Edgar Filing: ADVANCED MAGNETICS INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

		For the quarterly period ended

OR

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

		For the transition period from October 1, 2006 to December 31, 2006

Commission File #0-14732

ADVANCED MAGNETICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		04-2742593
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)

125 CambridgePark Drive - 6th Floor
Cambridge, Massachusetts		02140
(Address of Principal Executive Offices)		(Zip Code)

(617) 498-3300

(Registrant’s Telephone Number, Including Area Code)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of May 30, 2007 there were 16,746,442 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

Advanced Magnetics, Inc. is filing this Transition Report on Form 10-Q, or this Transition Report, in connection with its change in fiscal year end from September 30 to December 31. We previously reported the change in fiscal year end on a Current Report on Form 8-K, dated May 14, 2007. This Transition Report is identical, in all material respects, to the Form 10-Q filed by us on February 9, 2007 with regard to the three months ended December 31, 2006, except that this Transition Report has been updated to reflect previously disclosed significant events that have occurred since February 9, 2007.

ADVANCED MAGNETICS, INC.
TRANSITION REPORT ON FORM 10-Q
QUARTER ENDED DECEMBER 31, 2006
PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements.

ADVANCED MAGNETICS, INC.
CONDENSED BALANCE SHEETS

DECEMBER 31, 2006 AND SEPTEMBER 30, 2006

(Unaudited)

	December 31, 2006			September 30, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	114,459,701		$	32,312,679
Short-term investments	41,599,019			9,760,367
Accounts receivable - trade	349,347			85,218
Inventories	343,831			370,060
Prepaid expenses and interest receivable	1,098,213			595,103
Total current assets	157,850,111			43,123,427
Property, plant and equipment:
Land	360,000			360,000
Building and improvements	4,947,803			4,812,331
Laboratory equipment	5,559,894			5,520,392
Furniture and fixtures	1,310,938			1,107,968
Total property, plant and equipment	12,178,635			11,800,691
Less - accumulated depreciation	(7,721,215		)	(7,569,157		)
Net property, plant and equipment	4,457,420			4,231,534
Restricted Cash	33,949			15,603
Total assets	$	162,341,480		$	47,370,564

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,850,905		$	4,759,038
Accrued expenses	3,550,316			3,734,523
Deferred revenue	976,301			1,007,074
Total current liabilities	8,377,522			9,500,635
Long-term liabilities:
Deferred revenue and rent expense	1,687,933			1,795,407
Total liabilities	10,065,455			11,296,042

Commitments and contingencies

Stockholders’ equity:
Preferred stock, par value $.01 per share, 2,000,000 shares authorized; none issued	—			—
Common stock, par value $.01 per share, 25,000,000 shares authorized; 14,065,663 shares issued and outstanding at December 31, 2006 and 11,940,532 shares issued and outstanding at September 30, 2006	140,657			119,405
Additional paid-in capital	234,929,697			111,309,066
Accumulated deficit	(82,794,329		)	(75,353,949		)
Total stockholders’ equity	152,276,025			36,074,522

Total liabilities and stockholders’ equity	$	162,341,480		$	47,370,564

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

ADVANCED MAGNETICS, INC.
CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE-MONTH PERIODS ENDED

DECEMBER 31, 2006 AND 2005

(Unaudited)

	Three-Month Periods Ended December 31,
	2006			2005
Revenues:
License fees	$	221,599		$	223,596
Royalties	44,427			47,819
Product sales	352,605			392,940
Total revenues	618,631			664,355

Costs and expenses:
Cost of product sales	286,528			122,116
Research and development expenses	6,393,162			3,070,968
Selling, general and administrative expenses	2,197,347			1,860,938

Total costs and expenses	8,877,037			5,054,022

Operating loss	(8,258,406		)	(4,389,667		)

Other Income:
Interest and dividend income, net	818,026			174,935

Net loss	$	(7,440,380	)	$	(4,214,732	)

Net Loss per share - basic and diluted:	$	(0.60	)	$	(0.43	)

Weighted average shares outstanding used to compute net loss per share:
Basic and diluted	12,383,149			9,886,262

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

ADVANCED MAGNETICS, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE THREE-MONTH PERIODS ENDED

DECEMBER 31, 2006 AND 2005

(Unaudited)

	Three-Month Periods Ended December 31,
	2006			2005

Net loss	$	(7,440,380	)	$	(4,214,732	)
Other comprehensive income:
Unrealized gains on securities	—			37,876
Comprehensive loss	$	(7,440,380	)	$	(4,176,856	)

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

ADVANCED MAGNETICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTH PERIODS ENDED

DECEMBER 31, 2006 AND 2005

(Unaudited)

	Three-Month Periods Ended December 31,
	2006			2005

Net loss	$	(7,440,380	)	$	(4,214,732	)

Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	152,058			68,619
Non-cash expense associated with non-employee stock options	—			148,800
Non-cash expense associated with employee stock options and restricted stock units	548,276			1,108,891
Amortization of premium on purchased securities	—			44,211
Changes in operating assets and liabilities:
Accounts receivable - trade	(264,129		)	(220,572		)
Inventories	26,229			(13,372		)
Prepaid expenses and interest receivable	(503,109		)	(232,543		)
Accounts payable and accrued expenses	(1,092,340		)	(177,539		)
Deferred revenue and rent expense, net	(138,248		)	(223,596		)
Total adjustments	(1,271,263		)	502,899
Net cash used in operating activities	(8,711,643		)	(3,711,833		)

Cash flows from investing activities:
Proceeds from maturities of short-term investments	9,760,367			—
Purchase of short-term investments	(41,599,019		)	—
Restricted cash	(18,346		)	—
Capital expenditures	(377,944		)	(27,069		)

Net cash used in investing activities	(32,234,942		)	(27,069		)

Cash flows from financing activities:

Proceeds from the exercise of stock options	173,253			125,828
Proceeds from the issuance of common stock, net of underwriting discount of $7,171,230 and other expenses of $294,416	122,920,354			—

Net cash provided by financing activities	123,093,607			125,828

Net increase (decrease) in cash and cash equivalents	82,147,022			(3,613,074		)

Cash and cash equivalents at beginning of the period	32,312,679			11,332,088

Cash and cash equivalents at end of the period	$	114,459,701		$	7,719,014

Supplemental data:
Non-cash financing activities:
Non-cash stock option exercises	$	183,975		$	—

Prior period presentation has been reclassified to the present period format.

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

ADVANCED MAGNETICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2006

(Unaudited)

A. Summary of Accounting Policies

Business

Founded in November 1981, Advanced Magnetics, Inc., a Delaware corporation, is a biopharmaceutical company engaged in the development and commercialization of therapeutic iron compounds to treat anemia, as well as novel imaging agents to aid in the diagnosis of cancer and cardiovascular disease. We have two approved products, Feridex I.V.® and GastroMARK®, and we have two product candidates, ferumoxytol and Combidex®. Ferumoxytol, our key product candidate, is being developed for use as an intravenous, or IV, iron replacement therapeutic for the treatment of iron deficiency anemia in chronic kidney disease. Combidex is our investigational functional molecular imaging agent consisting of iron oxide nanoparticles for use in conjunction with magnetic resonance imaging, or MRI, to aid in the differentiation of cancerous from normal lymph nodes. Feridex I.V., our liver contrast agent, is approved and marketed in Europe, the United States and other countries. GastroMARK, our oral contrast agent used for delineating the bowel in MRI, is approved and marketed in Europe, the United States and other countries.

Change of Year End

Effective May 14, 2007, our Board of Directors, or the Board, approved a change in our fiscal year end from September 30 to December 31. As set forth on the cover page of this report, our Transition Report modifies our Quarterly Report on Form 10-Q for the three months ended December 31, 2006 that was previously filed with the Securities and Exchange Commission.

Basis of Presentation

These condensed financial statements are unaudited and, in the opinion of management, include all adjustments necessary for a fair statement of such interim financial statements. Such adjustments consisted only of normal recurring items. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

In accordance with accounting principles generally accepted in the United States of America for interim financial reports and the instructions for Form 10-Q and the rules of the Securities and Exchange Commission, or the SEC, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. Our accounting policies are described in the Notes to the Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006. Interim results are not necessarily indicative of the results of operations for the full year. These interim financial statements should be read in conjunction with our most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain 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 revenue and expenses during the reported period. Actual results could differ from those estimates.

Equity-Based Compensation

On October 1, 2005, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123R “Share-Based Payment,” or SFAS 123R, and its related implementation guidance as promulgated by both the Financial Accounting Standards Board, or the FASB, and the SEC Staff Accounting Bulletin 107, or SAB 107, in connection with the accounting for the share-based compensation arrangements of our employees and certain directors. These pronouncements require that equity-based compensation cost be measured at the grant date (based upon an estimate of the fair value of the compensation granted) and recorded to expense over the requisite service period, which generally is the vesting period.

We estimate the fair value of equity-based compensation involving stock options utilizing the Black-Scholes option pricing model. This model requires the input of several factors such as the expected option term, expected volatility of our stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield over the expected option term, and an expected forfeiture rate, and is subject to various assumptions. We believe this valuation methodology is appropriate for estimating the fair value of stock options we grant to employees and directors which are subject to SFAS 123R requirements. These amounts are estimates and thus may not be reflective of actual future results or amounts ultimately realized by recipients of these grants. These amounts, and the amounts applicable to future quarters, are also subject to future quarterly adjustments based upon a variety of factors, which include, but are not limited to, the issuance of new options. The fair value of restricted stock units granted to employees and directors is determined at the grant date and is computed using the fair value method, which is based upon the estimated fair market value per share on the date of the grant.

Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, investments, accounts receivable and accounts payable. Any net unrealized gain (loss) on investments is recorded as a separate component of stockholders’ equity entitled “Accumulated other comprehensive loss.”

Reclassifications

Certain amounts from the prior fiscal quarter have been reclassified to conform to the current quarter’s presentation. We have changed from the direct method presentation of cash flows to the indirect method presentation of cash flows in order to conform to comparable industry presentations.

B. Investments

We account for and classify our short-term investments as either “available-for-sale,” “trading,” or “held-to-maturity,” in accordance with the guidance outlined in SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities,” or SFAS 115. The determination of the appropriate classification by us is based on a variety of factors including management’s intent.

As of December 31, 2006, our short-term investments amounted to $41,599,019, and consisted of four debt securities, all of which were classified as “held-to maturity.” The maturity dates of securities held as of December 31, 2006 ranged from one to four months. The security held as of September 30, 2006 matured on November 16, 2006.

The following table summarizes information relative to our short-term investments:

	December 31, 2006		September 30, 2006
U. S. Treasury Bill	$	—	$	9,760,367
U. S. Government Agencies	$	21,599,539	$	—
U. S. State and Political Subdivisions	$	19,999,480	$	—
	$	41,599,019	$	9,760,367

Aggregate fair value	$	41,600,000	$	9,945,531
Gross unrecognized holding (losses)	$	—	$	—
Gross unrecognized holding gains	$	981	$	185,164
Net carrying amount (amortized cost)	$	41,599,019	$	9,760,367

C. Inventories

The major classes of inventories were as follows:

	December 31, 2006		September 30, 2006
Raw materials	$	288,991	$	302,937
Work in process	40,428		52,556
Finished goods	14,412		14,567
Total inventories	$	343,831	$	370,060

D. Income Taxes

There were no income tax provisions or benefits for the three months ended December 31, 2006 and 2005, as we incurred a loss in both of those periods. Due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, we have recorded a full valuation allowance against our otherwise recognizable net deferred tax assets as of December 31, 2006 and September 30, 2006.

