Edgar Filing: ADVANCED MAGNETICS INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K/A

(AMENDMENT NO. 1)

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
OR

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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-14732
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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.)

61 MOONEY STREET, 02138
CAMBRIDGE, MASSACHUSETTS (zip code)
(Address of principal executive
offices)

(617) 497-2070
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK,
PAR VALUE $.01 PER SHARE, AMERICAN STOCK EXCHANGE

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

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

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

As of December 11, 2001, there were 6,633,895 shares of the registrant's
Common Stock, $.01 par value per share, outstanding. The aggregate market value
of the registrant's voting stock held by non-affiliates as of December 11, 2001
was approximately $26,668,258.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a Definitive Proxy Statement for its 2001
Annual Meeting of Stockholders, scheduled to be held on February 5, 2002,
pursuant to regulation 14A within 120 days of the end of the fiscal year ended
September 30, 2001. Portions of such Proxy Statement are incorporated by
reference in Part III hereof.

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EXPLANATORY NOTE

This Amendment No. 1 to Annual Report on Form 10-K/A of Advanced Magnetics,
Inc. (the "Company") amends Item 1 of Part I, Items 6, 7 and 8 of Part II and
Item 14 of Part IV of the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2001, as filed by the Company on December 14, 2001 (the
"Original 10-K"), to reflect the change described below. All other items of the
Original 10-K are also set forth herein for clarity of presentation and have not
been amended.

The Company previously entered into a license and marketing agreement and a
supply agreement with Cytogen Corporation ("Cytogen"). As part of the
agreements, the Company received 1,500,000 shares of Cytogen common stock. The
Company had accounted for net unrealized holding losses associated with the
Cytogen common stock as temporary declines which were recorded in comprehensive
income and as a separate component of stockholders' equity. During the course of
preparing the Company's financial statements for the quarter ended December 31,
2001, it was determined that the decline in the carrying value of the Cytogen
common stock below its original basis should have been assessed as an
other-than-temporary decline prior to the filing of the Original 10-K and
recorded as a loss in the fiscal year ended September 30, 2001. Accordingly, the
Company has restated its financial statements to reflect a non-cash charge
against earnings of approximately $4.7 million. The Company has also revised the
presentation of the Statements of Operations for all periods to exclude
interest, dividends and net gains and losses on sales of securities from revenue
and include such amounts as "other income (expense)." See the "Restatement"
section of Note A to the financial statements for more detail. In order to
provide comparability among all periods presented, these revisions have been
made in the Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations, the Financial Statements and
Notes thereto, and in the Company's discussion of Major Customers and Foreign
Operations in the Description of Business section of Item 1 of Part I. It should
be noted that these revisions and the restatement do not affect total assets,
total liabilities or total stockholders' equity, nor do they negatively affect
the Company's current or future operations, and the loss associated with the
restatement is a non-cash charge.

Except for the aforementioned changes in the "Major Customers" and "Foreign
Operations" sections included in Item 1 of Part I, and revisions in Items 6, 7
and 8 of Part II and Item 14 of Part IV, no other information included in the
Original 10-K is amended by this Form 10-K/A. All information in this Annual
Report on Form 10-K/A is as of September 30, 2001 or as of the date of the
filing of the Original 10-K, as required, and does not reflect, unless otherwise
explicitly noted, any subsequent information or events.

PART I

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. ADVANCED MAGNETICS, INC. MAKES SUCH
FORWARD-LOOKING STATEMENTS PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. IN THIS ANNUAL REPORT ON FORM 10-K,
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. THE
COMPANY'S 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 IN ITEM 7 UNDER "CERTAIN FACTORS THAT MAY AFFECT
FUTURE RESULTS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY
CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THEY ARE MADE. THE COMPANY DISCLAIMS
ANY OBLIGATION 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, EXCEPT AS SPECIFICALLY REQUIRED BY LAW.

ITEM 1. BUSINESS:

COMPANY OVERVIEW

Advanced Magnetics, Inc., a Delaware corporation ("Advanced Magnetics" or
the "Company"), is dedicated to the development and commercialization of
therapeutic iron compounds for treating anemia as well as novel imaging agents
to aid in the diagnosis of cancer and cardiovascular disease. In June 2001, the
Company filed an Investigational New Drug Exemption ("IND") with the U.S. Food
and Drug Administration ("FDA") for Code 7228, the lead product in the Company's
development pipeline, for use as an iron replacement therapeutic for patients
suffering from chronic anemia. Code 7228 is currently in Phase II clinical
studies in chronic kidney disease patients receiving erythropoietin for the
treatment of anemia. Code 7228 is also in Phase II clinical studies for use in
magnetic resonance angiography ("MRA") and is being evaluated for magnetic
resonance imaging ("MRI") applications in oncology. In June 2000, the Company
received an approvable letter, subject to certain conditions, from the FDA for
Combidex-Registered Trademark-, the Company's contrast agent to aid in the
diagnosis of lymph node disease. The Company is currently discussing the
outstanding issues from the approvable letter with the FDA in an effort to bring
COMBIDEX to market. The Company's liver contrast agent, Feridex
I.V.-Registered Trademark-, is approved and marketed in Europe, Japan, the
United States, Argentina, South Korea, China and Israel. In December 2000, the
Company submitted a supplemental New Drug Application ("sNDA") with the FDA for
FERIDEX I.V. seeking an expanded indication as well as a more convenient dosing
regimen. In August 2001, the FDA determined that the sNDA was not approvable.
The Company is currently evaluating its response to the FDA's decision. The
Company's oral contrast agent, GastroMARK-Registered Trademark-, used for
delineating the bowel in MRI procedures, is approved and marketed in Europe and
the United States.

The Company was incorporated in Delaware in November 1981. The Company's
principal offices are located at 61 Mooney Street, Cambridge, Massachusetts
02138, and its telephone number is (617) 497-2070.

IRON REPLACEMENT THERAPY

Iron replacement therapy plays a major role, along with erythropoietin, a
hormone produced in the kidneys that stimulates red blood cell production, in
treating certain types of chronic anemia in patients suffering from chronic
kidney disease or kidney failure as well as in many patients receiving
chemotherapy. According to the United States Renal Data System 2001 Annual
Report, in 1999 there were over 230,000 dialysis patients and approximately
800,000 pre-dialysis patients suffering from

varying degrees of kidney failure in the United States. The majority of dialysis
patients, as well as some pre-dialysis patients, suffer from anemia and receive
erythropoietin and iron replacement therapy to manage this condition.

