less--accumulated depreciation and amortization..................... (8,748,779) (8,331,740)
------------------ -------------------
Net property, plant and equipment................................... 5,177,007 5,336,659

Other assets........................................................ 304,237 304,237
------------------ -------------------
Total assets...................................................... $ 29,568,172 $ 34,114,708
================== ===================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.................................................... $ 294,887 $ 422,993
Accrued expenses.................................................... 696,807 720,266
Income taxes payable................................................ 50,750 52,051
------------------ -------------------
Total current liabilities......................................... 1,042,444 1,195,310

Stockholders' equity:
Preferred stock, par value $.01 per share, authorized
2,000,000 shares; none issued.................................... --- ---
Common stock, par value $.01 per share,
authorized 15,000,000 shares; issued and
outstanding 6,767,660 shares at March 31, 1999
and 6,767,358 shares at September 30, 1998....................... 67,677 67,674
Additional paid-in capital.......................................... 44,277,706 44,277,698
Retained earnings (deficit)......................................... (15,808,670) (12,404,643)
Unrealized gains (losses) on market value of securities (Note B).... (10,985) 978,669
------------------
-------------------
Total stockholders' equity........................................ 28,525,728 32,919,398
------------------
-------------------

Total liabilities and stockholders' equity.......................... $ 29,568,172 $ 34,114,708
================== ===================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

Page 3 of 26
<PAGE> 4

ADVANCED MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED
MARCH 31, 1999 AND 1998
(UNAUDITED)
---------

<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED MARCH 31, SIX-MONTH PERIOD ENDED MARCH 31,
---------------------------------- --------------------------------
1999 1998 1999 1998

- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS

<S> <C> <C> <C> <C>
Revenues:
Royalties................................. $ 200,000 $ 370,000 $ 360,000 $ 740,000
Product sales............................. 1,001,239 619,464 1,318,079 624,024
Contract research and development......... 144,856 --- 389,758 ---
Interest, dividends and net gains
and losses on sales of securities....... 937,638 996,977 1,130,415 1,988,990
--------------- --------------- --------------- ---------------
Total revenues....................... 2,283,733 1,986,441 3,198,252 3,353,014

Cost and expenses:
Cost of product sales..................... 155,903 103,514 268,084 109,319
Contract research and development ........
expenses................................ 15,815 --- 15,815 ---
Company-sponsored research and............
development expenses.................... 1,980,625 2,166,670 4,471,376 4,418,171
Selling, general and administrative
expenses................................ 1,346,808 942,317 2,268,565 1,805,316
--------------- --------------- --------------- ---------------
Total costs and expenses............. 3,499,151 3,212,501 7,023,840 6,332,806

Other (income) expenses................... (421,561) --- (421,561) ---
--------------- --------------- --------------- ---------------

Income (loss) before provision for
income taxes and minority interest in (793,857) (1,226,060) (3,404,027) (2,979,792)
subsidiary.....................................
Provision for income taxes................ --- --- --- ---
--------------- --------------- --------------- ---------------
Income (loss) before minority interest (793,857) (1,226,060) (3,404,027) (2,979,792)
in subsidiary................................
Minority interest in subsidiary........... --- (80,243) --- (153,541)
--------------- --------------- --------------- ---------------
Net income (loss)............................ (793,857) (1,145,817) (3,404,027) (2,826,251)
=============== =============== =============== ===============

Basic and diluted net income (loss)
per share................................. $ (0.12) $ (0.17) $ (0.50) $ (0.42)
================================================================================

Weighted average number of common
shares.................................... 6,767,660 6,745,837 6,767,574 6,742,118

Weighted average number of common
and common equivalent shares............ 6,767,660 6,745,837 6,767,574 6,742,118
--------------- --------------- --------------- ---------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

Page 4 of 26
<PAGE> 5

THREE-MONTH PERIOD ENDED MARCH 31, SIX-MONTH PERIOD ENDED MARCH 31,
---------------------------------- --------------------------------
1999 1998 1999 1998

- ---------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME

<S> <C> <C> <C> <C>
Net income (loss)............................ $ (793,857) $1,145,817) $(3,404,027) $(2,826,251)

Other comprehensive income:
Unrealized gains (losses) on
securities.............................. (2,379,173) 1,593,614 (232,947) 2,334,037
Reclassification adjustment for
gains included in net income............ (757,707) (732,345) (756,707) (1,499,375)
--------------- --------------- --------------- ---------------
Other comprehensive income................... (3,135,880) 861,269 (989,654) 834,662
--------------- --------------- --------------- ---------------
Net income (loss)............................ $(3,929,737) $ (284,548) $(4,393,681) $(1,991,589)
=============== =============== =============== ===============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

Page 5 of 26
<PAGE> 6

ADVANCED MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED
MARCH 31, 1999 AND 1998
(UNAUDITED)
---------

<TABLE>
<CAPTION>
Six-Month Periods Ended
March 31,
--------------------------------------------

1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers........................................... $ 1,624,917 $ 527,580
Cash paid to suppliers and employees................................... (6,255,845) (6,456,054)
Dividends and interest received........................................ 397,568 595,690
Royalties received..................................................... 335,618 386,799
------------------ -----------------

Net cash provided by (used in) operating activities.................... (3,897,742) (4,945,985)

Cash flows from investing activities:
Proceeds from sales of securities...................................... 2,959,633 5,655,077
Proceeds from U.S. Treasury Notes maturing............................. 7,500,000 5,000,000
Purchase of securities................................................. (1,082,782) (5,745,974)
Capital expenditures................................................... (257,386) (345,950)

Net cash provided by (used in) investing activities.................... 9,119,465 4,563,153
------------------ -----------------

Cash flows from financing activities:
Proceeds from issuances of common stock................................ 11 135,104
Purchase of treasury stock............................................. --- (156,349)
------------------ -----------------

Net cash provided by (used in) financing activities.................... 11 (21,245)
------------------ -----------------

Net increase (decrease) in cash and cash equivalents................... 5,221,734 (404,077)

Cash and cash equivalents at beginning of the period................... 7,704,245 10,724,740
------------------ -----------------

Cash and cash equivalents at end of the period......................... $ 12,925,979 $ 10,320,663
================== =================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

Page 6 of 26
<PAGE> 7

ADVANCED MAGNETICS, INC.
RECONCILIATION OF CONSOLIDATED NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
FOR THE SIX-MONTH PERIODS ENDED
MARCH 31, 1999 AND 1998
(UNAUDITED)
---------

<TABLE>
<CAPTION>
Six-Month Periods
Ended March 31,
-----------------------------------------------
1999 1998
---- ----

<S> <C> <C>
Net income (loss)......................................................... $ (3,404,027) $ (2,826,251)
------------------ ---------------------