E. Loss per Share

We compute basic loss per share by dividing net loss by the weighted average number of common shares outstanding during the relevant period. Options to purchase a total of 1,206,486 and 1,199,772 shares of common stock that were outstanding as of the three months ended December 31, 2006 and 2005, respectively, were excluded from the computation of diluted net loss per share because such options were anti-dilutive as we incurred a loss in those periods. In addition, 34,000 shares of common stock issuable upon the vesting of restricted stock units were outstanding as of December 31, 2006 and were excluded from the computation of diluted net loss per share because such units were anti-dilutive as we incurred a loss in that period. There were no restricted stock units outstanding as of December 31, 2005.

Warrants to purchase 261,780 shares of common stock, issued in July 2003 at an exercise price of $15.50 per share, and warrants to purchase 359,999 shares of common stock, issued in June 2005 at an exercise price of $13.00 per share, were excluded from the computation of diluted net loss per share for the three months ended December 31, 2005 because such warrants were anti-dilutive as we incurred a loss in that period. There were no warrants outstanding as of December 31, 2006.

The components of basic and diluted loss per share were as follows:

	Three-Month Periods Ended December 31,
	2006			2005

Net loss (A)	$	(7,440,380	)	$	(4,214,732	)

Weighted average common shares outstanding (B)	12,383,149			9,886,262
Loss per share:
Basic and diluted (A/B)	$	(0.60	)	$	(0.43	)

F. Common Stock Transactions

In December 2006, we sold an aggregate of 2,103,000 shares of our common stock, $.01 par value per share, in an underwritten public offering at a price to the public of $62 per common share, resulting in gross proceeds of approximately $130 million. Net proceeds to us after deducting fees, commissions and other expenses related to the offering were approximately $123 million. The shares were issued pursuant to a shelf registration statement on Form S-3 and a registration statement filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, or the Securities Act.

G. Equity-Based Compensation

We have several stock-based compensation plans. Our Amended and Restated 2000 Stock Plan, which was approved by our stockholders, provides for the grant of options and other stock awards to our directors, officers, employees and consultants. The terms and conditions of each such grant, including, but not limited to, the number of shares, the exercise price, term of the option/award and vesting requirements, are determined by our Board of Directors or the Compensation Committee of our Board of Directors.

As of December 31, 2006, we have granted options and restricted stock units covering 1,659,650 shares of common stock under the Amended and Restated 2000 Stock Plan, of which 145,900 stock options and no restricted stock units have expired or terminated, and 314,514 of which have been exercised. The remaining number of outstanding options and restricted stock units pursuant to this plan as of December 31, 2006 was 1,165,236 and 34,000, respectively. The remaining number of shares available for future grants as of December 31, 2006 was 486,250. All outstanding options granted have an exercise price equal to the closing price of our common stock on the grant date and substantially all have a ten year term.

Our standard stock option agreement allows for payment of the exercise price for vested stock options either through cash remittance to us in exchange for newly issued shares, or through a non-cash exchange of previously issued shares held by the recipient in exchange for our newly issued shares. The latter method results in no cash being received by us, but also results in a lower number of total shares subsequently being outstanding (as compared to a cash exercise), as a direct result of previously issued shares being exchanged in return for the issuance of new shares. Shares returned to us in this manner are retired.

The following table summarizes the weighted average assumptions we utilized for grants of options to differing groups of optionees in the quarter ended December 31, 2006.

	Options granted	Options granted
	to Chairman and CEO	to Non-Employee Directors	Employee Options
Assumptions	November 2006	November 2006	Granted

Risk free interest rate %	4.6	4.6	4.4
Expected volatility %	73	73	73
Expected option life (years)	6.25	5	6.25
Dividend yield	none	none	none

Our 1993 Stock Plan, approved by our stockholders, provided for the grant of options to our directors, officers, employees and consultants to purchase up to an aggregate of 700,000 shares of common stock at a price equal to at least the fair market value, or the minimum legal consideration, of the stock at the date of the grant for incentive stock options and non-statutory stock options, respectively. No further grants may be made under our 1993 Stock Plan. The maximum term of the options under the 1993 Stock Plan is ten years, with limited exceptions. The remaining number of shares subject to outstanding options pursuant to this plan as of December 31, 2006 was 41,250.

Our 2003 Employee Stock Purchase Plan, approved by our stockholders, provides for the issuance of up to 100,000 shares of our common stock to eligible employees. Under the terms of the 2003 Employee Stock Purchase Plan, which expires on May 31, 2007, eligible employees may purchase shares (subject to certain plan and/or income tax limitations) in five annual offerings through payroll deductions of up to a maximum of 10% of the employee’s earnings, at a price equal to the lower of 85% of the fair market value of the stock on the applicable annual offering commencement date of June 1 or termination date of May 31. As of December 31, 2006, 49,567 shares have been issued under the 2003 Employee Stock Purchase Plan.

At our Annual Meeting of Stockholders held on February 6, 2007, a proposal to approve our 2006 Employee Stock Purchase Plan was approved by a vote of our stockholders. The plan authorizes the issuance of up to 100,000 shares of our common stock to eligible employees. Under the terms of the 2006 Employee Stock Purchase Plan, which begins on June 1, 2007 and expires May 31, 2012, eligible employees are granted the option to purchase shares (subject to certain plan and/or income tax limitations) in ten semi-annual offerings through payroll deductions of up to an annual maximum of 10% of the employee’s total compensation, including base pay or salary and any overtime, bonuses or commissions. The first period of the plan commences on June 1, 2007 and ends November 30, 2007. For the remainder of the plan, periods will consist of six-month periods commencing June 1 and ending November 30 and commencing December 1 and ending May 31. The option price per share is the lesser of 85% of the fair market value of the stock on the first or last day of the plan period. As of December 31, 2006, no shares have been issued under the 2006 Employee Stock Purchase Plan.

On November 7, 2006, the Board of Directors approved, based on the recommendation of our Compensation Committee, a revised plan of non-employee director compensation. As part of this plan it is intended that on the first Tuesday of each November, each non-employee director will be granted an option to purchase $100,000 in value of shares of our common stock pursuant to our Amended and Restated 2000 Stock Plan. These options will vest in full on the date of grant, have an exercise price equal to the fair market value of a share of our common stock as of the date of grant, and have a ten year term. The actual number of shares granted will be determined using a Black-Scholes option pricing model identical to that used by us for purposes of preparing our financial statements. In lieu of the foregoing annual grant for the first year of service on the Board, each newly-elected non-employee director will be granted an option to purchase $250,000 in value of shares of our common stock pursuant to our Amended and Restated 2000 Stock Plan on the date such director is elected to the Board. These options will vest in four equal annual installments beginning one year from the date of grant, have an exercise price equal to the fair market value of a share of our common stock as of the date of grant, and have a ten-year term. The actual number of shares granted will be determined using a Black-Scholes option pricing model.

H. Concentration of Credit Risk

Our operations are located solely within the United States. We perform ongoing credit evaluations of our customers and generally do not require collateral. Three companies were responsible for approximately 91% of our revenue during the three months ended December 31, 2006. Berlex Laboratories, Inc., or Berlex, represented approximately 31% of our revenue, Guerbet, S.A, or Guerbet, represented approximately 45% of our revenue, and Tyco Healthcare, Ltd, or Tyco Healthcare, represented approximately 15% of our revenue. Two companies were responsible for approximately 78% of our revenue during the quarter ended December 31, 2005. Berlex represented approximately 28% of our revenue and Guerbet represented approximately 50% of our revenue. No other company accounted for more than 10% of our total revenues for the three months ended December 31, 2006 or 2005.

Two companies were responsible for our trade receivables at December 31, 2006. Guerbet represented approximately 77%, and Tyco Healthcare represented approximately 23% of our trade receivables at December 31, 2006. Revenues from customers and licensees outside of the United States, principally in Europe, South Korea and Japan, amounted to 47% and 62% of our total revenues for the three months ended December 31, 2006 and 2005, respectively.

I. Recently Issued and Proposed Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, or FIN 48, entitled “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109.” FIN 48, and related pronouncements, specifically clarify the accounting for uncertainty in income taxes recognized in financial statements in accordance with the provisions of FASB 109, “Accounting for Income Taxes.” The adoption of the provisions of these pronouncements, which become effective for fiscal years that begin on or after December 15, 2006, is not expected to have a material impact on our financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, or SAB 108, which outlines its views regarding the process of quantifying financial statement misstatements, effective for fiscal years ended after November 15, 2006. The adoption of the provisions of this pronouncement did not have a material impact on our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS 157. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Accordingly, we are in the process of evaluating the impact of SFAS 157.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115,” or SFAS 159. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, thereby providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available-for-sale and trading securities. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Accordingly, we are in the process of evaluating the impact of SFAS 159.

J. Commitments and Contingencies

Legal Proceedings

On January 25, 2006, Cytogen Corporation, or Cytogen, filed a lawsuit against us in Massachusetts Superior Court. The complaint included claims of breach of contract, breach of implied covenant of good faith and fair dealing, fraudulent misrepresentation and unjust enrichment relating to a license and marketing agreement entered into in August 2000 between us and Cytogen. We filed an answer to the complaint asserting numerous counterclaims, including breach of contract, defamation, tortious interference with advantageous business relations, tortious interference with contract, abuse of process, and violation of the Lanham Act. On February 15, 2007, we settled the lawsuit with Cytogen, as described more fully in Note K below.

Facility Lease and Related Letter of Credit

On February 28, 2006, we entered into a lease agreement with CambridgePark 125 Realty Corporation, for certain real property located on the 6th Floor at 125 CambridgePark Drive, Cambridge, Massachusetts. The lease has a three year term, with an additional partial month at the beginning of the term and provides for one option to extend the lease for a two year period. Under the terms of the lease, we are required to pay the landlord approximately $15,600 per calendar month for the first year of the term (plus the partial month at the beginning of the term), approximately $16,300 per calendar month for the next year of the term and approximately $17,000 per calendar month for the last year of the term. In addition to rent, we are also required to pay a proportionate share of the landlord’s annual operating costs and electricity. The rent for any extension term will be determined at the time of the exercise of the option under terms set out in the lease.

On November 29, 2006, we entered into an amendment to our lease with CambridgePark 125 Realty Corporation, for the purpose of securing the rental of an additional 8,154 square feet of executive office space at 125 CambridgePark Drive on a coterminous basis with our existing lease. Under the terms of the lease amendment, we are required to pay the landlord approximately $18,300 per calendar month for the first year of the amended lease for the additional space, approximately $19,000 per calendar month for the second year of the amended lease for the additional space, and approximately $19,700 per calendar month for the remaining term of the amended lease for the additional space. All of the other terms and conditions of the original lease apply to the additional rented space. In addition to rent, we are also required to pay a proportionate share of the landlord’s annual operating costs and electricity. The rent for any extension term will be determined at the time of the exercise of the option under terms set out in the lease.

In accordance with FASB Technical Bulletin No. 85-3 “Accounting for Operating Leases with Scheduled Rent Increases,” rent expense is being recognized in the financial statements on a straight-line basis over the lease term, excluding extension periods. In accordance with FASB Technical Bulletin No. 88-13 “Issues Relating to Accounting for Leases” and other related interpretations, lease incentives granted to us by the lessor pursuant to the lease amendment are being accounted for on a straight-line basis over the remaining term of the amended lease for the additional space. In addition, in fulfillment of a security deposit requirement for both the original space and the additional space, we issued a $33,949 irrevocable letter of credit to the landlord. This amount is classified on the accompanying balance sheet as a long-term asset and is restricted in its use.

Other

We are a party to an agreement with FoxKiser Development Partners LLC, or FoxKiser, one of our regulatory consultants for Combidex, which provides for certain royalty payments to FoxKiser based on future commercial product sales of Combidex, if any.

K. Subsequent Events

At our Annual Meeting of Stockholders held on February 6, 2007, a proposal to approve our 2006 Employee Stock Purchase Plan was approved by a vote of our stockholders. See Note G above for a description of the material provisions of the plan.