ANEMIA

The cells in the body need oxygen, which is carried from the lungs to the
tissues throughout the body by the red blood cells. Specifically, hemoglobin, a
protein found in red blood cells, binds to the oxygen to transport it throughout
the body. Anemia is a condition in which the body does not have enough red blood
cells, and therefore does not have enough hemoglobin to transport the amount of
oxygen the body needs. If the body's tissues receive less oxygen than the body
needs, it can lead to fatigue and weakness. Normal red blood cell production
requires both erythropoietin and an adequate supply of iron.

THE BODY'S IRON STORES

The average adult has from 2 to 4 grams of iron stored in the body.
Approximately 2/3 of this iron is in the hemoglobin and 1/3 is in storage,
including in the bone marrow, the spleen and the liver. The body conserves iron,
losing approximately 0.03% daily, which requires supplementation of about 1 mg
per day. This supplementation comes from dietary intake for most adults. When
the body needs extra iron, often as a result of bleeding, pregnancy or disease,
the body accesses its iron stores because it is difficult to absorb extra iron
from the diet.

KIDNEY DISEASE AND ANEMIA

Diseased kidneys do not produce enough erythropoietin to stimulate the
production of the amount of red blood cells the body needs. As a result, people
with chronic kidney disease often develop anemia. To increase red blood cell
production, chronic kidney disease patients suffering from anemia are often
given recombinant erythropoietin therapy, which in turn increases their need for
iron. Long-term use of erythropoietin therapy causes the body to progressively
deplete its iron stores to meet this increased need for iron. As a result, the
majority of these chronic kidney disease patients eventually develop iron
deficiency anemia. In addition, when iron stores become too low, erythropoietin
therapy becomes less effective in treating anemia. For hemodialysis patients in
particular, iron deficiency is made worse by blood loss in the dialysis
procedure or intermittent gastrointestinal bleeding.

CHEMOTHERAPY AND ANEMIA

Chemotherapy helps eliminate cancer cells, but it can also eliminate healthy
cells, such as blood cells, which may decrease red blood cell levels and cause
anemia. In addition, for some cancer patients undergoing chemotherapy
treatments, the kidneys are affected by the chemotherapy and, like chronic
kidney disease patients, do not produce enough erythropoietin to stimulate
sufficient red blood cell production. In recent years, doctors have started
giving cancer patients recombinant erythropoietin therapy to treat their anemia.
As with chronic kidney disease patients, some cancer patients receiving
erythropoietin will also eventually need intravenous ("IV") iron replacement
therapy to maintain healthy body iron stores and effectively treat the anemia.

CODE 7228 AND THE TREATMENT OF CHRONIC ANEMIA

For most patients receiving erythropoietin, oral iron supplements do not
adequately replenish the body's iron stores. Oral iron is not well absorbed by
the gastrointestinal tract and can often have unpleasant side effects, such as
constipation, diarrhea and cramping, that cause people to stop taking the iron
supplements. As an IV iron replacement product, Code 7228 could allow for
significantly greater amounts of iron to be provided to patients whose iron
stores have been severely depleted in comparison to oral iron supplements and
could avoid the side effects associated with taking oral iron.

Accordingly, Code 7228 could provide a more effective and desirable form of iron
replacement therapy than oral iron supplement treatments for patients suffering
from chronic anemia.

MRI CONTRAST AGENTS

DIAGNOSTIC IMAGING

Diagnostic imaging is generally a non-invasive method to visualize internal
structures, abnormalities or anatomical changes in order to diagnose disease and
injury. Today, the most widely accepted imaging techniques include x-rays,
ultrasound, nuclear medicine, computed tomography ("CT") and MRI. Since the
introduction of x-rays, doctors have sought increasingly accurate and detailed
non-invasive visualization of soft tissue for diagnostic purposes. The choice of
diagnostic imaging technique to be used in any particular circumstance depends
upon a variety of factors, including the particular disease or condition to be
studied, image quality, availability of imaging machines, availability of
contrast agents, cost and managed health care policies. There is no imaging
technique that is considered superior to all others for most or all diagnostic
applications.

MAGNETIC RESONANCE IMAGING

Introduced in the 1980's, MRI is the diagnostic imaging technique of choice
for the central nervous system and is widely used for the imaging of ligaments
and tendons. MRI provides high-quality spatial resolution and does not use
radiation. In MRI procedures, the patient is placed within the core of a large
magnet where radio frequency signals are transmitted into the patient's body,
the interaction of which produces signals that are processed by a computer to
create cross-sectional images.

MRI CONTRAST AGENTS

Contrast agents play a significant role in improving the quality of
diagnostic images by increasing the contrast between different internal
structures or types of tissues in various disease states and medical conditions
of interest. Consequently, contrast agents, which may be administered
intravenously or orally, are widely used when available. MRI contrast agents
currently marketed in the United States are used primarily in imaging the
central nervous system. The availability of effective contrast agents often
determines the choice of imaging technique for a particular procedure. The
Company believes that the development of effective MRI contrast agents would
allow MRI to be used for a wider range of applications, such as the diagnosis
and staging of cancer, and should increase the use of MRI as a diagnostic
imaging technique, in turn generating additional demand for MRI contrast agents.

Currently available imaging techniques can be of limited usefulness in
visualizing certain soft-tissue structures. For example, the liver and the
lymphatic system are among the principal sites where metastases of many common
cancers, including colon, prostate and breast cancer, are discovered. Contrast
enhanced computed tomography ("CECT") is currently the primary imaging technique
used to confirm a preliminary or suspected diagnosis of liver cancer. The
Company believes that MRI exams of the liver produced with contrast agents
provide more diagnostic information and permit the identification of smaller
abnormalities than images produced by MRI studies without contrast agents or
images produced by CECT. FERIDEX I.V. was the first organ-specific MRI contrast
agent designed specifically for the liver and is marketed in the United States,
Europe, Japan, Argentina, South Korea, China and Israel.

Additionally, the Company believes that MRI exams of lymph nodes using a
contrast agent provide increased confidence in the diagnosis and staging of
metastatic disease. As a result, MRI contrast agents can allow for more accurate
diagnosis and monitoring of treatment results and may be a cost-effective way to
assess medical treatments and to improve patient outcomes. With respect to the
lymphatic system, there are no contrast agents currently available. An MRI
contrast agent that localizes

to and causes contrast enhancement of the lymph nodes, such as COMBIDEX, could
allow for more accurate disease diagnosis and monitoring of treatment results.