Adjustments to reconcile net income to net cash provided by
(used in) operating activities:

Accretion of U.S. Treasury Notes discount................................. (15,358) (25,697)
Decrease (increase) in accounts receivable................................ (177,861) (398,741)
(Increase) decrease in inventories........................................ 103,246 (264,314)
(Increase) decrease in prepaid expenses and other assets.................. 88,792 (220,905)
Depreciation and amortization............................................. 417,039 502,007
(Decrease) increase in accounts payable and accrued expenses............. (151,565) (250,846)
(Decrease) in income taxes payable........................................ (1,301) (2,500)
Non-cash reduction in value of investment in subsidiary................... --- 194,178
Minority interest in subsidiary........................................... --- (153,541)
Net realized (gains) losses on sales of securities........................ (756,707) (1,499,375)
------------------ ---------------------

Total adjustments......................................................... (493,715) (2,119,734)
------------------ ---------------------

Net cash provided by (used in) operating activities....................... $ (3,897,742) $ (4,945,985)
================== =====================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

Page 7 of 26
<PAGE> 8

ADVANCED MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999

A. SUMMARY OF ACCOUNTING POLICIES

BUSINESS

Founded in November 1981, Advanced Magnetics, Inc., a Delaware corporation
(the "Company"), is a biopharmaceutical company engaged in the development and
manufacture of compounds utilizing the Company's core proprietary colloidal
superparamagnetic particle technology for magnetic resonance imaging ("MRI") and
for polysaccharide directed drug delivery systems. The initial products
developed by the Company are diagnostic imaging agents for use in conjunction
with MRI to aid in the diagnosis of cancer and other diseases.

The consolidated balance sheet of the Company, and the consolidated
statements of operations and cash flows include the accounts of Kalisto
Biologicals, Inc., an 80.7% owned subsidiary of the Company. All significant
intercompany balances and transactions have been eliminated. These financial
statements are unaudited and in the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have been
recorded. Such adjustments consisted only of normal recurring items. Certain
amounts in the fiscal 1998 financial statement have been reclassified to conform
with the fiscal 1999 presentation.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. 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 reporting period. Actual results could differ from those estimates.
The year-end balance sheet data were derived from audited financial statements,
but do not include disclosures required by generally accepted accounting
principles. It is suggested that these interim financial statements be read in
conjunction with the Company's most recent Form 10-K and Annual Report as of
September 30, 1998.

B. MARKETABLE SECURITIES

The cost and market value of the Company's marketable securities portfolio
are as follows:

<TABLE>
<CAPTION>
March 31, 1999 September 30, 1998
------------------------------------- --------------------------------------

Cost Fair Value Cost Fair Value
---------------- ----------------- ----------------- -----------------

<S> <C> <C> <C> <C>
U. S. government securities
Due in one year or less $ --- $ --- $ 7,484,642 $ 7,513,215

Corporate Bonds --- --- 482,403 582,500

Preferred stock --- --- 543,003 570,000

Common stock 9,513,486 9,502,501 9,608,225 10,431,227
---------------- ----------------- ----------------- -----------------

$ 9,513,486 $ 9,502,501 $18,118,273 $19,096,942
================ ================= ================= =================
</TABLE>

Page 8 of 26
<PAGE> 9

C. INCOME TAX

There were no income tax provisions for the three and six month periods
ended March 31, 1999 and 1998 due to net operating losses in those periods.

D. EARNINGS (LOSS) PER SHARE

The weighted average common and common equivalent shares used in the
computation of basic and diluted earnings per share is presented below.
Aggregate options of 430,320 (weighted average exercise price of $11.21) and
404,849 (weighted average exercise price of $11.28) for the three and six-month
periods ended March 31, 1999 and March 31, 1998, respectively, have not been
included in the calculation of weighted average shares, since their effect would
be anti-dilutive, given the net loss in those periods.

<TABLE>
<CAPTION>
Three-Month Periods Six-Month Periods
Ended March 31, Ended March 31,
------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of shares
issued and outstanding.................. 6,767,660 6,745,837 6,767,574 6,742,118

Common stock equivalents --- --- --- ---
---------------------------------------------- ------------- ------ ------------- ------- ------------- ------- -------------

As adjusted................................ 6,767,660 6,745,837 6,767,574 6,742,118
============= ============= ============= =============
</TABLE>

E. LEGAL PROCEEDINGS

The Company and certain of its officers were sued in an action entitled
David D. Stark, M.D. v. Advanced Magnetics. Inc., Jerome Goldstein, Ernest V.
Groman, and Lee Josephson, Civil Action No. 92-12157-WGY, in the United States
District Court for the District of Massachusetts on September 3, 1992. The
plaintiff, a former consultant to the Company, claims that he was incorrectly
omitted as an inventor or joint inventor on certain of the Company's patents and
on pending applications, and seeks injunctive relief and unspecified damages. In
addition, the complaint also alleges state law claims for breach of contract,
breach of good faith and fair dealing, breach of implied contract,
misappropriation of trade secrets, conversion, negligent misrepresentation,
misrepresentation, unjust enrichment and unfair trade practices. The District
Court has stayed this federal action pending resolution of an appeal in the
State Court of summary judgment in the Company's favor as well as resolution of
a jurisdictional issue. While the outcome of the action cannot be determined,
the Company believes the action is without merit and intends to defend the
action vigorously. There can be no assurance, however, that the Company will be
able to defend successfully this action and the failure by the Company to
prevail for any reason could have an adverse effect on the Company's future
business, financial condition and results of operations.

The Company and certain of its officers were sued in David D. Stark, M.D.
v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee
Josephson, Civil Action No. 93-02846-C, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County. This case involves claims of
breach of contract, breach of good faith and fair dealing, breach of implied
contract, unjust enrichment and unfair trade practices that were originally
dismissed by, but later remanded to, the Federal Court in the above-mentioned
action, as well as a new count alleging tortious interference with contractual
or advantageous relations. The Superior Court granted partial summary judgment
in the Company's favor and dismissed the unfair trade practices and tort counts.
The plaintiff's contract claims have been dismissed with prejudice and final
judgment was entered against the plaintiff. The plaintiff filed an appeal in
David D. Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V.
Groman and Lee Josephson, Appeal No. 98-P-1749 in the Massachusetts Appeals
Court, on January 25, 1999. While the outcome of the action cannot be
determined, the Company believes the action is without merit and intends to
defend the action vigorously.

Page 9 of 26
<PAGE> 10

There can be no assurance, however, that the Company will be able to defend this
action successfully and the failure by the Company to prevail for any reason
could have an adverse effect on the Company's future business, financial
condition and results of operations.