On February 6, 2007, the Board approved, based on the recommendation of the Compensation Committee, the following:

1. A $100,000 bonus opportunity for Brian J.G. Pereira, MD, our Chief Executive Officer and President, if he achieves certain performance goals established by the Board on or prior to December 31, 2007. This bonus opportunity is in addition to the annual bonus opportunity of up to 75% of Dr. Pereira’s base salary if he achieves certain other performance goals established by the Board during the fiscal year ending September 30, 2007. The specific terms of Dr. Pereira’s performance goals are not disclosed because they involve confidential commercial and business information, the disclosure of which would cause competitive harm to us.

2. The grant to Dr. Pereira of an option to purchase 100,000 shares of our Common stock pursuant to the Amended and Restated 2000 Stock Plan at an exercise price of $62.78, which was the fair market

value of a share of our common stock on the date of grant. The foregoing option will vest if, and only if, Dr. Pereira achieves certain performance goals established by the Board on or prior to December 31, 2008. The specific terms of Dr. Pereira’s performance goals are not disclosed because they involve confidential commercial and business information, the disclosure of which would cause competitive harm to us.

3. The elimination of Dr. Pereira’s $1,200 monthly automobile allowance and the increase in Dr. Pereira’s annual base salary from $416,000 to $431,000.

On February 15, 2007, we entered into a Settlement Agreement with Cytogen pursuant to which both parties agreed to dismiss the existing lawsuit between the parties and drop all claims against each other, and all agreements between the parties were terminated. Under the terms of the settlement we paid Cytogen a lump sum payment of $4 million in cash and released to Cytogen the 50,000 shares of Cytogen common stock being held in escrow under the terms of the original license and marketing agreement between the parties.

On May 1, 2007, Jerome Goldstein, the Executive Chairman of the Board and founder of our company, retired as an officer and director of our company. In connection with his retirement, Mr. Goldstein entered into a separation agreement with us whereby he received $85,000 plus accrued salary and vacation through May 1, 2007. In addition, effective May 1, 2007, Mr. Goldstein’s November 7, 2006 option to purchase 50,000 shares was accelerated to become vested and immediately exercisable with respect to 25,000 shares. The option agreement with respect to the November 7, 2006 grant was amended to make the vested portion of that option grant exercisable until December 31, 2007.

On May 14, 2007, the Board voted to increase the compensation payable to Mark Skaletsky as a result of his appointment as the Chairman of the Board. Mr. Skaletsky will be paid an annual retainer of $60,000, payable in four equal quarterly installments, and it is intended that he will be granted an annual option to purchase $200,000 in value of shares of our common stock pursuant to our current equity incentive plan. The actual number of shares underlying the option to be granted will be determined using a Black-Scholes option pricing model identical to that used by us for purposes of preparing our financial statements. Such option will be granted at the same time as the other members of the Board receive their annual grant of stock options. The option will be granted with an exercise price equal to the fair market value of our common stock on the date the option is granted.

On May 14, 2007, the Board voted to adopt new severance and change of control arrangements for the following executive officers: Brian J.G. Pereira, President and Chief Executive Officer, David Arkowitz, Chief Financial Officer and Chief Business Officer, Joseph L. Farmer, General Counsel and Vice President of Legal Affairs, Louis Brenner, Senior Vice President, and Timothy G. Healey, Senior Vice President of Commercial Operations. The employment agreements entered into with each of those officers will be amended to reflect the changes resulting from the new severance and change of control arrangements.

On May 14, 2007, the Board voted to change our fiscal year end from September 30 to December 31.

On May 14, 2007, the Board voted to amend and restate our Amended and Restated By-laws in order to effect the change to our fiscal year end as described above and to change the date of our Annual Meeting from the first Tuesday in February of each year to a date to be fixed by the Board.

In May 2007, we sold an aggregate of 2,500,000 shares of our common stock, $.01 par value per share, in an underwritten public offering at a price to the public of $65.14 per common share, resulting in gross proceeds of approximately $162,850,000. Net proceeds to us after deducting fees, commissions and other expenses related to the offering were approximately $154,507,500. The shares were issued pursuant to a shelf registration statement on Form S-3 which became effective upon filing.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Transition Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

Except for the historical information contained herein, the matters discussed in this Transition Report on Form 10-Q may be deemed to be forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. In this Transition Report on Form 10-Q, words such as “may,” “will,” “expects,” “intends,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements. Any forward-looking statement should be considered in light of factors discussed elsewhere in this Transition Report on Form 10-Q and those risks identified in our other SEC filings, including but not limited to our Annual Report on Form 10-K for the fiscal year ended September 30, 2006. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC to publicly update or revise any such statements to reflect any change in company expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

Advanced Magnetics, Inc. was incorporated in Delaware in November 1981 and is a biopharmaceutical company that utilizes its proprietary nanoparticle technology for the development and commercialization of therapeutic iron compounds to treat anemia and novel imaging agents to aid in the diagnosis of cancer and cardiovascular disease. We have two approved products, Feridex I.V.® and GastroMARK®, and two product candidates, ferumoxytol and Combidex®.

Ferumoxytol, our key product candidate, is being developed for use as an intravenous, or IV, iron replacement therapeutic for the treatment of iron deficiency anemia in chronic kidney disease, or CKD. We have completed enrollment in all four of our planned pivotal Phase III clinical studies for ferumoxytol as an IV iron replacement therapeutic. Two of the completed studies were identical efficacy and safety studies each of which enrolled 304 non-dialysis dependent chronic kidney disease, or CKD, patients comparing two doses of 510 mg ferumoxytol to daily oral iron. The third completed study was a safety study in 750 non-dialysis dependent CKD and dialysis-dependent CKD patients comparing a single dose of 510 mg ferumoxytol to placebo. The final study, in which enrollment was completed in March 2007, is a 230 patient multi-center efficacy and safety study in hemodialysis-dependent CKD patients comparing two doses of 510 mg ferumoxytol to daily oral iron. Based on our current estimates of the timing of our efforts to prepare and finalize the submission of the New Drug Application, or NDA, for ferumoxytol, we currently plan to submit the NDA for ferumoxytol as an IV iron replacement therapeutic to the U.S. Food and Drug Administration, or the FDA, during the fourth calendar quarter of 2007.

Combidex, our other product under development, is an investigational functional molecular imaging agent consisting of iron oxide nanoparticles for use in conjunction with magnetic resonance imaging, or MRI, to aid in the differentiation of cancerous from normal lymph nodes. In March 2005, we received an approvable letter from the FDA with respect to Combidex, subject to certain conditions. We are working with our European partner, Guerbet, S.A, or Guerbet, on the potential presentation to the FDA of additional data from a Phase III study sponsored by Guerbet in Europe in patients with pelvic cancers, including prostate, bladder, cervical and uterine cancer, which, together with other additional information we intend to provide to the FDA, we hope will address the concerns raised in the March 2005 approvable letter. In December 2006, Guerbet announced that it submitted a marketing authorization application to the European Agency for the Evaluation of Medicinal Products, the European equivalent of an NDA, seeking approval for Combidex under the tradename SineremÔ as an aid in the differentiation of lymph nodes in patients with pelvic cancers, including prostate, bladder and uterine cancer. We plan to announce our strategy for responding to the March 2005 approvable letter during the second half of calendar year 2007. However,

until our evaluation of the additional data from Guerbet is complete and we meet with the FDA to discuss our intended response to the March 2005 approvable letter, we cannot predict with certainty the timing or likelihood of our ability to satisfy the conditions specified by the FDA for approval of Combidex. In February 2007, we announced that we had re-acquired all U.S. marketing rights to Combidex in connection with the settlement of a lawsuit with Cytogen Corporation.

Feridex I.V., our liver contrast agent, is currently approved and marketed in Europe, the United States and other countries. GastroMARK, our oral contrast agent used for delineating the bowel in MRI, is also approved and marketed in Europe, the United States and other countries.

Critical Accounting Policies and Estimates

We account for and classify our short-term investments as either “available-for-sale,” “trading,” or “held-to-maturity,” in accordance with the guidance outlined in SFAS 115. The determination of the appropriate classification by us is based on a variety of factors including management’s intent.

There have been no other changes in accounting policies or estimates in the fiscal quarter ended December 31, 2006. See also Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

Results of Operations for the Quarter Ended December 31, 2006 as Compared to the Quarter Ended December 31, 2005

Revenues

Total revenues were $618,631 and $664,355 for the quarters ended December 31, 2006 and 2005, respectively, representing a decrease of approximately 7%. The decrease in revenues was primarily the result of decreased sales of Feridex I.V. and GastroMARK by our marketing partners, partially offset by an increase in the sale of bulk Combidex. Three companies were responsible for approximately 91% of our revenue during the quarter ended December 31, 2006. Berlex represented approximately 31% of our revenue, Guerbet represented approximately 45% of our revenue, and Tyco Healthcare represented approximately 15% of our revenue during the quarter. Two companies were responsible for approximately 78% of our revenue during the quarter ended December 31, 2005. Berlex represented approximately 28% of our revenue and Guerbet represented approximately 50% of our revenue for that quarter.

Our revenues for each of the quarters ended December 31, 2006 and 2005 consisted of the following:

	Three-Month Periods Ended December,
	2006		2005		$ Change			% Change
Revenues:
License fees	$	221,599	$	223,596	$	(1,997	)	-1	%
Royalties	44,427		47,819		(3,392		)	-7	%
Product sales	352,605		392,940		(40,335		)	-10	%
Total revenues	$	618,631	$	664,355	$	(45,724	)	-7	%

License Fee Revenue

All of our license fee revenue for the quarters ended December 31, 2006 and 2005 consisted of license fee revenue related to a license and marketing agreement signed with Cytogen in fiscal 2000 and license fee revenue associated with a license and marketing agreement with Berlex signed in fiscal 1995.

In August 2000, we entered into a license and marketing agreement with Cytogen in which, among other things, we granted Cytogen exclusive United States marketing rights to Combidex. At the time of signing that agreement, we received shares of common stock of Cytogen with a market value of $13,546,875 as a non-refundable licensing fee. We determined to account for the revenue associated with this fee over the development period of the products subject to the agreement as costs were incurred. The entire amount of the license fee was booked as deferred revenue upon signing the agreement. We slightly decreased our projected future research and development expenses associated with the Cytogen agreement as of December 31, 2006, based upon our then estimate of the cost of future efforts that might be required to obtain approval of Combidex, as compared to the estimate of such costs as of December 31, 2005. As a result, our revenue associated with the Cytogen agreement in the quarter ended December 31, 2006 decreased as compared with the quarter ended December 31, 2005. In the quarters ended December 31, 2006 and 2005, respectively, we recognized license fee revenue of $37,160 and $39,157 of previously deferred revenue associated with our license and marketing agreement with Cytogen. On February 15, 2007, as part of the settlement of a lawsuit with Cytogen, the license and marketing agreement with Cytogen was terminated. Therefore, the remainder of the deferred revenue associated with this agreement, $357,819, was recognized during the three months ended March 31, 2007.

In February 1995, we entered into a license and marketing agreement and a supply agreement with Berlex, granting Berlex a product license and exclusive marketing rights to Feridex I.V. in the United States and Canada. In 1996, the parties agreed to remove Canada from the territories subject to the agreement. Berlex paid us non-refundable license fees and other fees in connection with the agreements. We have determined to account for the revenue associated with this agreement on a straight-line basis over the term of the agreement due to the existence of an established contract period. The agreement expires in 2010 but can be terminated earlier upon the occurrence of certain specified events.