To facilitate the marketing and distribution of its MRI contrast agents, the
Company has entered into strategic relationships with certain established
pharmaceutical companies. These marketing and distribution alliances, both in
the United States and abroad, include: (i) Guerbet S.A. ("Guerbet"), a leading
European producer of contrast agents, in western Europe and Brazil; (ii) Eiken
Chemical Co., Ltd. ("Eiken"), one of Japan's leading medical diagnostics
manufacturers, in Japan; (iii) Berlex Laboratories, Inc. ("Berlex"), a leading
U.S. marketer of MRI contrast agents, in the United States; (iv) Cytogen
Corporation ("Cytogen"), a U.S. marketer of oncology products, in the United
States; and (v) Mallinckrodt Inc. ("Mallinckrodt"), a unit of Tyco, Inc. and a
leading manufacturer of contrast agents, in the United States, Canada and
Mexico.

ADVANCED MAGNETICS' CORE TECHNOLOGY

Advanced Magnetics' core technology is based on the characteristic
properties of extremely small, polysaccharide-coated superparamagnetic iron
oxide particles. The Company's core competencies are the ability to design such
particles for particular applications, manufacture the particles in controlled
sizes and cover the particles with different coatings depending upon the
application. The Company's technology and expertise enable it to synthesize,
sterilize and stabilize these iron oxide particles in a manner necessary for
their use in pharmaceutical products such as iron replacement therapeutics and
MRI contrast agents. In the area of iron replacement therapeutics, because the
Company's iron oxide particles are composed of bioavailable iron that is easily
absorbed by the body and incorporated into the body's iron stores, products
using the Company's core technology are ideal for use in IV iron replacement
therapy. In the field of MRI, when these particles are used as MRI contrast
agents and placed in a magnetic field, they become strongly magnetic, but lose
their magnetism once the field is removed. Once inside the targeted organ or
area of study, the properties of the Company's iron oxide particles result in
images that show greater soft tissue contrast and thus increase the information
available to the reviewing physicians. The Company's rights to its technology
are derived from and/or protected by license agreements, patents, patent
applications and trade secret protections. See "Patents and Trade Secrets."

PRODUCTS

The following table summarizes applications and potential applications,
marketing alliances and current U.S. and foreign status for each of the
Company's products and product candidates.

ADVANCED MAGNETICS' PRODUCTS

PRODUCT APPLICATIONS MARKETING ALLIANCES U.S. STATUS FOREIGN STATUS
--------------------- ----------------- ------------------- ----------------- -----------------

CODE 7228 Iron replacement Phase II clinical
therapy. trials underway
in iron
replacement
therapy.

Magnetic Phase II clinical
resonance trials underway
angiography. in magnetic
resonance
angiography.

Primary and Cytogen for
secondary tumor oncology
imaging, lymph applications only
node imaging. (United States).

PRODUCT APPLICATIONS MARKETING ALLIANCES U.S. STATUS FOREIGN STATUS
--------------------- ----------------- ------------------- ----------------- -----------------

COMBIDEX Diagnosis of Cytogen (United Approvable Letter EU Dossier filed
lymph node States), Guerbet received December 1999.
disease. (western Europe and June 2000, Additional
Brazil). subject to clinical trials
certain in process.
conditions.

FERIDEX I.V. Diagnosis of Berlex (United Approved and Approved and
liver lesions. States), Eiken marketed. marketed in Japan
(Japan), Guerbet and most EU
(western Europe and countries.
Brazil).

GASTROMARK Marking of the Guerbet (western Approved and Approved and
bowel in Europe and Brazil), marketed. marketed in
abdominal Mallinckrodt several EU
imaging. (United States). countries.

"Phase I clinical trials" refers to the first phase of human pharmaceutical
clinical trials in which testing for the safety and tolerance of the product is
conducted on a small group of normal subjects. "Phase II clinical trials" and
"Phase III clinical trials" are the second and third phases of human clinical
trials, where preliminary dosing and efficacy studies are conducted and where
additional testing for efficacy and safety is conducted on an expanded patient
group. "IND" is an Investigational New Drug Exemption that is filed with the FDA
when seeking to begin human clinical studies. "NDA" is a New Drug Application
that is filed with the FDA when seeking marketing approval for a product in the
United States. "Dossier" is the European Union ("EU") equivalent of an NDA and
is filed with the Committee for Proprietary Medicinal Products ("CPMP"), the EU
equivalent of the FDA. "Approvable Letter" is an official letter received from
the FDA in response to an NDA that has been submitted, indicating that a product
is approvable but that the FDA still has some questions or comments that need to
be resolved before such product can be given final marketing approval. For a
further description of the substantial regulatory requirements subsequent to the
completion of pre-clinical testing, see "Government Regulation and
Reimbursement."

CODE 7228. The Company believes Code 7228 will be useful in iron
replacement therapy for patients receiving erythropoietin because Code 7228
consists of bioavailable iron which may be administered intravenously, allowing
for more efficient replenishment of the body's iron stores without the common
side effects associated with oral iron supplements. Code 7228 is also a blood
pool agent, an agent that stays in the blood stream for an extended period of
time, which may make Code 7228 useful as a contrast agent for MRA as well as for
cardiac perfusion. In addition, Code 7228 may be useful for the detection of
metastatic and primary tumors, including breast cancer, and may also improve
tumor border delineation. The product is currently in Phase II clinical studies
for use in iron replacement therapy and in Phase II clinical studies for use in
MRA.

The Company has granted exclusive rights to market Code 7228 for oncology
applications in the United States to Cytogen. See "Licensing and Marketing
Arrangements."

COMBIDEX. The Company believes that COMBIDEX will be useful in the
diagnostic imaging of lymph nodes. Lymph nodes are frequently the site for
metastases of different types of cancer, particularly breast cancer and prostate
cancer. Effective imaging of lymph nodes could play a role in determining
appropriate patient management. There are currently no available non-invasive
methods for distinguishing between lymph nodes enlarged by the infiltration of
cancerous cells as opposed to inflammation. Since CT and unenhanced MRI, the
imaging modalities currently used for imaging lymph nodes, cannot distinguish
between inflamed nodes and cancerous nodes, the current practice is

to assume that enlarged nodes are cancerous and to perform a biopsy to establish
their true status. Nodes less than ten millimeters in size are often assumed to
be normal. The Company believes that COMBIDEX will enable doctors using MRI to
have improved diagnostic confidence in differentiating between normal and
diseased lymph nodes, irrespective of node size, because the Company has
demonstrated in clinical studies that COMBIDEX only accumulates in normal lymph
node tissue and can therefore facilitate differentiation between cancerous nodes
and other nodes.