The Company filed suit on October 7, 1997 against Sanofi Pharmaceuticals,
Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA (collectively,
"Defendants") in the Superior Court of the Commonwealth of Massachusetts. The
action is entitled Advanced Magnetics, Inc. v. Sanofi Pharmaceuticals, Inc. and
Sanofi SA, Civil Action No. 97-5222B. The Company claims that the Defendants
tortiously interfered with a license, supply and marketing agreement (the
"Agreement"), and seeks unspecified monetary damages. In addition, the Company
seeks a declaration that the Defendants do not have any rights under the
Agreement and that the Company has not breached the Agreement. Sanofi
Pharmaceuticals, Inc., filed counterclaims against the Company on February 4,
1998 seeking compensatory damages of $11,500,000 and multiple damages as a
result of the Company's alleged breach of the Agreement. Sanofi Pharmaceuticals,
Inc. also filed a motion to dismiss the Company's tortious interference claim,
which the Court denied on July 3, 1998. On October 26, 1998, the Company served
a motion for partial summary judgment which, among other things, requests
judgment in its favor on all of Sanofi Pharmaceuticals, Inc.'s counterclaims. On
November 13, 1998 the Company filed an amended complaint adding claims for
unfair competition and breach of contract against the Defendants. On November
23, 1998, Defendants answered the Company's amended complaint, and Sanofi
Pharmaceuticals, Inc. served a new set of counterclaims seeking compensatory
damages of $15,000,000 and multiple damages as a result of the Company's alleged
conduct. On December 18, 1998, the court held a hearing on the Company's motion
for partial summary judgment, and at that time, ordered all discovery stayed
until a ruling on the pending summary judgment motion. While the final outcome
of these claims and counterclaims cannot be determined, the Company will pursue
its claims vigorously, and believes that the Sanofi Pharmaceuticals, Inc.
counterclaims are without merit and intends to defend them vigorously.

F. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In 1997, the FASB issued Statement No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information". This Statement, which
supersedes Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise," changes the way public companies report information about segments.
The Statement, which is based on the management approach to segment reporting,
includes requirements to report segment information quarterly and entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenues. The Statement
is effective for periods beginning after December 15, 1997. Restatement for
earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year,
however, in subsequent years, interim period information must be presented on a
comparative basis.

In June 1998, the FASB issued Statement No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities" which is effective for fiscal
years beginning after June 15, 1999. The statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability, measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Adoption of this standard is not expected to have a material impact on the
financial position or results of operations of the Company.

G. COMPREHENSIVE INCOME.

Effective December 31, 1998, the Company has adopted FASB Statement 130
("SFAS 130"), "Reporting Comprehensive Income". This statement required changes
in comprehensive income to be shown in a financial statement that is displayed
with the same prominence as other financial statements. Accordingly, the Company
has provided a statement of comprehensive income and has reclassified earlier
periods for comparative purposes.

Page 10 of 26
<PAGE> 11

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

This document contains forward-looking statements. Any statements contained
herein that do not describe historical facts are forward looking statements. The
forward-looking statements contained herein are based on current expectations,
but are subject to a number of risks and uncertainties. The factors that could
cause actual results to differ materially from current expectations include the
following: the ability to successfully market Feridex I.V.(R), GastroMARK(R) and
the EndoCheck Plus(R) analyzer, the timing and result of FDA action, delays in
arrangements with clinical investigations, uncertainties relating to results of
the clinical trials of Combidex and other product candidates, achieving
projected expense reductions, the need for additional cost reduction measures,
the Company's dependence on its corporate partners, the Company's ability to
obtain future financing, uncertainties relating to patents and proprietary
rights, the ability of the Company to compete successfully in the future and the
risks identified in the Company's Securities and Exchange Commission filings,
including but not limited to its Form 10-K for the year ended September 30,
1998.

OVERVIEW

Since its inception in November 1981, Advanced Magnetics, Inc. ("Advanced
Magnetics" or the "Company") has focused its efforts on developing applications
of its core magnetic particle technology. This has led to the development of
magnetic resonance imaging (MRI) contrast agents as well as polysaccharide
technology for targeted delivery of antiviral therapeutics. The Company has
funded its operations with cash from license fees from corporate partners,
royalties, sales of its products, fees from contract research performed for
third parties, the proceeds of financings and income earned on invested cash.
The Company's success in the market for diagnostic and therapeutic products will
depend, in part, on the Company's ability to: successfully develop, test,
produce and market its products; obtain necessary governmental approvals in a
timely manner; attract and maintain key employees; and successfully respond to
technological changes in its marketplace.

The Company's operating results may continue to vary significantly from
quarter to quarter or from year to year depending on a number of factors,
including: (i) the timing of payments from corporate partners; (ii) the
introduction of new products; (iii) the timing and size of orders from
customers; (iv) the general level of acceptance of the Company's products; and
(v) increases or decreases in, and timing of, research and development, clinical
trials and other expenses. The Company's current planned expense levels are
based in part upon expectations as to future revenue. Consequently, profits may
vary significantly from quarter to quarter or year to year based on the timing
of revenue. Revenue or profits in any period will not necessarily be indicative
of results in subsequent periods and there can be no assurance that the Company
will be profitable or that revenue growth will be achieved in the future.

In October 1997, the Company acquired approximately 80.7% of the issued and
outstanding capital stock of Kalisto Biologicals, Inc. ("Kalisto"), an
early-stage company that intends to develop, manufacture and market veterinary
laboratory diagnostic products. The Company's results of operations reflect the
operations of Kalisto for the period from the date of acquisiton until March 31,
1999.

Page 11 of 26
<PAGE> 12

YEAR 2000 READINESS DISCLOSURE STATEMENT

The widely publicized Year 2000 issue arose because many existing computer
programs use only the last two digits to define the applicable year. As a
result, such computer programs may misinterpret "00" as the year 1900 rather
than the year 2000. The consequences of such a misinterpretation could range
from a simple miscalculation to a system failure that might cause a disruption
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Since computer and microprocessor use is so widespread, the issue has become a
societal concern, the potential impact of which is not yet known.

Under the auspices of the Audit Committee, the Company conducted and
completed an assessment of its exposure to potential disruptions caused by the
Year 2000 issue. In the first phase of its readiness investigation the Company
identified its Clinical Data Network (which tracks and analyzes the results of
product trials in support of FDA approvals) and its accounting system as
mission-critical components that required protection from Year 2000 related
disruption. The Company, in order to address Year 2000 concerns and as part of a
general systems upgrade, has determined to modify the Clinical Data Network and
replace the accounting system. The Company has obtained written confirmation
that the new software applications are Year 2000 compliant. The accounting
system has been replaced at this time and the Company expects that the necessary
Clinical Data Network modifications will be installed and operational by the end
of November 1999.