Total license fee revenue for each of the quarters ended December 31, 2006 and 2005 was recognized as follows:

	Three-Month Periods Ended December 31,
	2006		2005		$ Change			% Change
Deferred license fee revenue recognized in connection with the Cytogen agreement	$	37,160	$	39,157	$	(1,997	)	-5	%
Deferred license fee revenue recognized in connection with the Berlex agreement	184,439		184,439		—			0	%
Total	$	221,599	$	223,596	$	(1,997	)	-1	%

Royalty Revenue

Royalties decreased $3,392, or 7%, to $44,427 for the quarter ended December 31, 2006, compared with royalties of $47,819 for the quarter ended December 31, 2005. The decrease in royalties was primarily associated with slight decreases in sales of both Feridex I.V. and GastroMARK by our marketing partners and payment variations by end users for our marketed products. Royalty payments can fluctuate based on uneven demand and/or payment variations by end users for our marketed products, Feridex I.V. and GastroMARK. We expect royalties to generally remain at current levels due to the competitive landscape for our marketed products. With our permission, one of our foreign distributors, Eiken Chemical Co., Ltd, or Eiken, withdrew Feridex I.V. as an approved product with the appropriate regulatory authorities in Japan. The withdrawal and the termination of our agreement with Eiken took effect in April 2007. Revenues from Eiken amounted to approximately $16,778 and $31,260 in the quarters ended December 31, 2006 and 2005, respectively. Accordingly, the termination of this agreement is not expected to have a material impact on our future results of operations.

Product Sale Revenue

Product sale revenue for each of the quarters ended December 31, 2006 and 2005 consisted of the following:

	Three-Month Periods Ended December 31,
	2006			2005		$ Change			% Change
Feridex I.V.	$	(2,741	)	$	24,146	$	(26,887	)	-111	%
GastroMARK	79,221			267,971		(188,750		)	-70	%
Combidex	276,125			100,823		175,302			174	%
Total	$	352,605		$	392,940	$	(40,335	)	-10	%

The decrease in product sale revenue in the quarter ended December 31, 2006 as compared to the quarter ended December 31, 2005 was primarily the result of a decrease in sales of both Feridex I.V. and GastroMARK to our marketing partners offset by an increase in the sale of bulk Combidex to one of our foreign marketing partners for research and development purposes. Product sales fluctuate from period to period largely as a result of unpredictable annual product demand by end users and the batch size in which our products are manufactured and shipped, which creates uneven purchasing patterns by our marketing partners. Due to the historically low volume of our product sales, the impact of inflation is immaterial. We expect revenue from product sales will continue to fluctuate from period to period as a result of these factors.

Costs and Expenses

Cost of Product Sales

We incurred costs of $286,528 associated with product sales during the quarter ended December 31, 2006 compared to costs of $122,116 associated with product sales during the quarter ended December 31, 2005. This constituted approximately 81% and 31% of product sales during the quarter ended December 31, 2006 and 2005, respectively. The increase in cost of product sales is due primarily to the sale of bulk Combidex at cost to one of our foreign marketing partners for research and development purposes. The cost of product sales and therefore our gross margins are dependent on the mix of customers, prices we charge for our products, product mix, changes in unit volume and production efficiencies.

Research and Development Expenses

Research and development expenses include external expenses, such as costs of clinical trials, contract research and development expenses, consulting fees and professional fees and expenses, and internal expenses, such as compensation of employees engaged in research and development activities, the manufacture of limited quantities of product needed to support research and development efforts, related costs of facilities, and other general costs related to research and development.

Research and development expenses for each of the quarters ended December 31, 2006 and 2005 consisted of the following:

	Three-Month Periods Ended December 31,
	2006		2005		$ Change			% Change
External Research and Development Expenses
Ferumoxytol in Iron Replacement Therapy	$	3,785,118	$	1,760,217	$	2,024,901		115	%
Ferumoxytol in MRA	—		44,933		(44,933		)	-100	%
Combidex	75,156		94,597		(19,441		)	-21	%
Other external costs	84,171		36,366		47,805			131	%
Total	$	3,944,445	$	1,936,113	$	2,008,332		104	%

Internal Research and Development Costs	2,448,717		1,134,855		1,313,862			116	%
Total Research and Development Costs	$	6,393,162	$	3,070,968	$	3,322,194		108	%

Total research and development expenditures incurred in the quarter ended December 31, 2006 amounted to $6,393,162, an increase of $3,322,194 from the quarter ended December 31, 2005. Of the $3,322,194 increase, $2,008,332 was attributable to an increase in external costs and $1,313,862 was attributable to an increase in internal costs. We expect research and development fees to continue to increase for the remainder of fiscal 2007 as we complete our Phase III clinical trials, prepare for our ferumoxytol NDA submission and finalize our plan for responding to the March 2005 approvable letter we received from the FDA with respect to Combidex.

The $2,008,332 increase in external costs was due primarily to an increase in expenditures associated with the development program for ferumoxytol as an iron replacement therapeutic as we moved our Phase III clinical trials toward completion as well as costs associated with a Phase I study for ferumoxytol as an iron replacement therapeutic. External research and development costs incurred in the quarter ended December 31, 2006 do not include any non-cash charge associated with consultant stock-based compensation compared to a non-cash charge of $148,800 in the quarter ended December 31, 2005.

The $1,313,862 increase in internal costs was due primarily to higher compensation related costs resulting from an increase in both the overall salary level and number of employees engaged in research and development activities during the quarter ended December 31, 2006 compared to the quarter ended December 31, 2005. In addition, during the quarter ended December 31, 2006 our Board of Directors approved a new compensation plan for our employees. The increase in internal costs reflects bonus payments for fiscal 2006 which were approved in fiscal 2007 and a pro rata share of the fiscal 2007 bonuses for employees engaged in research and development activities. There was also an increase of approximately $337,000 in our non-cash employee stock based compensation charge related to SFAS 123R in the quarter ended December 31, 2006 compared to the quarter ended December 31, 2005 for employees engaged in research and development activities.

Through the end of fiscal 2000, we incurred aggregate internal and external research and development expenses of approximately $6,550,000 related to pre-clinical and toxicology studies of ferumoxytol. Since the end of fiscal 2000 and through the quarter ended December 31, 2006, we incurred aggregate external research and development expenses of approximately $30,100,000 related to pre-clinical activities and clinical trials in connection with ferumoxytol. As of March 31, 2007, we estimated that the future cost of the external efforts necessary to complete development prior to the submission of our NDA for ferumoxytol as an IV iron replacement therapeutic for the treatment of anemia in CKD patients in the U.S. would be in the range of approximately $7 to $9 million over approximately the following 6 to 9 months. These external costs could increase if we experience unexpected results from our clinical sites or inadequate performance or errors by third party service providers. External costs could also increase if we need to increase the scope and/or budget of the services provided by third parties, if there are deficiencies in the design or oversight by us of these studies, or if we need to conduct additional clinical trials or we otherwise experience a delay in the submission of our NDA for ferumoxytol as an IV iron replacement therapeutic.

We incurred total research and development expenses of approximately $13,500,000 through the end of fiscal 2000 in connection with the development of Combidex. Since fiscal 2000 and through the quarter ended December 31, 2006, we incurred additional external research and development expenses of approximately $1,464,000, as well as additional internal research and development costs related to our efforts to obtain FDA approval for Combidex. We cannot predict with certainty the timing or cost of the efforts that would be necessary to satisfy the conditions specified by the FDA for approval of Combidex or our ability to complete those efforts in a timely or cost-effective manner, if at all. However, we expect that both our internal and external research and development expenses will increase as we finalize our strategy for responding to the March 2005 approvable letter with respect to Combidex.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for each of the quarters ended December 31, 2006 and 2005 consisted of the following:

	Three-Month Periods Ended December 31,
	2006		2005		$ Change			% Change
Compensation, payroll taxes and benefits	1,261,067		1,390,692		(129,625		)	-9	%
Professional and consulting fees	549,520		317,298		232,222			73	%
Facilities, insurance and other	386,760		152,948		233,812			153	%
Total	$	2,197,347	$	1,860,938	$	336,409		18	%

Compensation, payroll taxes and benefits

The decrease in compensation, payroll taxes and benefits for the quarter ended December 31, 2006 as compared to the quarter ended December 31, 2005 was due to a decrease in non-cash SFAS 123R expense associated with employee stock-based compensation offset by an increase of wage, bonus and benefit expense for our employees. The decrease of approximately $898,000 in SFAS 123R expense was due primarily to a new Director compensation package approved by the Board of Directors in November 2006. The increase in compensation, payroll taxes and benefits to employees was due primarily to a new annual compensation program for our employees approved by our Board of Directors which provided retroactive bonuses for fiscal 2006 and certain bonus opportunities for fiscal 2007. Amounts for the full bonus for fiscal 2006 and an accrual of the pro rata fiscal 2007 bonuses were included in compensation, payroll taxes and benefits for the quarter ended December 31, 2006. There were no company-wide bonus plans in place during the quarter ended December 31, 2005. In addition, compensation, payroll taxes and benefits to employees increased due to an increase in the overall average salary level and the higher number of employees during the first fiscal quarter of 2007 compared to the same quarter in fiscal 2006.

We expect compensation, including bonuses, payroll taxes and benefit costs included in selling, general and administrative expenses to continue to increase over the remainder of fiscal 2007 as we continue our efforts to recruit additional staff, including sales and marketing professionals and consultants to assist in preparation for the potential commercialization of ferumoxytol as an IV iron replacement therapeutic.

At December 31, 2006, the amount of unrecorded expense associated with the adoption of SFAS 123R attributable to future periods for employee stock-based compensation was approximately $12,477,000, of which $11,770,000 was associated with stock options and $707,000 was associated with restricted stock units. Such amounts will be amortized, in varying amounts, to research and development or general and administrative expense, on a straight line basis over a weighted average amortization period of approximately three years. These future estimates are subject to change based upon a variety of future events which include, but are not limited to, changes in estimated forfeiture rates, and the issuance of new options.

Professional and consulting fees

Professional and consulting fees for the quarter ended December 31, 2006 increased as compared to the quarter ended December 31, 2005. We incurred increased expenses for professional fees in the quarter ended December 31, 2006 for consultants assisting with our ongoing efforts to comply with the internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and increased external audit fees associated with

these requirements. In addition, in the quarter ended December 31, 2006, we incurred consultant fees associated with our search for new members of our Board of Directors as well as increased legal fees associated with defending the Cytogen lawsuit.

Facilities, insurance and other

The increase in facilities and other costs in the quarter ended December 31, 2006 is associated with our November 2006 lease of additional office space, increased insurance costs, and increased recruiting costs related to various new employees.

Other Income

Other income for each of the quarters ended December 31, 2006 and 2005 consisted of the following:

	Three-Month Periods Ended December 31,
	2006		2005			$ Change		% Change
Interest income	$	818,026	$	219,146		$	598,880	273	%
Amortization of premiums on purchased investments	—		(44,211		)	44,211		100	%
Total Other Income	$	818,026	$	174,935		$	643,091	368	%

The increase in other income in the quarter ended December 31, 2006, as compared to the quarter ended December 31, 2005, was primarily attributable to funds being invested in higher interest-bearing investments, combined with a higher average total dollar amount of invested funds in the quarter ended December 31, 2006 as compared to the quarter ended December 31, 2005 as a result of our March and December 2006 financings (as described below in “Liquidity and Capital Resources”).

Income Taxes

We had no income tax provision for the quarters ended December 31, 2006 and 2005, as we incurred a loss in each of those fiscal quarters. Due to the uncertainty of the realizability of our deferred tax assets, including loss carryforwards, a full valuation allowance has been recorded as of December 31, 2006 and 2005 against these assets.

Net Loss

For the reasons stated above, there was a net loss of $7,440,380, or $0.60 per basic and diluted share, for the quarter ended December 31, 2006 compared to a net loss of $4,214,732, or $0.43 per basic and diluted share for the quarter ended December 31, 2005.