The Company has granted exclusive rights to market and sell COMBIDEX in the
United States to Cytogen and in western Europe and Brazil to Guerbet. See
"Licensing and Marketing Arrangements."

FERIDEX I.V. The liver is a principal site for metastasis of primary cancer
originating in other parts of the body, particularly colon cancer, a common type
of cancer in the United States. Identification of metastatic tumors in the liver
has a significant impact on physicians' treatment plans for cancer because
proper staging of disease affects treatment plans. Diagnosis of metastases at an
early stage can be difficult because small tumors are frequently not accompanied
by detectable physical symptoms. The Company believes that contrast-enhanced MRI
exams using FERIDEX I.V. allow for the ability to image liver tumors that may
not be visible with CT scanning or ultrasound, the most widely used techniques
for liver imaging, and that liver scans may now be performed using
contrast-enhanced MRI instead of, or in addition to, CT scanning and ultrasound.

FERIDEX I.V. was approved by the FDA in August 1996. In October 1996,
Berlex, the Company's exclusive U.S. marketing alliance, began the marketing of
FERIDEX I.V. in the United States. In addition, FERIDEX I.V. was approved in
August 1994 by the EU's CPMP and most of the member states of the EU have since
issued local approvals to market the product. Guerbet began marketing the
product in Europe in late 1994. Eiken received approval for marketing the
product in Japan in July 1997 and received pricing approval in September 1997.
FERIDEX I.V. was launched in Japan in September 1997 through Eiken's affiliate
Tanabe Seiyaku, Ltd. See "Licensing and Marketing Arrangements."

GASTROMARK. MRI of organs and tissues in the abdomen without contrast
agents is difficult because these organs and tissues cannot be easily
distinguished from the loops of the bowel. GASTROMARK, the Company's oral
contrast agent for marking of the bowel, when ingested, flows through and
darkens the bowel. By more clearly identifying the intestinal loops, GASTROMARK
improves visualization of adjacent abdominal tissues, such as the pancreas.

In April 1997, the Company's marketing alliance, Mallinckrodt, launched
GASTROMARK in the United States. In addition, the Company has licensed the
marketing rights to GASTROMARK on an exclusive basis to Guerbet in western
Europe and Brazil. During fiscal 1993, Guerbet began marketing the product in
several EU countries. See "Licensing and Marketing Arrangements."

LICENSING AND MARKETING ARRANGEMENTS

BERLEX. In February 1995, the Company entered into a licensing 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. Under the terms of the agreements, Berlex paid a $5,000,000
non-refundable license fee in fiscal 1995 and an additional $5,000,000
non-refundable license fee in October 1996 upon the FDA's marketing approval of
FERIDEX I.V. In addition, the Company receives payments for manufacturing the
product and royalties on sales. Under the terms of the agreements, Berlex pays
for 60% of ongoing development expenses related to FERIDEX I.V. These agreements
expire in 2010 but can be terminated earlier upon the occurrence of certain
specified events. Under the terms of the license and marketing agreement, the
Company has the right to terminate the exclusive marketing rights based on the
failure of Berlex to achieve minimum sales targets, but has not exercised that
right at this time.

CYTOGEN. In August 2000, the Company entered into a license and marketing
agreement and a supply agreement with Cytogen. The Company granted Cytogen the
exclusive right to market and sell in the United States COMBIDEX, Code 7228 for
oncology applications and agreed to grant to Cytogen the exclusive right to
market and sell FERIDEX I.V. if the Company's existing marketing arrangement for
FERIDEX I.V. terminates for any reason. Upon signing of the agreements, the
Company received 1,500,000 shares of Cytogen common stock as a non-refundable
license fee. An additional 500,000 shares of Cytogen common stock were placed in
escrow and will be released to the Company upon satisfaction of certain
milestones under the agreements. Cytogen has agreed to pay the Company for
manufacturing and supplying the products and royalties on sales, if any. These
agreements have an initial ten-year term with automatic five-year extensions,
but can be terminated earlier upon the occurrence of certain specified events.

EIKEN. In 1988, the Company entered into a manufacturing and distribution
agreement with Eiken, granting Eiken the exclusive right to manufacture and
distribute FERIDEX I.V. in Japan. Eiken was responsible for conducting clinical
trials and securing the necessary regulatory approval in Japan which was
received in 1997. Under the terms of the agreement, Eiken paid the Company a
license fee of $1,500,000. In addition, Eiken pays royalties based upon sales.
The agreement terminates on the later of (i) the expiration of the last to
expire technology patent or (ii) ten years after the date all necessary
approvals were obtained.

In 1990, the Company entered into a second manufacturing and distribution
agreement with Eiken, granting Eiken the exclusive right to manufacture and
distribute GASTROMARK and COMBIDEX in Japan. In addition, for a period of 180
days after the Company files an IND for any future Advanced Magnetics' MRI
contrast agent, Eiken has the right of first refusal to manufacture and
distribute such product in Japan. Upon execution of this agreement, Eiken paid
the Company a license fee of $1,000,000. Additionally, Eiken agreed to pay the
Company royalties on sales of all products sold by Eiken under the agreement.
The agreement is perpetual but terminable upon certain specified events. Due to
market conditions in Japan, Eiken has decided not to market GASTROMARK or
COMBIDEX and rights to these products in Japan have reverted back to the
Company. Additionally, Eiken has decided not to exercise its option to develop
Code 7228 in Japan.

GUERBET. In 1987, the Company entered into a supply and distribution
agreement with Guerbet. Under this agreement, Guerbet has been appointed the
exclusive distributor of FERIDEX I.V. in western Europe and Brazil (under the
tradename Endorem-TM-). Guerbet is responsible for conducting clinical trials
and securing the necessary regulatory approvals in the countries in its
territory. Under the terms of this agreement, Guerbet paid the Company license
fees and is obligated to pay royalties based on sales. The Company is entitled
to receive an additional percentage of Guerbet's sales in return for selling to
Guerbet its requirements for the active ingredient used in ENDOREM. The
agreement terminates on the later of (i) the expiration of the last to expire
technology patent or (ii) ten years after the date all necessary approvals were
obtained in France.