In addition to evaluating its computer systems, the Company recognizes that
the Year 2000 issue may impact machines or equipment that rely on embedded
microchips. The Company has evaluated and tested such equipment used in its
manufacturing facilities and believes that it does not have a material risk of
disruptions in manufacturing due to a Year 2000 failure. The Company is in the
process of evaluating its non-manufacturing equipment.

In addition to the Company's critical systems, the Company recognized that
it relies on third party service providers and suppliers in the conduct of its
business and that there was potential exposure to Year 2000 related business
disruptions as a result. For example, third party service providers handle the
payroll function for the Company, and the Company also relies on the services of
telecommunication companies, banks, and utility companies, among others.

The Company has contacted all of its significant service providers and
obtained assurances that they are addressing Year 2000 issues in a prudent
fashion. However, the Company, like all others, is subject to exposure to
disruptions in the generic systems that all businesses and consumers rely on
generally.

The Company is currently obtaining assurances from its significant raw
material suppliers that there will be no interruption of service as a result of
the Year 2000 issue, and to the extent such assurances are not given, the
Company intends to devise contingency plans to ameliorate the potential negative
effects in the event of the unavailability of materials. The Company also
intends to increase inventory levels moderately prior to December 1999 as a
contingency against possible disruptions anywhere in its supply chain.

A failure of any contingency plan developed by the Company may not prevent
a business interruption caused by one or more of the Company's third party
service providers or suppliers, and such a failure may have a material adverse
effect on the Company. In addition, the failure on the part of the accounting
systems of the Company's customers due to the Year 2000 issue could result in a
delay in the payment of invoices issued by the Company. A failure of the
accounting systems of a significant number of the Company's customers would have
a material adverse effect on the Company.

Page 12 of 26
<PAGE> 13

All expenses related to determining and addressing Year 2000 readiness have
been expensed as incurred and have amounted to roughly $60,000 to date. The
Company has provided $200,000 for the enhancement of its systems in its
operating and capital budgets for the current fiscal year. However, if
compliance efforts of which the Company is not currently aware are required and
are not completed on time, or if the cost of any required updating, modification
or replacement of the Company's Information Technology systems exceeds the
Company's estimates, the Year 2000 issue could have a material adverse impact on
the Company.

Various statements in this discussion of Year 2000 issues are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include statements of the
Company's expectation, statements with regard to schedules and expected
completion dates and statements regarding expected Year 2000 compliance. These
forward-looking statements are subject to various risk factors which may
materially affect the Company's efforts to achieve Year 2000 compliance. These
risk factors include the inability of the Company to complete the plans and
modifications that it has identified, the wide variety of information systems
and components, both hardware and software, that must be evaluated, the variety,
number and complexity of equipment used in the Company's operations and the
large number of vendors and customers with which the Company interacts. The
Company's assessments of the effect of Year 2000 on the Company are based, in
part, upon information received from third parties and the Company's reasonable
reliance on that information. Therefore, the risk that inaccurate information is
supplied by third parties upon which the Company reasonably relied must be
considered as a risk factor that might affect the Company's Year 2000 efforts.
The Company is attempting to reduce the risks by utilizing an organized
approach, extensive testing, and allowance of ample contingency time to address
issues identified by tests.

Page 13 of 26
<PAGE> 14

RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 AS COMPARED TO THE
- -----------------------------------------------------------------------------
QUARTER ENDED MARCH 31, 1998
- ----------------------------

REVENUES

Total revenues for the second fiscal quarter ended March 31, 1999 were
$2,283,733 compared to $1,986,441 for the second fiscal quarter ended March 31,
1998. The increase in revenues in the second quarter ended March 31, 1999
compared to the second quarter ended March 31, 1998 was due to an increase in
both product sales and contract research and development, offset by a decrease
in royalty income and lower interest, dividends and gains on sales of
securities.

Royalties for the fiscal quarter ended March 31, 1999 of $200,000 were
$170,000 lower than in the fiscal quarter ended March 31, 1998 because of the
launch of Feridex I.V. in Japan in the fiscal quarter ended March 31, 1998.
Royalties in that quarter were higher because the Company's marketing partner
made orders to stock product.

Product sales for the second fiscal quarter ended March 31, 1999 were
$1,001,239 compared to $619,464 for the second fiscal quarter ended March
31,1998. The increase of $381,775 was primarily due to sales of diagnostic
systems by Kalisto Biologicals, Inc.

Contract research and development revenues were $144,856 for the second
fiscal quarter ended March 31, 1999 compared with none for the second fiscal
quarter ended March 31,1998. The increase reflects the reimbursement of certain
development costs of approximately $100,000 under an agreement with Berlex
Laboratories, Inc. and development work done for Guerbet S.A.

Interest, dividends and gains on sales of securities resulted in revenues
of $937,638 in the fiscal quarter ended March 31, 1999 compared to $996,977 for
the fiscal quarter ended March 31, 1998. Interest, dividends and net gains on
sales of securities consisted of the following:

Second Quarter Ended March 31,
----------------------------------------
1999 1998
---- ----

Interest income $ 124,436 $ 202,832
Dividend income 56,495 61,800
Net gains on sales of securities 756,707 732,345
=============== ===============
Total $ 937,638 $ 996,977
=============== ===============

COSTS AND EXPENSES

As a result of increased product sales, the Company incurred costs of
$155,903 for products sold in the quarter ended March 31, 1999 compared to
$103,514 for the second fiscal quarter ended March 31, 1998. The cost of product
sales for the three-month period ended March 31, 1999 remained relatively
constant at 16% of product sales compared with 17% for the three-month period
ended March 31, 1998. Direct costs of $15,815 were incurred for contract
sponsored research and development during the three-month period ended March 31,
1999.

Company sponsored research and development expenses for the second fiscal
quarter ended March 31, 1999 were $1,980,625 compared to $2,166,670 for the
second fiscal quarter ended March 31, 1998. The decrease in fiscal 1999 was due
to the reduction of costs associated with a shift from research to development
efforts at both Advanced Magnetics and Kalisto.

Selling, general and administrative expenses were $1,346,808 for the second
fiscal quarter ended March 31, 1999 compared to $942,317 for the second fiscal
quarter ended March 31, 1998. The increase of $394,101 in fiscal 1999 was
primarily related to increased costs for Kalisto sales efforts and increased
legal expenses at Advanced Magnetics.

Page 14 of 26
<PAGE> 15

The Company had $421,560 in other income during the second fiscal quarter
ended March 31, 1999. An excise tax claim against the Commonwealth of
Massachusetts was settled in the amount of $50,000 and an insurance settlement
in the amount of $371,560 was made for damages to research facilities caused by
a flood in June 1998.