Liquidity and Capital Resources

We have financed our operations primarily from the sale of our equity securities, proceeds from our marketing and distribution partners and cash generated from our investing activities. Our long-term capital requirements will depend on many factors, including, but not limited to, the following:

· the progress of, and our ability to successfully complete, development of ferumoxytol as an IV iron replacement therapeutic in a timely manner and within our projected budget;

· our need to hire additional staff and lease additional office space as part of our commercialization efforts for ferumoxytol as an IV iron replacement therapeutic, including our efforts to build an internal sales and marketing function;

· the costs associated with preparing for commercial-scale manufacturing of ferumoxytol as an IV iron replacement therapeutic and Combidex, including the costs associated with qualifying second source suppliers and a second manufacturing facility;

· costs associated with our potential development of additional indications for ferumoxytol;

· costs associated with our pursuit of approval for ferumoxytol as an IV iron replacement therapeutic in Europe and other countries;

· our ability to successfully obtain regulatory approvals for our product candidates, including our ability to satisfy the conditions specified by the FDA for approval of Combidex;

· our ability to obtain appropriate reimbursement from governmental and other third party payors for our products and product candidates;

· the magnitude of product sales and royalties;

· our ability to establish additional development and marketing arrangements or to enter into alternative strategic relationships, if needed;

· the costs involved in filing, prosecuting and enforcing patent claims; and

· our ability to raise additional capital on terms and within a timeframe acceptable to us.

As of December 31, 2006, our short-term investments consisted of four debt securities. Cash and cash equivalents (which consist of cash on hand, money market funds and U.S. Treasury Bills having an original maturity of less than three months) and short term investments consisted of the following:

	December 31,		September 30,
	2006		2006		$ Change		% Change
Cash and cash equivalents	$	114,459,701	$	32,312,679	$	82,147,022	254	%
Short-term investments	41,599,019		9,760,367		31,838,652		326	%
Total cash, cash equivalents and investments	$	156,058,720	$	42,073,046	$	113,985,674	271	%

The significant increase in cash, cash equivalents and short-term investments as of December 31, 2006 compared to September 30, 2006 is primarily the result of the receipt of net proceeds of approximately $123 million from our December 2006 public offering of common stock. We believe that our cash, cash equivalents, and short-term investments, combined with cash we currently expect to receive from other sources, will be sufficient to satisfy our future cash flow needs for at least the next twelve months, including projected operating expenses and research and development costs related to our development program for ferumoxytol as an IV iron replacement therapeutic.

Net cash used in operating activities was $8,711,643 in the quarter ended December 31, 2006 compared to $3,711,833 in the quarter ended December 31, 2005, an increase of $4,999,810. This increase was due to higher payments made to research and development service providers associated with our ongoing clinical trials, costs associated with a Phase I study for ferumoxytol as an IV iron replacement therapeutic, an increase in the overall salary level and number of employees during the quarter compared to the same quarter last year, and bonus payments made to our employees during the quarter ended December 31, 2006. The payments to research and development service providers were higher during the quarter ended December 31, 2006 compared to the quarter ended December 31, 2005 due to a change in billing practices by one of our clinical service providers, some of which was accrued for as of September 30, 2006. Our professional fees were also higher during the quarter ended December 31, 2006 due to work performed in connection with our December 2006 financing.

We anticipate cash used in operating activities will increase in future periods as we continue to advance our ongoing development program for ferumoxytol as an IV iron replacement therapeutic, including our preparation of our NDA submission for ferumoxytol, our development of new indications for ferumoxytol in the United States, and/or our planning and initiation of clinical trials outside the United States, our continued expansion of our commercial organization in support of ferumoxytol, our efforts to qualify second source

suppliers and manufacturers of ferumoxytol, and finalization of our strategy for responding to the FDA’s March 2005 approvable letter with respect to Combidex.

In addition to our internal research and development costs, we estimated that as of March 31, 2007, the future cost of the external efforts necessary to complete development prior to the submission of our NDA for ferumoxytol as an IV iron replacement therapeutic for the treatment of anemia in CKD patients in the U.S. would be in the range of approximately $7 to $9 million over approximately the following 6 to 9 months. These external costs could increase if we experience unexpected results from our clinical sites or inadequate performance or errors by third party service providers. External costs could also increase if we need to increase the scope and/or budget of the services provided by third parties, if there are deficiencies in the design or oversight by us of these studies, or if we need to conduct additional clinical trials or we otherwise experience a delay in the submission of our NDA for ferumoxytol as an IV iron replacement therapeutic. We also expect that both our internal and external research and development expenses will increase as we finalize our plan for responding to the March 2005 approvable letter with respect to Combidex.

Cash used in investing activities was $32,234,942 in the quarter ended December 31, 2006 compared to $27,069 in the quarter ended December 31, 2005, an increase of $32,207,873. The increase was due primarily to the net purchase of $31,838,652 of short term investments in the quarter ended December 31, 2006 utilizing proceeds received from our December 2006 financing. Our capital expenditures in the quarter ended December 31, 2006 increased by $279,985 compared to the quarter ended December 31, 2005 due to expenditures for furniture, fixtures and telecommunications equipment associated with our November 2006 lease of additional office space.

Cash provided by financing activities was $123,093,607 in the quarter ended December 31, 2006 compared to $125,828 in the quarter ended December 31, 2005, an increase of $122,967,779. On December 13, 2006, we sold 2,103,000 shares of our common stock in an underwritten public offering. Net proceeds to us from the financing were approximately $123 million after deducting external transaction costs directly associated with the common stock offering. The shares were issued pursuant to a shelf registration statement on Form S-3 and a registration statement filed pursuant to Rule 462(b) promulgated under the Securities Act.

Facility Lease and Related Letter of Credit

exercise of the option under terms set out in the lease. In addition, in fulfillment of a security deposit requirement for both the original space and the additional space, we issued a $33,949 irrevocable letter of credit to the landlord. This amount is classified on the balance sheet as a long-term asset and is restricted in its use.

Off-Balance Sheet Arrangements

As of December 31, 2006, we did not have any off-balance sheet arrangements as defined by SEC rules and regulations. Warrants to purchase 359,999 shares of common stock issued in June 2005 at an exercise price of $13.00 were outstanding as of December 31, 2005. There were no warrants outstanding as of December 31, 2006.

Impact of Recently Issued and Proposed Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, or FIN 48, entitled, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109.” FIN 48, and related pronouncements, specifically clarify the accounting for uncertainty in income taxes recognized in financial statements in accordance with the provisions of FASB 109, “Accounting for Income Taxes.” The adoption of the provisions of these pronouncements, which become effective for fiscal years that begin on or after December 15, 2006, is not expected to have a material impact on our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS 157. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Accordingly we are in the process of evaluating the impact of SFAS 157.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115,” or SFAS 159. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, thereby providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The amendment to SFAS 115 applies to all entities with available-for-sale and trading securities. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Accordingly we are in the process of evaluating the impact of SFAS 159.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As of December 31, 2006, we invested a portion of our surplus cash in four debt securities. These investments are subject to interest rate risk and will fall in value if market interest rates increase. However, even if market interest rates for comparable investments were to increase immediately and uniformly by 10% from levels at December 31, 2006, we estimate that the fair value of this investment would decline by an immaterial amount. Therefore, we believe our exposure to interest rate risk is not substantial.

Item 4. Controls and Procedures.

Managements’ Evaluation of our Disclosure Controls and Procedures

Our principal executive officer and our principal financial and accounting officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rule 13a-15(e), or Rule 15d-15(e), with the participation of our management, has concluded that, as of the end of the period covered by this Transition Report, our disclosure controls and procedures are effective and are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. It should be noted that any system of controls is designed to provide reasonable, but not absolute, assurances that the system will achieve its stated goals under all reasonably foreseeable circumstances. Our principal executive officer and principal financial and accounting officer have concluded that our disclosure controls and procedures are effective at a level that provides such reasonable assurances.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1a. Certain Factors That May Affect Future Results.

The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial conditions and results of operations could be materially and adversely affected.

Our ability to successfully complete the development of, and obtain regulatory approval to market and sell, ferumoxytol as an IV iron replacement therapeutic is uncertain because the results of our clinical trials may not demonstrate that ferumoxytol is safe and efficacious.

Before obtaining regulatory approvals for the commercial sale of ferumoxytol, we must demonstrate through extensive pre-clinical testing and human clinical trials that ferumoxytol is safe and efficacious. We have completed enrollment in all four of our planned pivotal Phase III studies of ferumoxytol as an IV iron replacement therapeutic, and we have publicly announced the results of three of these four studies. However, ferumoxytol may be found to be unsafe, to have harmful side effects on humans, to be ineffective or may otherwise fail to meet regulatory standards or receive necessary regulatory approvals. If ferumoxytol fails in any of the Phase III clinical trials or our Phase III clinical trials do not demonstrate sufficient safety and efficacy of ferumoxytol as an IV iron replacement therapeutic, we will be unable to obtain regulatory approval for, and market, ferumoxytol as an IV iron replacement therapeutic, thereby dramatically reducing our potential future revenues and severely adversely impacting the future prospects for our business. For example, there are certain serious adverse reactions and side effects that are often associated with iron replacement therapeutics such as ferumoxytol. For IV iron replacement products that are currently being marketed, these serious adverse reactions have been seen more frequently when large doses of iron are delivered rapidly. In our clinical trials we administered a relatively large dose of ferumoxytol more rapidly than the currently marketed products. If our studies show a sufficient number of cases of such reactions or side effects in patients which are deemed related to ferumoxytol, then ferumoxytol may be considered unsafe by the FDA and/or the physicians who select which iron replacement product patients will receive. In addition, our clinical trials are conducted in patients in the most advanced stages of disease. During the course of the trials, these patients can and do die or suffer adverse medical effects for reasons that may or may not be related to ferumoxytol, but which could nevertheless adversely affect clinical trial results for ferumoxytol as an IV iron replacement therapeutic and could adversely affect our ability to obtain approval by the FDA. Any such adverse results from our Phase III clinical trials would likely have a severe adverse impact on our stock price.

Our results from pre-clinical testing, early clinical trials, and completed Phase III clinical trials of ferumoxytol as an IV iron replacement therapeutic may not be predictive of results obtained in subsequent human clinical trials with respect to the safety or efficacy of ferumoxytol. For example, although we had positive results and only one patient that was deemed to experience a drug-related SAE after receiving ferumoxytol in our three completed Phase III clinical trials of ferumoxytol, there can be no assurance that the results of our remaining Phase

III trial will be positive or that we will not observe an unacceptable level of drug-related SAEs in this trial. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage, or even Phase III, development. In addition, new information may arise from our continuing analysis of the disclosed data that may be less favorable than currently anticipated. Clinical data is often susceptible to varying interpretations and many companies that have believed their products performed satisfactorily in clinical trials have nonetheless failed to obtain FDA approval for their products. We cannot be sure that the data obtained from our Phase III clinical trials for ferumoxytol as an IV iron replacement therapeutic will support the indication we are seeking or demonstrate sufficient safety and efficacy to obtain regulatory approvals.

We may not be able to obtain the necessary regulatory approvals in order to market and sell our products, and the approval process is lengthy and unpredictable.

Prior to marketing, every product candidate must undergo an extensive regulatory approval process in the United States and in every other country in which we intend to test and market our product candidates and products. This regulatory process includes testing and clinical trials of product candidates to demonstrate safety and efficacy and can take many years and require the expenditure of substantial resources. In addition, changes in FDA or foreign regulatory approval policies or requirements may occur or new regulations may be promulgated which may result in a delay or failure to receive FDA or foreign regulatory approval. Delays and related costs in obtaining regulatory approvals could delay our product commercialization and revenue and consume our resources, both financial and managerial.

Clinical testing of pharmaceutical products is itself subject to approvals by various governmental regulatory authorities. For example, we conduct our Phase III clinical trials in accordance with specific protocols, which are filed with the FDA. The FDA could determine that there are flaws in the design of the protocols or conduct of the trials during the course of the studies which could require us to conduct additional Phase III trials or invalidate the data from completed trials.