In 1989, the Company entered into a second supply and distribution agreement
with Guerbet granting Guerbet an exclusive right in western Europe and Brazil to
manufacture and sell GASTROMARK (under the tradename Lumirem-TM-) and the option
to acquire such rights to any future Advanced Magnetics MRI contrast agents.
Guerbet has taken the rights to COMBIDEX (under the tradename Sinerem-TM-).
Guerbet has not met its contractual obligations with respect to the exercise of
its option to acquire rights to Code 7228, and, accordingly, rights to this
product have reverted back to the Company. Under the terms of this second
distribution agreement, Guerbet paid the Company a license fee in 1989. In
addition, Guerbet has agreed to pay the Company royalties and a percentage of
net sales as the purchase price for the active ingredient of the licensed
products. The Company is required to sell to Guerbet its requirements for the
active ingredient used in the contrast agents. The agreement is perpetual but
terminable upon certain specified events.

MALLINCKRODT. In 1990, the Company entered into a manufacturing and
distribution agreement with Mallinckrodt granting Mallinckrodt a product license
and co-marketing rights to GASTROMARK in the United States, Canada and Mexico.
Under the terms of the agreement, the Company reserved the right to sell
GASTROMARK through its own direct sales personnel. Mallinckrodt paid $1,350,000
in license fees and a $500,000 non-refundable milestone payment upon FDA
marketing approval of GASTROMARK. In addition, the Company receives royalties
based on Mallinckrodt's GASTROMARK sales as well as a percentage of sales for
supplying the active ingredient. The agreement is perpetual but terminable upon
certain specified events.

SQUIBB DIAGNOSTICS. In 1994, under an agreement with Squibb Diagnostics, a
division of Bristol-Myers Squibb Co., the Company reacquired the development and
marketing rights to COMBIDEX, which had previously been licensed to Squibb
Diagnostics. Pursuant to this agreement, the Company is obligated to pay up to a
maximum of $2,750,000 in royalties to Squibb Diagnostics in connection with the
Company's product sales of COMBIDEX.

The Company is the licensee of certain technologies under agreements with
third parties which require the Company to make payments in accordance with
these license agreements and upon the attainment of particular milestones. The
Company is also required to pay royalties on a percentage of certain product
sales, if any. There were no milestone payments in fiscal years 1999, 2000 or
2001. Future milestone payments are not to exceed $400,000.

MANUFACTURING AND SUPPLY ARRANGEMENTS

The Company's Cambridge, Massachusetts facility is registered with the FDA
and is subject to "current Good Manufacturing Practices" ("cGMP") as prescribed
by the FDA. The Company currently manufactures FERIDEX I.V. bulk product for
sale to Guerbet, FERIDEX I.V. finished product for sale to Berlex and GASTROMARK
bulk product for sale to Guerbet and Mallinckrodt at its Cambridge,
Massachusetts facility. The Company intends to manufacture COMBIDEX formulated
drug product for commercial use, subject to FDA approval, and Code 7228 finished
product for clinical use at this facility. The Company intends to use a contract
manufacturer for the final manufacturing of COMBIDEX.

PATENTS AND TRADE SECRETS

The Company considers the protection of its technology to be material to its
business. Because of the substantial length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the Company places considerable importance on obtaining patent and
trade secret protection for current and future technologies and products. The
Company's success will, in large part, depend on its ability to maintain the
proprietary nature of the Company's technology and other trade secrets. To do
so, the Company must prosecute and maintain existing patents, obtain new patents
and pursue trade secret protection. The Company also must operate without
infringing the proprietary rights of third parties or letting third parties
infringe the Company's rights.

The Company's policy is to aggressively protect its competitive technology
position by a variety of means, including applying for patents in the United
States and in appropriate foreign countries. The Company has been granted 28
U.S. patents, has several patent applications pending, and has filed counterpart
patent applications in several foreign countries. The Company has assigned three
of its U.S. patents to another company and has abandoned two of its patents.
These patents were abandoned because the covered technology did not relate to
any of the Company's existing or potential products. In addition, the Company is
a party to various license agreements, including nonexclusive cross-licensing
arrangements covering MRI technology with Nycomed Imaging A.S. of Oslo, Norway
("Nycomed") and Schering AG ("Schering") of Berlin, Germany. The Company's
proprietary position

depends in part on these licenses, and termination of the licenses for any
reason could have a material adverse effect on the Company by limiting or
prohibiting the commercial sale of its products. Although the Company believes
that further patents will be issued on pending applications, no assurance to
this effect can be given. The claims which are included in pending or future
patent applications may not be issued, any issued patents may not provide the
Company with competitive advantages or may be challenged by others, and the
existing or future patents of third parties may have an adverse effect on the
ability of the Company to commercialize its products, any of which could have a
material adverse effect on the Company's business or financial condition and
results of operations.

COMPETITION

The pharmaceutical and biopharmaceutical industries are subject to intense
competition and rapid technological change. Certain companies, including some of
the Company's collaborators, which have greater human and financial resources
dedicated to product development and clinical testing than the Company, are
developing MRI contrast agents and iron replacement therapy products. The
Company's collaborators are not restricted from developing and marketing
competing products and, as a result of certain cross-license agreements among
the Company and certain of its competitors (including one of its collaborators),
the Company's competitors will be able to utilize certain of the Company's
technology in the development of competing products. The Company may not be able
to compete successfully with these companies.

The Company believes that its ability to compete successfully will depend on
a number of factors including the implementation of effective marketing
campaigns by the Company and/or its marketing and distribution alliances,
development of efficacious products, timely receipt of regulatory approvals and
product manufacturing at commercially acceptable costs. Additionally, although
the Company believes Code 7228 will offer advantages over existing products in
the IV iron replacement therapy market, competing iron therapy products may
receive greater acceptance. The IV iron replacement market is highly sensitive
to several factors including, but not limited to, reimbursement, price
competitiveness and product characteristics such as perceived safety profiles
and dosing regimens. In addition, market acceptance of both MRI as an
appropriate technique for imaging certain organs, especially the liver and the
lymphatic system, and the use of the Company's products as part of such imaging
is critical to the success of its contrast agent products. Although the Company
believes that its 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 such as
CT and x-ray 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 the Company's contrast agent products. The Company may not be able to
successfully market its products alone or with its alliances, develop
efficacious products, obtain timely regulatory approvals, manufacture products
at commercially acceptable costs, gain satisfactory market acceptance or
otherwise successfully compete in the future.