INCOME TAXES

There were no income tax provisions for the fiscal quarters ended March 31,
1999 and March 31, 1998 due to operating losses for both periods.

EARNINGS

For the reasons stated above, there was a net loss of $793,857 or $(0.12)
per share for the quarter ended March 31, 1999 compared to a net loss of
$1,145,817 or $(0.17) per share for the fiscal quarter ended March 31, 1998.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1999 AS COMPARED TO THE
- --------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31, 1998
- -------------------------------

REVENUES

Total revenues for the six-month period ended March 31, 1999 were
$3,198,252 compared to $3,353,014 for the six-month period ended March 31, 1998.

Royalties for the six-month period ended March 31, 1999 were $360,000
compared with royalties for the six-month period ended March 31, 1998 of
$740,000. The decrease in royalties is associated with the non-recurring product
launch of Feridex I.V. in Japan during the six-month period ended March 31,
1998.

Product sales for the six-month period ended March 31, 1999 were $1,318,079
compared to $624,024 for the six-month period ended March 31, 1998. The increase
is primarily due to Kalisto sales increases.

Contract research and development revenues were $389,758 for the six-month
period ended March 31, 1999 compared with none for the six-month period ended
March 31,1998. The increase reflects the reimbursement of certain development
costs of approximately $345,000 under an agreement with Berlex Laboratories,
Inc. and development work done for Guerbet S.A.

Interest, dividends and gains and losses on sales of securities resulted in
revenues of $1,130,415 for the six-month period ended March 31, 1999 compared to
$1,988,990 for the six-month period ended March 31, 1998. The decrease compared
to the six-month period ended March 31, 1998 reflects the maturity of a U.S.
Treasury Note and a decrease in interest income due to a reduction in interest
bearing securities.

COSTS AND EXPENSES

The cost of product sales for the six-month period ended March 31, 1999 was
$268,084 compared to $109,319 for the six-month period ended March 31, 1998. The
cost of product sales for the six-month period ended March 31, 1999 was 20.3% of
product sales compared with 17.5% for the six-month period ended March 31, 1998.
The higher rate of cost of sales reflects the increase in sales of Kalisto
diagnostic systems as those systems have a higher cost of sales than do contrast
agents in general. Direct costs of $15,815 were incurred for contract sponsored
research and development during the six-month period ended March 31, 1999.

Page 15 of 26
<PAGE> 16

Company sponsored research and development expenses for the six-month
period ended March 31, 1999 remained relatively constant at $4,487,191 compared
to $4,418,171 for the same period in 1998. Selling, general and administrative
expenses increased to $2,268,565 for the six-month period ended March 31, 1999
from $1,805,316 for the six-month period ended March 31, 1998. The increase of
$463,249 in fiscal 1999 was primarily related to increased costs for Kalisto
sales efforts and increased legal expenses at Advanced Magnetics.

The Company had $421,560 in other income during the six-month period ended
March 31, 1999. An excise tax claim against the Commonwealth of Massachusetts
was settled in the amount of $50,000 and an insurance settlement in the amount
of $371,560 was made for damages to research facilities caused by a flood in
June 1998.

INCOME TAXES

There was no income tax provision for the six-month periods ended March 31,
1999 and March 31, 1998 due to operating losses for both periods.

EARNINGS

For the reasons stated above, there was a net loss of $3,404,027 or $(0.50)
per share for the six-month period ended March 31, 1999 compared to a net loss
for the six-month period ended March 31, 1998 of $2,826,251 or $(0.42) per
share.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1999, the Company's cash and cash equivalents totaled
$12,925,979 compared to $7,704,245 at September 30, 1998. In addition, the
Company had marketable securities of $9,502,501 at March 31, 1999 compared to
$19,096,942 on September 30, 1998. Net cash used in operating activities was
$3,897,742 in the six-month period ended March 31, 1999 compared to net cash
used in operating activities of $4,945,985 in the six-month period ended March
31, 1998. Cash provided by investing activities was $9,119,465 for the six-month
period ended March 31, 1999 compared to $4,563,153 provided by investing
activities in the six-month period ended March 31, 1998. Cash provided by
investing activities in the six-month period ended March 31, 1999 included the
proceeds of $2,959,633 from the sale of marketable securities and $7,500,000
from the maturing of a U.S. Treasury Note. Offsetting these proceeds was the
purchase of marketable securities of $1,082,782 in the six-month period ended
March 31, 1999. Cash provided by financing activities in the six-month period
ended March 31, 1999 was $11 compared to $21,245 used in financing activities in
the six-month period ended March 31, 1998.

Capital expenditures during the six-month period ended March 31, 1999 were
$257,386 compared to $345,950 in the six-month period ended March 31, 1998. This
reflects a continuing upgrade to existing property, plant and equipment and
purchases to support the research facilities of Kalisto.

The Company has reduced its overhead by decreasing the number of its
employees, excluding Kalisto, from 61 to 49 and has made, and will continue to
make, cutbacks in discretionary expenditures. These efforts are expected to
significantly reduce the Company's cash expenditures in what has been a
difficult financing environment for small biopharmaceutical companies. The
Company is being careful to retain all of its critical capabilities, including
research and development, and to ensure that headcount reductions will reduce
capacity rather than core competencies.

Management believes that existing cash balances, cash generated from
investing activities and cash generated from operations will be sufficient to
meet cash and working capital requirements for the foreseeable future. In
addition, the Company will consider from time to time various financing
alternatives and may seek to raise additional capital through equity or debt
financing or to enter into corporate partnering arrangements. There can be no
assurance, however, that such funding will be available on terms acceptable to
the Company, if at all.

Page 16 of 26
<PAGE> 17

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change to the information concerning the
Company's market risk sensitive instruments as set forth in the Company's 10-K
for the period ended September 30, 1998.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material developments in the legal proceedings to which
the Company is a party since the description of the litigation with Sanofi
Pharmaceuticals, Inc. described in the Company's most recent Form 10-Q for the
quarter ended December 31, 1998.

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

On February 2, 1999, the Company held its Annual Meeting of Stockholders.
At the meeting, the stockholders acted upon the following proposals: (i)
election of directors and (ii) an amendment to the Company's 1993 Stock Plan
(the "1993 Plan") to increase the number of shares of common stock available for
issuance under the 1993 Plan from 500,000 to 700,000.

Votes "FOR" represent affirmative votes and do not include abstentions or
broker non-votes. In cases where a signed proxy was submitted without
designation, the shares represented by the proxy were voted "FOR" each proposal
in the manner described in the Proxy Statement. On the record date (December 7,
1998), 6,767,660 shares of the Company's common stock were issued and
outstanding.