Even if we complete our Phase III clinical trials in accordance with our protocols, the FDA may not approve ferumoxytol because it may determine that there were flaws in the design of our studies. For example, in discussions with us, the FDA recommended that we also test ferumoxytol at lower doses than 510 mg. We have chosen to continue our studies of ferumoxytol using only a 510 mg dose. If the FDA determines that the data we submit with our NDA for ferumoxytol does not support the safety of a 510 mg dose, it could require us to conduct additional studies and/or studies at lower doses as a condition for approval, in which case we could incur significant additional costs and experience significant delays in our efforts to obtain regulatory approval for ferumoxytol. In addition, the FDA guidelines generally suggest that a sponsor like us conduct two adequate and well-controlled studies to demonstrate the safety and efficacy of a product candidate such as ferumoxytol in support of FDA approval. FDA interpretation of the statutory requirements also states that a single study may be sufficient to support approval if the FDA determines that based on relevant science and other confirmatory evidence from pertinent, adequate and well-controlled studies, there is strong evidence to establish the safety and efficacy of the drug candidate to support a single adequate and well-controlled study demonstrating safety and efficacy. We have chosen to conduct only a single study for ferumoxytol as an IV iron replacement therapeutic in the hemodialysis dependent CKD patient population. If the FDA determines that the results of our single study in hemodialysis dependent CKD patients, together with other confirmatory evidence we provide, is not sufficiently strong to demonstrate ferumoxytol’s safety and efficacy in hemodialysis dependent CKD patients, then ferumoxytol may not be approved by the FDA for our proposed indication or may be approved for a more limited indication. Any such deficiency in the design or oversight of our Phase III clinical studies by us would delay or prevent us from obtaining regulatory approval for ferumoxytol and would significantly increase the costs of our clinical trials and negatively affect our future prospects and stock price.

We may also be required to demonstrate that ferumoxytol as an IV iron replacement therapeutic represents an improved form of treatment over existing therapies in order to receive regulatory approval, and we may be unable to do so without conducting further clinical studies, if at all. If, upon completion of our current Phase III clinical trial program, we need to perform additional studies, we could incur significant additional costs and experience significant delays in our efforts to obtain regulatory approval for ferumoxytol as an IV iron replacement therapeutic.

In addition, regulatory approvals may entail limitations on the indicated uses of our ferumoxytol products and impose labeling requirements which may also adversely impact our ability to market such products. Any such requirements or limitations could also result in delays in, or the prevention of, our ability to make regulatory submissions and delays in, or the prevention of, the commercialization of our products. Any such delays would significantly impair or delay our ability to generate future revenues from product sales of ferumoxytol as an IV iron replacement therapeutic and adversely impact the future prospects for our business. Any such delays could also have a severe adverse impact on our stock price.

We may not complete our development program, file the NDA for ferumoxytol and obtain regulatory approval for ferumoxytol as an IV iron replacement therapeutic in a timely or cost-effective manner.

Our ability to complete our development program for ferumoxytol as an IV iron replacement therapeutic and file the NDA for ferumoxytol in a timely and cost-effective manner is subject to a number of uncertainties, many of which are out of our control. For example, we rely on third-parties for a variety of activities in our IV iron replacement therapy development program, including monitoring of our clinical sites, collection and analysis of data, clinical laboratory testing, drafting study reports and assisting in regulatory submissions. We are relying on a number of third party consultants to help us write and prepare the NDA submission for ferumoxytol. If we cannot engage a sufficient number of such third-parties or if they should fail to perform or perform inadequately, we may not complete our development program for ferumoxytol, file the NDA or obtain regulatory approval for ferumoxytol as an iron replacement therapeutic on our intended schedule or within our estimated budget. Any such delays or inadequate performance would also significantly impair or delay our ability to generate future revenues from sales of ferumoxytol as an IV iron replacement therapeutic and adversely impact the future prospects for our business and our stock price.

In addition to our internal research and development costs, we estimated that as of March 31, 2007, the future cost of the external efforts necessary to complete development prior to the submission of our NDA for ferumoxytol as an IV iron replacement therapeutic for the treatment of anemia in CKD patients in the U.S. would be in the range of approximately $7 to $9 million over approximately the following 6 to 9 months. Our total estimated external costs necessary to complete development of ferumoxytol as an IV iron replacement therapeutic could increase as a result of a number of factors. Examples of such factors include significant delays due to unexpected results from our clinical sites, inadequate performance or errors by third-party service providers, deficiencies in our design or oversight of these studies, or the need to conduct additional clinical trials.

We have limited marketing and sales experience.

We have very limited experience in marketing and selling products and rely on our corporate partners to market and sell Feridex I.V. and GastroMARK.

In order to achieve commercial success for ferumoxytol as an IV iron replacement therapeutic, we will have to either develop our own internal marketing and sales function, including a direct sales force, enter into a collaborative arrangement with a third party or parties to market and sell ferumoxytol, or otherwise contract for these services with a third party. If we market and sell ferumoxytol ourselves, we may not be able to successfully recruit and retain the qualified marketing and sales personnel that would be necessary to market and sell ferumoxytol. In addition, in order to establish our own marketing and sales force, we will have to expend substantial amounts of additional capital to support the costs associated with such an effort. We may not be able to secure additional financing, if necessary, on terms or within a timeframe acceptable to us, if at all. If we fail to raise any necessary capital, or choose not to market and sell ferumoxytol ourselves, we may not be able to enter into marketing and sales agreements or otherwise contract with others for such services on acceptable terms, if at all.

If we are unsuccessful in developing our own sales and marketing function or if we are unsuccessful in entering into a collaborative relationship or otherwise contracting with a third party for such services, then our product marketing efforts and potential product launch of ferumoxytol as an IV iron replacement therapeutic would be delayed and the commercialization of ferumoxytol would be severely impaired. Furthermore, whether we market and sell ferumoxytol ourselves or through marketing and sales arrangements, we, or our corporate partners, may not be successful in marketing and selling our products. Any delay or failure in our commercial product launch of

ferumoxytol as an IV iron replacement therapeutic would have a material adverse impact on our ability to generate additional revenues, our ability to achieve profitability, and on the future prospects for our business.

We are dependent on a limited number of products and product candidates.

We have two products, Feridex I.V. and GastroMARK, currently approved for marketing and sale in the United States and in certain foreign jurisdictions. The only other products currently in our development pipeline, Combidex and ferumoxytol as an IV iron replacement therapeutic, are not yet approved for marketing or sale in the United States or in any other country. Sales of Feridex I.V. and GastroMARK by our marketing partners have been at relatively low levels in recent years, and we expect sales of Feridex I.V. and GastroMARK will remain at current low levels overall. We may not be able to obtain regulatory approval for Combidex or ferumoxytol as an IV iron replacement therapeutic in the United States or in any other country. Even if approved, Combidex and ferumoxytol as an IV iron replacement therapeutic may fail to achieve market acceptance. In this event, we do not currently have an alternative source of revenue or profits, other than Feridex I.V. and GastroMARK. Any failure by us to obtain approval of Combidex or ferumoxytol as an IV iron replacement therapeutic would have a material adverse impact on our ability to generate additional revenues, our ability to achieve profitability, and on the future prospects for our business.

In addition, although we have dedicated significant resources to our research and development efforts in the past, we may not develop new applications for our existing technology or expand the indications for our current products or product candidates for development into future product candidates. We are not currently conducting or sponsoring research to expand our development pipeline. Any failure by us to develop and commercialize additional products and product candidates will place greater pressure on the performance of our existing products and product candidates and will materially adversely affect our ability to increase revenues, our ability to achieve profitability, and the future prospects of our business.

Our inability to obtain raw materials and our reliance on sole source suppliers could adversely impact our business.

We currently purchase the raw materials used to manufacture our products from third-party suppliers. However, only in certain limited cases do we have any long-term supply contracts with these third parties. Certain raw materials used in our products are procured from a single source with no qualified alternative supplier. If any of these third-party suppliers should cease to produce the raw materials used in our products, we would be unable to manufacture our products until we were able to qualify an alternative source. For example, during fiscal 2005 one of our suppliers notified us of its decision to discontinue manufacturing a key raw material in our manufacturing process for our products. At that time, we purchased all remaining inventory from the supplier and have since identified an alternative supplier and are continuing our efforts to find a second supplier of this raw material. The qualification of an alternative source may require repeated testing of the new materials and generate greater expenses to us if materials that we test do not perform in an acceptable manner. In addition, we sometimes obtain raw materials from one vendor only, even where multiple sources are available, to maintain quality control and enhance working relationships with suppliers, which could make us susceptible to price inflation by the sole supplier, thereby increasing our production costs. As a result of the high quality standards imposed on our raw materials, we may not be able to obtain raw materials of the quality required to manufacture our products from an alternative source on commercially reasonable terms, or in a timely manner, if at all. Any delay in or failure to obtain sufficient quantities of raw materials would prevent us from manufacturing our products, both for commercial sale and for use by us in clinical trials. In addition, even if we are able to obtain raw materials from an alternative source, if these raw materials are not available in a timely manner or on commercially reasonable terms, we would be unable to manufacture our products, both for commercial sale and for use in our clinical trials, on a timely and cost-effective basis. Any such difficulty in obtaining raw materials would severely hinder our ability to manufacture our products and would have a material adverse impact on our ability to generate additional revenues and our ability to achieve profitability, and on the future prospects for our business. Any such difficulty could also impede our development efforts with respect to our product candidates.

Our success is dependent on third-party reimbursement.

In both the United States and foreign markets, our ability to commercialize our products will depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payors. We expect that our products will be purchased by hospitals, clinics, dialysis centers, doctors and other users that bill various third-party payors, such as Medicare, Medicaid and other government insurance programs, and private payors including indemnity insurers and managed care organizations such as health maintenance organizations. Most of these third-party payors provide coverage for IV iron replacement therapeutics and for MRI for some indications but may not include a separate payment for the use of an MRI contrast agent. Third-party private payors often mirror Medicare coverage policy and payment limitations in setting their own reimbursement payment and coverage policies. Reimbursement rates vary depending on the procedure performed, the third-party payor, the type of insurance plan and other factors.

In the United States, there have been, and we expect there will continue to be, a number of federal and state proposals to reform the health care system. Significant uncertainty exists as to the reimbursement status of newly-approved healthcare products and products which have competitors for their approved indications. If Medicare or third-party payors do not approve our therapeutic products, MRI products and/or related MRI procedures for reimbursement, or do not approve them for adequate levels of reimbursement, the adoption of our products may be limited. Sales may suffer as some physicians or their patients will opt for a competing product that is approved for sufficient reimbursement, or some patients may forgo the treatment or MRI procedure instead of paying out-of-pocket for costs associated with the treatment or procedure and contrast agent, and our ability to generate revenue may be impaired. Even if third-party payors make reimbursement available, these payors’ reimbursement policies may be insufficient, which may negatively impact us and our corporate partners’ ability to sell our products on a profitable basis.

Health care reform is an area of continuing national and international attention and a priority of many government officials. Future changes could impose limitations on the prices that can be charged in the United States and elsewhere for our products or the amount of reimbursement available for our products from government agencies or third-party private payors. The increasing use of managed care organizations, health maintenance organizations and the growing trend in capitated coverage as well as continued legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our products which could harm our ability to profit from product sales. In addition, recent and possible future legislation and regulations affecting the pricing of pharmaceuticals may change reimbursement in ways adverse to us that may affect the marketing of our current or future products. While we cannot predict the likelihood or timing of adoption of any of these legislative or regulatory proposals, if the government or a private third-party payor adopts these proposals, our ability to price our products at desired levels would be adversely affected.

We may not be successful in competing with other companies or our technology may become obsolete.

The pharmaceutical and biopharmaceutical industries are subject to intense competition and rapid technological change. We believe that our ability to compete successfully will depend on a number of factors including our ability to develop safe and efficacious products, our timely receipt of regulatory approvals, our ability to manufacture products at commercially acceptable costs, secure adequate reimbursement and the implementation of effective marketing campaigns by us or our marketing and distribution partners. We may not be able to successfully develop safe and efficacious products, obtain timely regulatory approvals, manufacture products at commercially acceptable costs, secure adequate reimbursement, market our products alone or with our partners, gain satisfactory market acceptance or otherwise successfully compete in the future.