IRON REPLACEMENT THERAPY PRODUCTS

There are several IV iron replacement therapy products on the market and in
various phases of clinical testing in the United States and abroad. Watson
Pharma, Inc. ("Watson") has two products, INFeD, iron dextran injection, and
Ferrlecit, sodium ferric gluconate complex in sucrose injection. INFeD is
approved for the treatment of iron deficiency anemia. Ferrlecit is approved for
the treatment of anemia in chronic hemodialysis patients receiving
erythropoietin. Watson has announced that it is planning to conduct clinical
trials for both INFeD and Ferrlecit in chemotherapy patients receiving
erythropoietin. American Regent Laboratories, Inc. has two products, Dexferrum,
iron dextran

injection, for the treatment of iron deficiency anemia, and Venofer, iron
sucrose injection, for the treatment of anemia in chronic hemodialysis patients
receiving erythropoietin.

MRI CONTRAST AGENTS

There are several MRI contrast agents for imaging lesions of the liver on
the market and in various phases of clinical testing in the United States and
abroad. Schering has two products, Resovist, a carboxydextran superparamagnetic
iron oxide formulation, and Eovist, a chelated gadolinium compound. The Company
believes that Schering has filed for EU and Japanese approval of Resovist and
that Resovist has received approval in some EU and non-EU countries. Clinical
trials are proceeding in the United States. Eovist is believed to be in Phase
III trials in Europe. Nycomed has received marketing approval in the United
States and Europe for its MnDPDP product, Teslascan, for MRI of liver lesions.
Bracco S.p.A. ("Bracco") has received marketing approval in Europe for
Gadolinium BOPTA (MultiHance), a chelated gadolinium compound for MRI of liver
lesions, and the Company believes Bracco may have filed for approval in the
United States as well. To the Company's knowledge, there are no approved
products or drug candidates in human clinical development for the
contrast-enhanced imaging of lymph nodes other than COMBIDEX and Code 7228.
Although the Company is unaware of any such products, those products may exist
and could have a material adverse effect on the marketing of the Company's
products.

In the area of oral contrast agents, Pharmacyclics, Inc. filed an NDA in
late 1995 for GADOLITE, its gadolinium-based product candidate which is
currently not approved by the FDA. Bracco received marketing approval in
December 1997 in the United States for Lumenhance, its liposomal encapsulated
oral manganese compound, but it is not being marketed at this time. In
October 1997, the FDA approved Ferriseltz, an oral MRI agent from Oncomembrane
Inc. It is not known how, or if, Bracco and Oncomembrane are planning to market
these products.

Many of these companies have substantially greater capital, research and
development, manufacturing and marketing resources and experience than the
Company and represent significant competition for Advanced Magnetics. Products
developed by such companies may be more effective than any products developed by
the Company or render the Company's technology obsolete. In addition, further
technological and product developments may make other iron replacement therapy
products more competitive than Code 7228 or other imaging modalities more
compelling than MRI, and adversely impact sales of the Company's iron
replacement and imaging products, respectively.

GOVERNMENT REGULATION AND REIMBURSEMENT

The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United States
and other countries. Pharmaceutical products intended for therapeutic use or for
intravenous or oral administration in humans are principally governed by FDA
regulations in the United States and by comparable government regulations in
foreign countries. Various federal, state and local statutes and regulations
also govern or influence the research and development, manufacturing, safety,
labeling, storage, record-keeping, distribution and marketing of such products.
The process of completing pre-clinical and clinical testing and obtaining the
approval of the FDA and similar health authorities in foreign countries to
market a new drug product requires a significant number of years, the
expenditure of substantial resources and is often subject to unanticipated
delays. There can be no assurance that any product will receive such approval on
a timely basis, if at all. Failure to obtain requisite governmental approvals,
failure to obtain approvals of the scope requested or withdrawal or suspension
by the FDA or foreign authorities of any approvals will delay or preclude the
Company or its licensees or collaborators from marketing the Company's

products or limit the commercial use of the products and will have a material
adverse effect on the Company's business, financial condition and results of
operations.

The steps required by the FDA before a new human pharmaceutical product,
including iron replacement therapy products and contrast agents, may be marketed
in the United States include: (a) pre-clinical laboratory tests, pre-clinical
studies and formulation studies; (b) the submission to the FDA of a request for
authorization to conduct clinical trials subject to an IND exemption, to which
the FDA must not object, before human clinical trials may commence;
(c) adequate and well-controlled human-clinical trials to establish the safety
and efficacy of the drug for its intended use; (d) submission to the FDA of an
NDA; (e) approval and validation of manufacturing facilities used in production
of the pharmaceutical product; and (f) review and approval of the NDA by the FDA
before the drug product may be shipped or sold commercially.

Pre-clinical tests include the laboratory evaluation of product chemistry.
Pre-clinical studies include animal studies to assess the potential safety and
efficacy of the product. Pre-clinical test and study results are submitted to
the FDA as a part of the IND and are reviewed by the FDA prior to the
commencement of human clinical trials. There can be no assurance that submission
of an IND will result in FDA authorization to commence clinical trials. Clinical
trials are typically conducted in three sequential phases, although the phases
may overlap. Phase I involves the initial administration of the drug to a small
group of humans, either healthy volunteers or patients, to test for safety,
dosage tolerance, absorption, distribution, metabolism, excretion and clinical
pharmacology and, if possible, early indications of effectiveness. Phase II
involves studies in a small sample of the actual intended patient population to
assess the preliminary efficacy of the investigational drug for a specific
clinical indication, to ascertain dose tolerance and the optimal dose range and
to collect additional clinical information relating to safety and potential
adverse effects. Once an investigational drug is found to have some efficacy and
an acceptable clinical safety profile in the targeted patient population, Phase
III studies can be initiated to further establish safety and efficacy of the
investigational drug in a broader sample of the target patient population. The
results of the clinical trials together with the results of the pre-clinical
tests and studies and complete manufacturing information are submitted in an NDA
to the FDA for approval. The FDA may suspend clinical trials at any point in
this process if it concludes that patients are being exposed to an unacceptable
health risk. In addition, clinical trial results are frequently susceptible to
varying interpretations by scientists, medical personnel, regulatory personnel,
statisticians and others which may delay, limit or prevent further clinical
development or regulatory approvals of a product candidate.

Both before and after approval is obtained, a product, its manufacturer, and
the holder of the NDA for the product are subject to comprehensive regulatory
oversight. Violations of regulatory requirements at any stage, including the
pre-clinical and clinical testing process, the approval process, or thereafter,
including after approval, may result in various adverse consequences, including
the FDA's delay in approving or refusal to approve a product, withdrawal of an
approved product from the market, and/or the imposition of criminal penalties
against the manufacturer and/or NDA holder. If an NDA is submitted to the FDA,
the application may not be approved by the FDA in a timely manner, if at all.
Any delay in obtaining regulatory approvals could delay product
commercialization and revenue and consume extensive resources of the Company,
both financial and managerial. In addition, later discovery of previously
unknown problems may result in restrictions on such product, manufacturer, or
NDA holder, including withdrawal of the product from the market. Also, new
government requirements may be established that could delay or prevent
regulatory approval of the Company's products under development.