Page 17 of 26
<PAGE> 18

Voting results were as follows:

<TABLE>
<CAPTION>
MATTER FOR AGAINST WITHHELD ABSTAIN
------ --- ------- -------- -------

<C> <C> <C> <C> <C>
1. Election of Directors
Leonard M. Baum 5,730,493 N/A 52,040 N/A
Jerome Goldstein 5,730,493 N/A 52,040 N/A
Leslie Goldstein 5,730,493 N/A 52,040 N/A
Joseph B. Lassiter, III 5,730,493 N/A 52,040 N/A
Michael D. Loberg 5,730,493 N/A 52,040 N/A
Edward B. Roberts 5,730,493 N/A 52,040 N/A
George M. Whitesides 5,730,493 N/A 52,040 N/A

2. Amendment to 1993 Plan 5,451,336 301,812 N/A 29,385
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit 10.1 1993 Stock Plan, as amended.

Exhibit 27.1 Financial Data Schedule (EDGAR filing only)

The Company did not file any current reports on Form 8-K during the quarter
ended March 31, 1999.

SIGNATURES

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

ADVANCED MAGNETICS, INC.

Date May 13, 1999 By /s/ Jerome Goldstein
---------------- ----------------------------------
Jerome Goldstein, Treasurer and
Chairman of the Board of Directors

Date May 13, 1999 By /s/ James A. Matheson
---------------- ----------------------------------
James A. Matheson, Vice President
and Principal Accounting Officer

Page 18 of 26

<PAGE> 1
ADVANCED MAGNETICS, INC.

1993 STOCK PLAN

(AS AMENDED FEBRUARY 2, 1999)

1. PURPOSE. This 1993 Stock Plan (the "Plan") is intended to provide
incentives: (a) to the officers and other employees of Advanced Magnetics, Inc.
(the "Company"), and of any present or future parent or subsidiary of the
Company (collectively, "Related Corporations"), by providing them with
opportunities to purchase stock in the Company pursuant to options granted
hereunder which qualify as "incentive stock options" ("ISOs") under Section
422(b) of the Internal Revenue Code of 1986, as amended (the "Code"); (b) to
directors, officers, employees and consultants of the Company and Related
Corporations by providing them with opportunities to purchase stock in the
Company pursuant to options granted hereunder which do not qualify as ISOs
("Non-Qualified Options"); (c) to directors, officers, employees and consultants
of the Company and Related Corporations by providing them with awards of stock
in the Company ("Awards"); and (d) to directors, officers, employees and
consultants of the Company and Related Corporations by providing them with
opportunities to make direct purchases of stock in the Company ("Purchases").
Both ISOs and Non-Qualified Options are referred to hereafter individually as an
"Option" and collectively as "Options." Options, Awards and authorizations to
make Purchases are referred to hereafter collectively as "Stock Rights." As used
herein, the terms "parent" and "subsidiary" mean "parent corporation" and
"subsidiary corporation," respectively, as those terms are defined in Section
424 of the Code.

2. ADMINISTRATION OF THE PLAN.

A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered
by the Board of Directors of the Company (the "Board") or by a committee
appointed by the Board (the "Committee"); provided that, to the extent
required by Rule 16b-3 promulgated under the Securities Exchange Act of
1934 or any successor provision ("Rule 16b-3"), with respect to specific
grants of Stock Rights, the Plan shall be administered by a disinterested
administrator or administrators within the meaning of Rule 16b-3.
Hereinafter, all references in this Plan to the "Committee" shall mean the
Board if no Committee has been appointed. Subject to ratification of the
grant or authorization of each Stock Right by the board (if so required by
applicable state law), and subject to the terms of the Plan, the Committee
shall have the authority to (i) determine the employees of the Company and
Related Corporations (from among the class of employees eligible under
paragraph 3 to receive ISOs) to whom ISOs shall be granted, and determine
(from among the class of individuals and entities eligible under paragraph
3 to receive Non-Qualified Options and Awards and to make Purchases) to
whom Non-Qualified Options, Awards and authorizations to make Purchases may
be granted; (ii) determine the time or times at which Options or Awards
shall be granted or Purchases made; (iii) determine the option price of
shares subject to each Option, which price shall not be less than the
minimum price specified in paragraph 6, and the purchase price of shares
subject to each Purchase; (iv) determine whether each Option granted shall
be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7)
the time or times when each Option shall become exercisable and the
duration of the exercise period; (vi) determine whether restrictions such
as repurchase options are to be imposed on shares subject to Options,
Awards and Purchases and the nature of such restrictions, if any, and (vii)
interpret the Plan and prescribe and rescind rules and regulations relating
to it. If the Committee determines to issue a Non-Qualified Option, it
shall take whatever actions it deems necessary, under Section 422 of the
Code and the regulations promulgated thereunder, to ensure that such Option
is not treated as an ISO. The interpretation and construction by the
Committee of any provisions of the Plan or of any Stock Right granted under
it shall be final unless otherwise determined by the Board. The Committee
may from time to time adopt such rules and regulations for carrying out the
Plan as it may deem best. No member of the Board or the Committee shall be
liable for any action or determination made in good faith with respect to
the Plan or any Stock Right granted under it.

Page 19 of 26
<PAGE> 2

B. COMMITTEE ACTIONS. The Committee may select one of its members as
its chairman, and shall hold meetings at such time and places as it may
determine. Acts by a majority of the members of the committee, or acts
reduced to or approved in writing by a majority of the members of the
Committee (if consistent with applicable state law), shall constitute the
valid acts of the Committee. From time to time the Board may increase the
size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies however caused, or remove all members of the
Committee and thereafter directly administer the Plan.

C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be
granted to members of the Board consistent with the provisions of the first
sentence of paragraph 2(A) above, if applicable. All grants of Stock Rights
to members of the Board shall in all other respects be made in accordance
with the provisions of this Plan applicable to other eligible persons.
Consistent with the provisions of the first sentence of paragraph 2(A)
above, members of the Board who either (i) are eligible to receive grants
of Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights
may vote on any matters affecting the administration of the Plan or the
grant of any Stock Rights pursuant to the Plan, except that no such member
shall act upon the granting to himself of Stock Rights, but any such member
may be counted in determining the existence of a quorum at any meeting of
the Board during which action is taken with respect to the granting to him
of Stock Rights.

3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees
of the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related Corporation. The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant an ISO, a Non-Qualified
Option, an Award or an authorization to make a Purchase. Granting of any Stock
Right to any individual or entity shall neither entitle that individual or
entity to, nor disqualify him from, participation in any other grant of Stock
Rights.