We have many competitors currently developing and/or marketing IV iron replacement therapy products or MRI contrast agents, many of whom have substantially greater capital and other resources than we do and represent significant competition for us. For example, in May 2007, The Galenica Group, a Swiss company, or Galenica, announced that Luitpold Pharmaceuticals, Inc., a subsidiary of Daiichi Sankyo, Inc. of Japan, and the U.S. licensing partner of Vifor (International), a Galenica subsidiary, submitted an NDA to the FDA for Ferinject® (under the name Injectafer®). According to Galenica, Injectafer® is an IV iron replacement product for which approval is being sought in the treatment of iron deficiency anemia in heavy uterine bleeding, post partum, inflammatory bowel

disease and hemodialysis patients. If the FDA approves Injectafer® during the current review period, commercial launch of the product may occur later this year. These companies may succeed in developing technologies and products that are safer, more effective or less costly than any that we may develop, and may be more successful than we are in developing, manufacturing and marketing products. In addition, our collaborators are not restricted from developing and marketing certain competing products and, as a result of certain cross-license agreements with our competitors (including one of our collaborators), our competitors will be able to utilize elements of our technology in the development of certain competing contrast agents. We may not be able to compete successfully with these companies. Further technological and product developments may make other iron replacement therapy products more competitive than IV iron products or other imaging modalities more compelling than MRI, and adversely impact sales of our iron replacement therapy and imaging products.

Additionally, although we believe ferumoxytol will offer advantages over existing products in the IV iron replacement therapy market, competing IV iron replacement therapy products may receive greater acceptance. The IV iron replacement market is highly sensitive to several factors including, but not limited to, the ability to obtain appropriate reimbursement, price competitiveness, and product characteristics such as dosing regimens. In particular, the IV iron replacement market is extremely sensitive to the perceived relative safety profiles of the various IV iron replacement therapeutics, and it will be critical for us to be able to demonstrate that ferumoxytol’s safety profile is as good or better than that of other IV iron replacement products in order to be competitive in the marketplace. In addition, market acceptance of MRI as an appropriate technique for imaging the lymphatic system and the use of our products as part of such imaging is critical to the success of Combidex, if approved. Although we believe that our contrast agents offer advantages over competing MRI, CT or x-ray contrast agents, competing contrast agents might receive greater acceptance. Additionally, to the extent that other diagnostic techniques may be perceived as providing greater value than MRI, any corresponding decrease in the use of MRI could have an adverse effect on the demand for our contrast agent products.

Our operating results will likely fluctuate so you should not rely on a good or bad quarter to predict how we will perform over time.

Our future operating results will likely vary from quarter to quarter depending on a number of factors including:

· the timing and magnitude of external research and development expenses, in particular, those related to our development program for ferumoxytol as an IV iron replacement therapeutic;

· the timing and likelihood of FDA approval of ferumoxytol, including the magnitude of potential revenues associated with sales of ferumoxytol, if approved;

· the timing and magnitude of costs associated with the potential commercial launch of ferumoxytol, including manufacturing costs and costs associated with hiring additional sales and marketing personnel;

· the timing and likelihood of FDA approval of Combidex, including the magnitude of potential costs we may incur, to satisfy the conditions specified by the FDA for approval of Combidex and the magnitude of potential revenues associated with sales of Combidex, if approved;

· the variable nature of our product sales to our marketing partners and the batch size in which our products are manufactured;

· uneven demand for our products by end users which affects the royalties we receive from our marketing partners;

· the magnitude of future non-cash accounting charges we expect to record to expense in a given period as a result of our adoption of Statement of Financial Accounting Standards No. 123R; and

· the extent of and changes in reimbursement for our approved products from government health administration authorities, private health insurers and other third-party payors.

As a result of these and other factors, our quarterly operating results could fluctuate, and this fluctuation could cause the market price of our common stock to decline. Results from one quarter should not be used as an indication of future performance.

We need to maintain, and possibly increase, our manufacturing capabilities in order to commercialize our products.

We manufacture bulk Feridex I.V. and GastroMARK, as well as Feridex I.V. finished product, for sale by our marketing partners, Combidex bulk product for use in non-Phase III clinical trials and ferumoxytol for use in human clinical trials, in our Cambridge, MA manufacturing facility. Pending FDA approval, we intend to manufacture ferumoxytol finished product and Combidex formulated drug product in bulk at our manufacturing facility as well. This facility is subject to current Good Manufacturing Practices regulations prescribed by the FDA, or cGMP. We may not be able to continue to operate at commercial scale in compliance with cGMP regulations. Failure to operate in compliance with cGMP regulations and other applicable manufacturing requirements of various regulatory agencies could delay our development efforts and impede product sales due to the unavailability of our products and product candidates. In addition, we are dependent on contract manufacturers for the final production of Combidex and do not currently have any long-term contracts in place with any third-party manufacturers to conduct this work. In the event that we are unable to arrange final manufacturing for Combidex, if approved, we will not be able to develop and commercialize this product as planned. Additionally, we may not be able to enter into agreements for the manufacture of future products with manufacturers whose facilities and procedures comply with cGMP regulations and other regulatory requirements. Furthermore, such manufacturers may not be able to deliver required quantities of product that conform to specifications in a timely manner.

We currently have only one manufacturing facility at which we produce limited quantities of ferumoxytol. Although we have tested scale-up for production of ferumoxytol, when we manufacture ferumoxytol in larger volumes for commercial sale, we could experience higher than anticipated material, labor and overhead costs per unit. Additionally, manufacturing and quality control problems may arise as we increase our level of production. We may not be able to increase our manufacturing capacity in a timely and cost-effective manner, and we may experience delays in manufacturing ferumoxytol. Furthermore, if we fail to attract and retain key members of our manufacturing or quality control departments, we may be unable to manufacture our products and product candidates in a timely manner, which could delay our product sales and development efforts.

If we are unable to consistently manufacture our products on a timely basis because of these or other factors, we will not be able to meet anticipated demand. As a result, we may lose sales and fail to generate increased revenue.

We have a limited number of customers and are dependent on our collaborative relationships.

Our strategy for the development, commercialization and marketing of our product candidates in the past has been to enter into strategic relationships with various corporate partners, licensees and other collaborators. We rely on a limited number of marketing and distribution partners to market and sell our approved products, Feridex I.V. and GastroMARK, both in the United States and in foreign countries, and we depend on these strategic partners for a significant portion of our revenue. Three companies, Berlex, Guerbet and Mallinckrodt, accounted for 41%, 37% and 11%, respectively, of our revenues in the twelve month period ended September 30, 2006. A decrease in revenue from any of our significant marketing or distribution partners would impair our overall revenues. In some cases, we have granted exclusive rights to these partners. If these partners are not successful in marketing our products, or if these partners fail to meet minimum sales requirements or projections, our ability to generate revenue would be substantially harmed. For example, to date, we have not generated significant revenues on royalties from the sale of our approved products by our marketing partners. In addition, we might incur further costs in an attempt to enforce our contractual rights, renegotiate agreements, find new partners or market our own products. In some cases, we are dependent upon some of our collaborators to manufacture and market our products. We may not be able to derive any revenues from these arrangements. If any of our collaborators breaches its agreement with us or

otherwise fails to perform, such event could impair our revenue and impose additional costs on us. In addition, many of our corporate partners have considerable discretion in electing whether to pursue the development of any additional products and may pursue technologies or products either on their own or in collaboration with competitors. Given these and other risks, our current and future collaborative efforts may not be successful. Failure of these efforts would materially adversely impact our ability to generate revenue from product sales, thereby decreasing the amount of cash from operations available to support our development efforts for our existing product candidates in development.

Due to the high cost of our research and development activities, in particular the cost of clinical trials and preparation of an NDA for filing with the FDA for ferumoxytol as an IV iron replacement therapeutic, our inability to secure strategic partners or alternative strategic arrangements could limit our ability to continue developing ferumoxytol or force us to raise additional capital through alternative means which may not be available to us on acceptable terms or within an acceptable timeframe, if at all. Any delay in, or termination of, any of our research and development projects due to insufficient funds resulting from lack of revenue from strategic partners or alternative capital raising or strategic arrangements would reduce our potential revenues and negatively impact our stock price.

We may be unable to address the issues raised by the FDA in the March 2005 approvable letter with respect to Combidex, and we may not be able to obtain FDA approval for Combidex.

Although we have received an approvable letter from the FDA with respect to Combidex, approval of Combidex remains very uncertain and subject to the satisfaction of certain conditions imposed by the FDA and final resolution of labeling. We may be unable to address the conditions specified in the March 2005 approvable letter to the satisfaction of the FDA, or we may be unable to satisfy these conditions in a timely manner and/or without the expenditure of significant additional resources, both financial and managerial. If we are unable to successfully address the concerns of the FDA in a timely manner, the NDA for Combidex may not be approved, or, if approved, may be approved for a limited or much narrower indication. If we are unable to obtain approval or are unable to obtain approval for our requested indication or if the FDA recommends labeling that imposes limitations on the use of Combidex, our partners’ ability to market the product to the medical community may be prevented or hindered. Any failure to successfully market and sell Combidex or any delay in these efforts would significantly impair or delay our ability to generate future revenues from product sales of Combidex, reduce the amount of cash generated from operations available to fund research and development or other activities and adversely impact the future prospects for our business.

Our success depends on our ability to attract and retain key employees.

Because of the specialized nature of our business, we are highly reliant on our executive officers, senior scientists, regulatory and clinical professionals, and manufacturing and quality control personnel, including our Chief Executive Officer and President, Brian J.G. Pereira, MD, and our VP of Scientific Operations, Jerome Lewis. If we are unable to attract and retain qualified scientific, technical, clinical, regulatory and sales and marketing personnel for the development activities conducted or sponsored by us, including our development program for ferumoxytol as an IV iron replacement therapeutic, or we fail to hire qualified people or lose the services of our key personnel, our product development efforts could be delayed or curtailed. For example, in order to achieve commercial success for ferumoxytol as an IV iron replacement therapeutic, we will have to either develop our own internal marketing and sales function, including a direct sales force, enter into a collaborative arrangement with a third party or parties to market and sell ferumoxytol, or otherwise contract for these services with a third party. If we market and sell ferumoxytol ourselves, we may not be able to successfully recruit and retain the qualified marketing and sales personnel that would be necessary to market and sell ferumoxytol. In addition, if we fail to attract and retain key members of our manufacturing or quality control departments, our ability to manufacture our products, or to manufacture our products in a timely and cost-effective manner, could be hindered and our product sales and development efforts delayed. Furthermore, our expected expansion into areas and activities requiring additional expertise, such as late-stage development and marketing and sales, will require the addition of new management personnel and the development of additional expertise by existing management personnel, which would increase our projected research and development costs and accelerate our need for additional financing. There is intense competition for qualified personnel in the areas of our activities, and we may not be able to continue

to attract and retain the qualified personnel necessary for the development of our business. The failure to attract and retain such personnel or to develop such expertise could impose significant limits on our business operations and hinder our ability to successfully and efficiently complete our development projects.

We cannot be certain that our products will be accepted in the marketplace.

For a variety of reasons, many of which are beyond our control, our products may not achieve market acceptance or become commercially successful. If our products do not receive market acceptance for any reason, it may limit sales of our products and reduce our revenues from royalties and direct sales, if any. The degree of market acceptance of any of our products will depend on a number of factors, including:

· the establishment and demonstration in the medical community of the clinical efficacy and safety of our products;

· our products’ potential advantage over existing treatments or diagnostic methods; and

· reimbursement policies of government and third-party payors, including insurance companies.