There are several conditions that must be met in order for final approval of
an NDA to be granted by the FDA. Among the conditions for NDA approval is the
requirement that a prospective manufacturer's manufacturing procedures conform
to cGMP requirements, which must be followed at

all times. Domestic manufacturing establishments are subject to periodic
inspections by the FDA in order to assess, among other things, cGMP compliance.
To supply product for use in the United States, foreign manufacturing
establishments must comply with cGMP and are subject to periodic inspection by
the FDA or by regulatory authorities in certain of such countries under
reciprocal agreements with the FDA. In complying with these requirements,
manufacturers, including a drug sponsor's third-party contract manufacturers,
must continue to expend time, money and effort in the area of production and
quality control to ensure compliance. Failure to maintain compliance with cGMP
regulations and other applicable manufacturing requirements of various
regulatory agencies could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
labeling of the product must also be approved by the FDA prior to final approval
of the product. Once the FDA determines that a product is approvable, it will
issue an action letter indicating if any additional information must be provided
or if any additional conditions must be met prior to final approval. Even after
initial FDA approval has been obtained, further studies, including post-market
studies, may be required to provide additional information. Results of such
post-market programs may limit or expand the further marketing of the product.
Even if initial marketing approval is granted, such approval may entail
limitations on the indicated uses for which a product may be used and impose
labeling requirements which may adversely impact the Company's ability to market
its products. Additionally, product approvals may be withdrawn if compliance
with regulatory standards is not maintained or if problems occur following
initial marketing.

The Company is also subject to foreign regulatory requirements governing
development, manufacturing and sales of pharmaceutical products that vary widely
from country to country. Approval of a drug by applicable regulatory agencies of
foreign countries must be secured prior to the marketing of such drug in those
countries. The regulatory approval process may be more or less rigorous from
country to country and the time required for approval may be longer or shorter
than that required in the United States.

The Company is subject to regulation under local, state and federal law
regarding occupational safety, laboratory practices, handling of chemicals,
environmental protection and hazardous substances control. The Company possesses
a Byproduct Materials License from the Commonwealth of Massachusetts for
receipt, possession, manufacturing and distribution of radioactive materials.
The Company holds Registration Certificates from the United States Drug
Enforcement Administration and the Commonwealth of Massachusetts Department of
Public Health for handling controlled substances. The Company is registered with
the United States Environmental Protection Agency ("EPA") as a generator of
hazardous waste. All hazardous waste disposal must be made in accordance with
EPA and Commonwealth of Massachusetts requirements. The Company is subject to
the regulations of the Occupational Safety and Health Act and has in effect a
safety program to assure compliance with these regulations.

In both the United States and foreign markets, the Company's ability to
commercialize its products successfully depends 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 payers. Significant uncertainty exists as to the
reimbursement status of newly-approved health care products, products used for
indications not approved by the FDA and products which have competitors for
their approved indications. If adequate reimbursement levels are not maintained
by government and other third-party payers for the Company's products and
related treatments, the Company's business, financial condition and results of
operations may be materially adversely affected.

MAJOR CUSTOMERS

Two companies, Cytogen and Berlex, accounted for approximately 64% and 14%
respectively, of the Company's revenues in fiscal 2001. Three companies, Berlex,
Guerbet and Eiken, accounted for approximately 33%, 27% and 17% respectively, of
the Company's revenues in fiscal 2000. Two companies, Guerbet and Berlex,
accounted for 35% and 30% respectively, of the Company's revenues in fiscal
1999. No other customer accounted for more than 10% of total revenues in fiscal
2001, 2000 or 1999.

BUSINESS SEGMENTS

See Notes L and M in the Notes to the Financial Statements for details on
business segments.

EMPLOYEES

As of December 11, 2001, the Company had approximately 24 full-time
employees, 16 of whom were engaged in research and development. The Company's
success depends in part on its ability to recruit and retain talented and
trained scientific personnel. The Company has been successful to date in
obtaining such personnel, but may not be so in the future.

None of the Company's employees is represented by a labor union, and the
Company considers its relations with its employees to be excellent.

FOREIGN OPERATIONS

The Company has no foreign operations. Revenues in fiscal 2001, 2000 and
1999 from customers and licensees outside of the United States, principally in
Japan and Europe, amounted to 20%, 49% and 53% respectively, of the Company's
total revenues.

PRODUCT LIABILITY INSURANCE

The use of any of the Company's potential products in clinical trials and
the sale of any approved products may expose the Company to liability claims
resulting from the use of products or product candidates. These claims might be
made by customers, including corporate alliances, clinical trial subjects,
patients, pharmaceutical companies or others. The Company maintains product
liability insurance coverage for claims arising from the use of its products
whether in clinical trials or approved commercial usage. However, coverage is
becoming increasingly expensive and the Company 's insurance may not provide
sufficient amounts to protect the Company against liability that could have a
material adverse effect on the Company's business, financial condition and
results of operations.

RESEARCH AND DEVELOPMENT

The Company is committed to internal research and development as a method of
producing new products, improving existing products and growing revenues. The
Company incurred research and development expenses of $3,622,102, $4,623,468 and
$7,952,331 in each of the last three fiscal years, respectively.

ITEM 2. PROPERTIES:

The Company's principal operations are located in a modern, Company-owned
building of approximately 25,000 square feet in Cambridge, Massachusetts. The
Company believes this facility is adequate for its current and anticipated
short-term needs and that it will be able to lease comparable space, if
necessary. However, the acquisition and required regulatory approvals for
additional pharmaceutical manufacturing space can be time-consuming and
expensive. If the Company desired to expand its manufacturing capacity, it might
not be able to do so on a timely basis, if at all. Additionally, in fiscal 2001,
the Company terminated its lease on approximately 5,200 square feet of office
space in Princeton, New Jersey, that was previously used for the Company's
clinical development group.