4. STOCK. The stock subject to Options, Awards and Purchases shall be
authorized but unissued shares of Common Stock of the Company, par value $.01
per share (the "Common Stock"), or shares of Common Stock reacquired by the
Company in any manner. The aggregate number of shares which may be issued
pursuant to the Plan is 700,000, subject to adjustment as provided in paragraph
13. If any Stock Right granted under the Plan shall expire or terminate for any
reason without having been exercised in full or shall cease for any reason to be
exercisable in whole or in part, the unpurchased shares subject to such Stock
Right shall again be available for grants of Stock Rights under the Plan.

5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan
at any time after December 8, 1992 and prior to December 7, 2002. The date of
grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Rights; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant.

6. MINIMUM OPTION PRICE; ISO LIMITATIONS.

A. PRICE FOR NON-QUALIFIED OPTIONS. The exercise price per share
specified in the agreement relating to each Non-Qualified Option granted
under the Plan shall in no event be less than the minimum legal
consideration required therefor under the laws of Massachusetts or the laws
of any jurisdiction in which the Company or its successors in interest may
be organized.

Page 20 of 26
<PAGE> 3

B. PRICE FOR ISOS. The exercise price per share specified in the
agreement relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the date of such
grant. In the case of an ISO to be granted to an employee owning stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, the
price per share specified in the agreement relating to such ISO shall not
be less than one hundred ten percent (110%) of the fair market value per
share of Common Stock on the date of grant. For purposes of determining
stock ownership under this paragraph, the rules of Section 424(d) of the
Code shall apply.

C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee
may be granted Options treated as ISOs only to the extent that, in the
aggregate under this Plan and all incentive stock option plans of the
Company and any Related Corporation, ISOs do not become exercisable for the
first time by such employee during any calendar year with respect to stock
having a fair market value (determined at the time the ISOs were granted)
in excess of $100,000. The Company intends to designate any Options granted
in excess of such limitation as Non-Qualified Options.

D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is
granted under the Plan, the Company's Common Stock is publicly traded,
"fair market value" shall be determined as of the last business day for
which the prices or quotes discussed in this sentence are available prior
to the date such Option is granted and shall mean (i) the average (on that
date) of the high and low prices of the Common Stock on the principal
national securities exchange on which the Common Stock is traded, if the
Common Stock is then traded on a national securities exchange; or (ii) the
last reported sale price (on that date) of the Common Stock on the NASDAQ
National Market List, if the Common Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the
NASDAQ National Market List. However, if the Common Stock is not publicly
traded at the time an Option is granted under the Plan, "fair market value"
shall be deemed to be the fair value of the Common Stock as determined by
the Committee after taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and offer prices of
the Common Stock in private transactions negotiated at arm's length.

7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10, each Option shall expire on the date specified by the
Committee, but not more than (i) ten years from the date of grant in the case of
Options generally and (ii) five years from the date of grant in the case of ISOs
granted to an employee owning stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
Related Corporation, as determined under paragraph 6(B). Subject to earlier
termination as provided in paragraphs 9 and 10, the term of each ISO shall be
the term set forth in the original instrument granting such ISO, except with
respect to any part of such ISO that is converted into a Non-Qualified Option
pursuant to paragraph 16.

8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:

A. VESTING. The Option shall either be fully exercisable on the date
of grant or shall become exercisable thereafter in such installments as the
Committee may specify.

B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee.

C. PARTIAL EXERCISE. Each Option or installment may be exercised at
any time or from time to time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.

Page 21 of 26
<PAGE> 4

D. ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date of exercise of any installment of any Option; provided
that the Committee shall not, without the consent of an optionee,
accelerate the exercise date of any installment of any Option granted to
any employee as an ISO (and not previously converted into a Non-Qualified
Option pursuant to paragraph 16) if such acceleration would violate the
annual vesting limitation contained in Section 422(d) of the Code, as
described in paragraph 6(C).

9. TERMINATION OF EMPLOYMENT. If an ISO optionee ceases to be employed by
the Company and all Related Corporations other than by reason of death or
disability as defined in paragraph 10, no further installments of his ISOs shall
become exercisable, and his ISOs shall terminate after the passage of ninety
(90) days from the date of termination of his employment, but in no event later
than on their specified expiration dates, except to the extent that such ISOs
(or unexercised installments thereof) have been converted into Non-Qualified
Options pursuant to paragraph 16. For purposes of this paragraph 9, employment
shall be considered as continuing uninterrupted during any bona fide leave of
absence (such as those attributable to illness, military obligations or
governmental service) provided that the period of such leave does not exceed 90
days or, if longer, any period during which such optionee's right to
reemployment is guaranteed by statute. A bone fide leave of absence with the
written approval of the Committee shall not be considered an interruption of
employment under this paragraph 9, provided that such written approval
contractually obligates the Company or any Related Corporation to continue the
employment of the optionee after the approved period of absence. ISOs granted
under the Plan shall not be affected by any change of employment within or among
the Company and Related Corporations, so long as the optionee continues to be an
employee of the Company or any Related Corporation. Nothing in the Plan shall be
deemed to give any grantee of any Stock Right the right to be retained in
employment or other service by the Company or any Related Corporation for any
period of time.

10. DEATH; DISABILITY.

A. DEATH. If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of his death, any ISO of his may be
exercised, to the extent of the number of shares with respect to which he
could have exercised it on the date of his death, by his estate, personal
representative or beneficiary who has acquired the ISO by will or by the
laws of descent and distribution, at any time prior to the earlier of the
specified expiration date of the ISO or 180 days from the date of the
optionee's death.

B. DISABILITY. If an ISO optionee ceases to be employed by the
Company and all Related Corporations by reason of his disability, he shall
have the right to exercise any ISO held by him on the date of termination
of employment, to the extent of the number of shares with respect to which
he could have exercised it on that date, at any time prior to the earlier
of the specified expiration date of the ISO or 180 days from the date of
the termination of the optionee's employment. For the purposes of the Plan,
the term "disability" shall mean "permanent and total disability" as
defined in Section 22(e) (3) of the Code or any successor statute.

11. ASSIGNABILITY. No Stock Right shall be assignable or transferable by
the grantee except by will or by the laws of descent and distribution. During
the lifetime of the grantee each Stock Right shall be exercisable only by him.

Page 22 of 26
<PAGE> 5

12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any
Non-Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.

13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to him hereunder shall be
adjusted as hereinafter provided, unless otherwise specifically provided in the
written agreement between the optionee and the Company relating to such Option:

A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of Options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.

B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets or otherwise (an "Acquisition"),
the Committee or the board of directors of any entity assuming the
obligations of the Company hereunder (the "Successor Board"), shall, as to
outstanding Options, either (i) make appropriate provision for the
continuation of such Options by substituting on an equitable basis for the
shares then subject to such Options the consideration payable with respect
to the outstanding shares of Common Stock in connection with the
Acquisition; or (ii) upon written notice to the optionees, provide that all
Options must be exercised, to the extent then exercisable, within a
specified number of days of the date of such notice, at the end of which
period the Options shall terminate; or (iii) terminate all Options in
exchange for a cash payment equal to the excess of the fair market value of
the shares subject to such Options (to the extent then exercisable) over
the exercise price thereof.