For example, even if we obtain regulatory approval to sell our products, physicians and health care payors could conclude that our products are not safe or effective and decide not to use them to treat patients. Our competitors may also develop new technologies or products which are more effective or less costly, or that are perceived as more effective or cost-effective than our products. Physicians, patients, third-party payors or the medical community in general may fail to accept or choose not to use any of the products that we develop.

To date, we have not generated significant revenues on royalties from the sale of our approved products by our marketing partners, and these products have not achieved broad market acceptance. Feridex I.V. and GastroMARK, approved in 1996 and 1997, respectively, represented an alternative technology platform for physicians to adopt in MRI. Feridex I.V. sales have decreased from their peak based on changes in MRI technology and competition in the market, and we expect product sales of Feridex I.V. to remain at current low levels overall. Combidex, if approved, will represent a shift in the diagnostic process that physicians could use to stage and monitor cancer patients that may not be adopted by physicians. In addition, ferumoxytol, if approved as an IV iron replacement therapeutic, will represent an alternative to existing products or procedures that might not be adopted by the medical community, especially if it is perceived to not be as safe as other available products which are equally effective. If our approved products or future products are not adopted by physicians, revenues will be delayed or fail to materialize, and our ability to achieve profitability will be significantly adversely effected.

We may need additional capital to achieve our business objectives.

We have expended and will continue to expend substantial funds to complete the research, development, clinical trials, applications for regulatory approvals, market conditioning and other activities necessary to achieve final commercialization of our product candidates, ferumoxytol as an IV iron replacement therapeutic and Combidex. In particular, we anticipate that the high levels of expenditures related to our development activities will continue due to the conduct of our development program for ferumoxytol as an IV iron replacement therapeutic, our preparation of the NDA for ferumoxytol, our development of a sales and marketing function, our pursuit of additional indications for ferumoxytol, and our efforts to obtain approval for ferumoxytol outside the U.S., and that our cash-burn rate will continue to increase in the near- and long-term. Our near- and long-term capital requirements will also depend on additional factors, including, but not limited to,

· the progress of, and our ability to successfully complete, development of ferumoxytol as an IV iron replacement therapeutic in a timely manner and within our projected budget;

· costs associated with our potential development of additional indications for ferumoxytol;

· costs associated with our pursuit of approval for ferumoxytol as an IV iron replacement therapeutic in Europe and other countries;

· our ability to successfully obtain regulatory approvals for our product candidates, including our ability to satisfy the conditions specified by the FDA for approval of Combidex;

· our ability to obtain appropriate reimbursement from governmental and other third party payors for our products and product candidates;

· the magnitude of product sales and royalties;

· our ability to establish additional development and marketing arrangements or to enter into alternative strategic relationships, if needed;

· the costs involved in filing, prosecuting and enforcing patent claims; and

· our ability to raise additional capital on terms and within a timeframe acceptable to us.

We estimate that our existing cash resources, combined with cash we currently expect to receive from other sources, excluding new financings, will be sufficient to finance our operations, including projected operating expenses and research and development costs related to the development program for ferumoxytol as an IV iron replacement therapeutic, for at least the next twelve months. Thereafter, we may require additional funds or need to establish alternative strategic arrangements to continue our research and development activities, including our ferumoxytol and Combidex development programs, to conduct future clinical trials for ferumoxytol in new indications and in countries outside the U.S., and to market and sell our products. We may seek needed funding through arrangements with collaborative partners or through public or private equity or debt financings. We may not be able to obtain financing or to secure alternative strategic arrangements on acceptable terms or within an acceptable timeframe, if at all. Any additional equity financings or alternative strategic arrangements would likely be dilutive to our stockholders. In addition, the terms of any debt financing could greatly restrict our ability to raise additional capital and may provide rights and preferences to the investors in any such financing which are not available to current stockholders. Our inability to raise additional capital on terms and within a timeframe acceptable to us when needed could force us to dramatically reduce our expenses and delay, scale back or eliminate certain of our activities and operations, including our research and development activities, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our success depends on our ability to maintain the proprietary nature of our technology.

We rely on a combination of patents, trademarks, copyrights and trade secrets in the conduct of our business. The patent positions of pharmaceutical and biopharmaceutical firms are generally uncertain and involve complex legal and factual questions. We may not be successful or timely in obtaining any patents for which we submit applications. The breadth of the claims obtained in our patents may not provide significant protection for our technology. The degree of protection afforded by patents for licensed technologies or for future discoveries may not be adequate to protect our proprietary technology. The patents issued to us may not provide us with any competitive advantage. In addition, there is a risk that others will independently develop or duplicate similar technology or products or circumvent the patents issued to us.

Moreover, patents issued to us may be contested or invalidated. Future patent interference proceedings involving either our patents or patents of our licensors may harm our ability to commercialize our products. Claims

of infringement or violation of the proprietary rights of others may be asserted against us. If we are required to defend against such claims or to protect our own proprietary rights against others, it could result in substantial costs to us and distraction of our management. An adverse ruling in any litigation or administrative proceeding could prevent us from marketing and selling our products, limit our development of our product candidates or harm our competitive position and result in additional significant costs. In addition, any successful claim of infringement asserted against us could subject us to monetary damages or injunction preventing us or our marketing partners from making or selling products. We also may be required to obtain licenses to use the relevant technology. Such licenses may not be available on commercially reasonable terms, if at all.

We currently hold approximately 19 U.S. patents and approximately 29 foreign patents, which expire between the years 2007 and 2020, some of which are subject to extension under FDA regulations. Because certain patents that cover our products will begin to expire in the coming years, the protection provided by these patents will also begin to expire. Our inability to commercialize our products prior to the expiration of our patents could have a material adverse effect on our business, financial condition and prospects. In the future, we may be required to obtain additional licenses to patents or other proprietary rights of others in order to commercialize our products or continue with our development efforts. Such licenses may not be available on acceptable terms, if at all. The failure to obtain such licenses could result in delays in marketing our products or our inability to proceed with the development, manufacture or sale of our products or product candidates requiring such licenses. In addition, the termination of any of our existing licensing arrangements could impair our revenues and impose additional costs which could limit our ability to sell our products commercially.

The laws of foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In countries where we do not have or have not applied for patents on our products, we will be unable to prevent others from developing or selling similar products. In addition, in jurisdictions outside the United States where we have patent rights, we may be unable to prevent unlicensed parties from selling or importing products or technologies derived elsewhere using our proprietary superparamagnetic iron oxide nanoparticle technology.

We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our corporate partners, collaborators, employees and consultants. These agreements, however, may be breached. We may not have adequate remedies for any such breaches, and our trade secrets might otherwise become known or be independently discovered by our competitors. In addition, we cannot be certain that others will not independently develop substantially equivalent or superseding proprietary technology, or that an equivalent product will not be marketed in competition with our products, thereby substantially reducing the value of our proprietary rights.

We are exposed to potential liability claims and we may not be able to maintain or obtain sufficient insurance coverage.

We maintain product liability insurance coverage for claims arising from the use of our products and product candidates in clinical trials and commercial use. However, coverage is becoming increasingly expensive and costs may continue to increase significantly particularly as our development program for ferumoxytol continues, and we may not be able to maintain insurance at a reasonable cost. Furthermore, our insurance may not provide sufficient coverage amounts to protect us against liability that could deplete our capital resources. We also may not be able to obtain commercially reasonable product liability insurance for any product approved for marketing in the future. Our insurance coverage and our resources may not be sufficient to satisfy any liability or cover costs resulting from product liability claims. A product liability claim or series of claims brought against us could reduce or eliminate our resources, whether or not the plaintiffs in such claims ultimately prevail. In addition, pursuant to our certificate of incorporation, by-laws and contractual agreements with our directors, and in order to attract competent candidates, we are obligated to indemnify our officers and directors against certain claims arising from their service to us. We maintain directors and officers’ liability insurance to cover such potential claims against our officers and directors. However, this insurance may not be adequate for certain claims and deductibles apply. As a result of our indemnification obligations and in instances where insurance coverage is not available or insufficient,

any liability claim or series of claims brought against our officers or directors could deplete or exhaust our resources, regardless of the ultimate disposition of such claims.

We are subject to environmental laws and potential exposure to environmental liabilities.

Because we use certain hazardous materials in the production of our products, we are subject to various federal, state and local environmental laws and regulations that govern our operations, including the handling and disposal of non-hazardous and hazardous wastes, and emissions and discharges into the environment. Failure to comply with these laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating the release or spill of hazardous substances or petroleum products on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, and such owner or operator may incur liability to third parties impacted by such contamination. The presence of, or failure to remediate properly the release or spill of, these substances could adversely affect the value of, and our ability to transfer or encumber, our real property.

We may be unable to comply with continuing regulatory requirements even after our products have been approved for marketing.

Even if we obtain regulatory approval for our product candidates, a marketed product and its manufacturer are subject to continuing regulatory review. Noncompliance with the regulatory requirements of the approval process at any stage may result in adverse consequences, including the FDA’s withdrawal of an approved product from the market or, under certain circumstances, the imposition of criminal penalties. We may be restricted or prohibited from marketing or manufacturing a product, even after obtaining product approval, if previously unknown problems with the product or its manufacture are subsequently discovered. Any such adverse consequence could limit or preclude our ability to sell our products commercially which would hinder our ability to generate revenue through royalties or direct sales of our products.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information about purchases by us during the quarter ended December 31, 2006 of our equity securities that are registered pursuant to Section 12 of the Exchange Act. Other than as set forth below, no purchases were made during the quarter by or on behalf of us by any person or entity acting, directly or indirectly, in concert with us for the purpose of acquiring our securities or by an affiliate of ours who, directly or indirectly, controls our purchases of such securities, whose purchases are controlled by us, or whose purchases are under common control with ours.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (2)
October 1, 2006 through October 31, 2006	1,163	$	34.37	—	—
November 1, 2006 through November 30, 2006	2,595	$	55.29	—	—
December 1, 2006 through December 31, 2006	—	—		—	—
Total	3,758	$	48.81	—	—

(1) Consists solely of shares tendered by current and former employees and directors as payment of the exercise price of stock options granted in accordance with provisions of both our equity compensation plans and individual stock option agreements.

(2) We do not currently have any publicly announced repurchase programs or plans.

Item 5. Other Information

On February 6, 2007, the Board of Directors approved, based on the recommendation of the Compensation Committee, the following:

2. The grant to Dr. Pereira of an option to purchase 100,000 shares of the our Common stock pursuant to the Amended and Restated 2000 Stock Plan at an exercise price of $62.78, which was the fair market value of a share of our common stock on the date of grant. The foregoing option will vest if, and only if, Dr. Pereira achieves certain performance goals established by the Board on or prior to December 31, 2008. The specific terms of Dr. Pereira’s performance goals are not disclosed because they involve confidential commercial and business information, the disclosure of which would cause competitive harm to us.

3. The elimination of Dr. Pereira’s $1,200 monthly automobile allowance and the increase in Dr. Pereira’s annual base salary from $416,000 to $431,000.

Item 6. Exhibits.

(a) List of Exhibits

Exhibit Number		Description
31.1 +		Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 +		Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 ++		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 ++		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Exhibits marked with a plus sign (“+”) are filed herewith.

++ Exhibits marked with a double plus sign (“++”) are furnished herewith.

SIGNATURES

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

		ADVANCED MAGNETICS, INC.


		By:	/s/ BRIAN J.G. PEREIRA
			Brian J.G. Pereira,
			Chief Executive Officer,
			President and Director

		Date: June 14, 2007

		ADVANCED MAGNETICS, INC.


		By:	/s/ DAVID A. ARKOWITZ
			David A. Arkowitz,
			Chief Financial Officer and Chief
			Business Officer

		Date: June 14, 2007

EXHIBIT INDEX

Exhibit Number		Description
31.1 +		Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 +		Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 ++		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 ++		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Exhibits marked with a plus sign (“+”) are filed herewith.

++ Exhibits marked with a double plus sign (“++”) are furnished herewith.