C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the
company or of another corporation are issued with respect to the
outstanding shares of Common Stock, an optionee upon exercising an Option
shall be entitled to receive for the purchase price paid upon such exercise
the securities he would have received if he had exercised his Option prior
to such recapitalization or reorganization.

D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to ISOs
shall be made only after the Committee, after consulting with counsel for
the Company, determines whether such adjustments would constitute a
"modification" or such ISOs (as that term is defined in Section 424 of the
Code) or would cause any adverse tax consequences for the holders of such
ISOs. If the Committee determines that such adjustments made with respect
to ISOs would constitute a modification of such ISOs or would cause adverse
tax consequences to the holders, it may refrain from making such
adjustments.

Page 23 of 26
<PAGE> 6

E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by
the Committee.

F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.

G. FRACTIONAL SHARES. No fractional shares shall be issued under the
Plan and the optionee shall receive from the Company cash in lieu of such
fractional shares.

H. ADJUSTMENTS. Upon the happening of any of the events described in
subparagraphs A, B or C above, the class and aggregate number of shares set
forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall
also be appropriately adjusted to reflect the events described in such
subparagraphs. The Committee or the Successor Board shall determine the
specific adjustments to be made under this paragraph 13 and, subject to
paragraph 2, its determination shall be conclusive.

14. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or
installment thereof) shall be exercised by giving written notice to the Company
at its principal office address. Such notice shall identify the Stock Right
being exercised and specify the number of shares as to which such Stock Right is
being exercised, accompanied by full payment of the purchase price therefor
either (a) in United States dollars in cash or by check, (b) at the discretion
of the Committee, through delivery of shares of Common Stock having a fair
market value equal as of the date of the exercise to the cash exercise price of
the Stock Right, (c) at the discretion of the Committee, by delivery of the
grantee's personal recourse note bearing interest payable not less than annually
at no less than 100% of the lowest applicable Federal rate, as defined in
Section 1274(d) of the Code, (d) at the discretion of the Committee and
consistent with applicable law, through the delivery of an assignment to the
Company of a sufficient amount of the proceeds from the sale of the Common Stock
acquired upon exercise of the Stock Right and an authorization to the broker or
selling agent to pay that amount to the Company, which sale shall be at the
participant's direction at the time of exercise, or (e) at the discretion of the
Committee, by any combination of (a), (b), (c) and (d) above. If the Committee
exercises its discretion to permit payment of the exercise price of an ISO by
means of the methods set forth in the clauses (b), (c), (d) or (e) of the
preceding sentence, such discretion shall be exercised in writing at the time of
the grant of the ISO in question. The holder of a Stock Right shall not have the
rights of a shareholder with respect to the shares covered by his Stock Right
until the date of issuance of a stock certificate to him for such shares. Except
as expressly provided above in paragraph 13 with respect to changes in
capitalization and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued.

Page 24 of 26
<PAGE> 7

15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on
December 8, 1992, subject, with respect to the validation of ISOs granted under
the Plan, to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders or, in lieu thereof, by written consent. If the approval
of stockholders is not obtained prior to December 8, 1993, any grants of ISOs
under the Plan made prior to that date will be rescinded. The Plan shall expire
at the end of the day on December 7, 2002 (except as to Options outstanding on
that date). Subject to the provisions of paragraph 5 above, Stock Rights may be
granted under the Plan prior to the date of stockholder approval of the Plan.
The Board may terminate or amend the Plan in any respect at any time, except
that, without the approval of the stockholders obtained within 12 months before
or after the Board adopts a resolution authorizing any of the following actions:
(a) the total number of shares that may be issued under the Plan may not be
increased (except by adjustment pursuant to paragraph 13); (b) the benefits
accruing to participants under the Plan may not be materially increased; (c) the
requirements as to eligibility for participation in the Plan may not be
materially modified; (d) the provisions of paragraph 3 regarding eligibility for
grants of ISOs may not be modified; (e) the provisions of paragraph 6(B)
regarding the exercise price at which shares may be offered pursuant to ISOs may
not be modified (except by adjustment pursuant to paragraph 13); (f) the
expiration date of the Plan may not be extended; and (g) the Board may not take
any action which would cause the Plan to fail to comply with Rule 16b-3. Except
as otherwise provided in this paragraph 15, in no event may action of the Board
or stockholders alter or impair the rights of a grantee, without his consent,
under any Stock Right previously granted to him.

16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS. The Committee, at the
written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting
Non-Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's ISOs
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action.

17. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.

18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after he makes a Disqualifying Disposition (as described in Sections
421, 422 and 424 of the Code and regulations thereunder) of any stock acquired
pursuant to the exercise of ISOs granted under the Plan. A Disqualifying
Disposition is generally any disposition occurring within two years of the date
the ISO was granted or within one year of the date the ISO was exercised,
whichever period ends later.

Page 25 of 26
<PAGE> 8

19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the vesting or transfer of restricted
stock or securities acquired on the exercise of a Stock Right hereunder, or the
making of a distribution or other payment with respect to such stock or
securities, the Company may withhold taxes in respect of amounts that constitute
compensation includible in gross income. The Committee in its discretion may
condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the
making of a Purchase of Common Stock for less than its fair market value, or
(iv) the vesting or transferability of restricted stock or securities acquired
by exercising a Stock Right, on the grantee's making satisfactory arrangement
for such withholding. Such arrangement may include payment by the grantee in
cash or by check of the amount of the withholding taxes or, at the discretion of
the Committee, by the grantee's delivery of previously held shares of Common
Stock or the withholding from the shares of Common Stock otherwise deliverable
upon exercise of a Stock Right shares having an aggregate fair market value
equal to the amount of such withholding taxes.

20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.

Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
send tax information statements to employees and former employees that exercise
ISOs under the Plan, and the Company may be required to file tax information
returns reporting the income received by grantees of Stock Rights in connection
with the Plan.

21. GOVERNING LAW; CONSTRUCTION. The validity and construction of the Plan
and the instruments evidencing Stock Rights shall be governed by the laws of
Massachusetts, or the laws of any jurisdiction in which the Company or its
successors in interest may be organized. In construing this Plan, the singular
shall include the plural and the masculine gender shall include the feminine and
neuter, unless the context otherwise requires.

Page 26 of 26

<ARTICLE> 5
<CIK> 0000792977
<NAME> ADVANCED MAGNETICS, INC.

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
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