ITEM 3. LEGAL PROCEEDINGS:

The Company and certain of its officers were sued in an action entitled
DAVID D. STARK, M.D. V. ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V.
GROMAN AND LEE JOSEPHSON, Civil Action No. 92-12157-WGY, in the United States
District Court for the District of Massachusetts on September 3, 1992. The
plaintiff, a former consultant to the Company, claims that he was incorrectly
omitted as an inventor or joint inventor on certain of the Company's patents and
on pending applications, and seeks injunctive relief and unspecified damages.
The District Court has stayed this federal action pending resolution of an
appeal in the State Court of summary judgment in the Company's favor as well as
resolution of a jurisdictional issue. As noted below, the Massachusetts Appeals
Court has decided the appeal, but the federal action remains stayed as of this
date. While the outcome of the action cannot be determined, the Company believes
the action is without merit and intends to defend the action vigorously. The
Company may not be able to successfully defend this action and the failure by
the Company to prevail for any reason could have an adverse effect on its future
business, financial condition and results of operations.

The Company and certain of its officers were sued IN DAVID D. STARK, M.D. V.
ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V. GROMAN AND LEE JOSEPHSON,
Civil Action No. 93-02846-C, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County on May 17, 1993. This case
involves claims of breach of contract, breach of good faith and fair dealing,
breach of implied contract, misappropriation of trade secrets, conversion,
negligent misrepresentation, misrepresentation, unjust enrichment, unfair trade
practices and tortious interference with contractual or advantageous relations.
The Superior Court granted partial summary judgment in the Company's favor and
dismissed the unfair trade practices and tort counts. The plaintiff's contract
claims have been dismissed with prejudice and final judgment was entered against
the plaintiff. The plaintiff filed an appeal in DAVID D. STARK, M.D. V. ADVANCED
MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V. GROMAN AND LEE JOSEPHSON, Appeal
No. 98-P-1749, in the Massachusetts Appeals Court, on January 25, 1999. On
October 13, 2000, the Massachusetts Appeals Court reversed the grant of partial
summary judgment in the Company's favor and remanded the case to the Superior
Court. While the outcome of the action cannot be determined, the Company
believes the action is without merit and intends to defend the action
vigorously. The Company may not be able to successfully defend this action and
the failure by the Company to prevail for any reason could have an adverse
effect on its future business, financial condition and results of operations.

unspecified monetary damages. In addition, the Company sought a declaration that
the Defendants did not have any rights under the Agreement and that the Company
had not breached the Agreement. Sanofi Pharmaceuticals, Inc. filed counterclaims
against the Company seeking compensatory damages and multiple damages as a
result of the Company's alleged breach of the Agreement. On October 29, 2001,
the Company and the Defendants executed a settlement agreement. On November 1,
2001, a Stipulation of Dismissal with Prejudice was filed with the Superior
Court of the Commonwealth of Massachusetts which resulted in the final dismissal
of all claims and counterclaims of all parties.

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

No matters were submitted to a vote of the Company's security holders during
the quarter ended September 30, 2001.

EXECUTIVE OFFICERS OF THE REGISTRANT:

JEROME GOLDSTEIN, 62, is a founder of the Company and has been Chief
Executive Officer, Chairman of the Board of Directors and Treasurer since the
Company's organization in November 1981. Mr. Goldstein was President from 1981
to 1997 and was re-elected President in 2001. Mr. Goldstein was a co-founder of
Clinical Assays, Inc., serving from 1972 to 1980 as Vice President and then as
President.

PAULA M. JACOBS, 57, joined the Company in January 1986 as Vice
President--Development. From 1981 to 1986, Dr. Jacobs was employed at
Seragen, Inc., first as Production Manager and later as General Manager of the
Research Products Division.

DENNIS LAWLER, 47, joined the Company in February 1989 as Director of
Quality Control and has been Vice President of Quality Control since
January 1997. Prior to February 1989, Mr. Lawler was employed at CIS-US, first
as Senior Quality Control Analyst, then as a Production Manager and then as a
Plant Manager.

JEROME M. LEWIS, 52, joined the Company in April 1986 as a Senior Scientist
and has been Vice President of Scientific Operations since February 1991. Prior
to April 1986, Dr. Lewis was employed as a senior scientist by Petroferm Ltd., a
biotechnology company.

JAMES A. MATHESON, 57, joined the Company in May 1996 as Vice President of
Finance. Prior to May 1996, Mr. Matheson was Controller of Diatech
Diagnostics, Inc.

MARK C. ROESSEL, 51, joined the Company in January 1982 as Director of
Regulatory Affairs and has been Vice President of Regulatory Affairs since
January 1995. Prior to January 1982, Mr. Roessel was Compliance Manager of the
Clinical Assay Division of Baxter International, Inc.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:

The Company's common stock is listed on the American Stock Exchange under
the symbol AVM.

The table below sets forth the high and low sales price of the Company's
common stock on the American Stock Exchange for the fiscal quarters of 2001 and
2000.

FISCAL QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------

2001 High.................................... 3.875 3.375 4.87 5.05
Low...................................... 2.25 2.25 2.80 2.86
2000 High.................................... 4.6875 10.75 8.875 8.125
Low...................................... 3.00 3.8125 6.125 3.25

On December 11, 2001, there were approximately 250 stockholders of record.
The Company believes that the number of beneficial holders of Common Stock is
approximately 1,750. The last reported sale price of the Common Stock on
December 11, 2001 was $4.02 per share. The Company has never declared or paid a
cash dividend on its capital stock. The Company currently anticipates that it
will retain all of its earnings for use in the development of its business and
does not anticipate paying any cash dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA:

The selected financial data set forth below has been derived from the
audited financial statements of the Company. This information should be read in
conjunction with the financial statements and the related notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included elsewhere in this Annual
Report on Form 10-K/A. The selected financial information for the year ended
September 30, 2001 has been restated due to a determination that the decline in
value of Cytogen common stock is other-than-temporary based on Statement of
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Additionally, the Company has revised its presentation of
the Statements of Operations for all periods to exclude interest, dividends and
net gains and losses on sales of securities from revenue and include such
amounts as "other income (expense)." See the "Restatement" section of Note A to
the financial statements for more detail.

SELECTED FINANCIAL DATA
(RESTATED)

FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------ ------------ ----------

Statement of Operations Data:
Revenues:
License fees................................ $ 4,640,198 $ 1,124,049 $ -- $ -- $5,500,000
Royalties................................... 700,000 825,000 680,000 980,542 363,445
Product sales............................... 633,480 1,253,537 1,966,059 1,399,871 1,580,357
Contract research and development........... -- 106,003 581,429 399,897 62,920
------------- ------------- ------------ ------------ ----------
Total revenues............................ 5,973,678 3,308,589 3,227,488 2,780,310 7,506,722
Costs and Expenses:
Cost of product sales....................... 204,399 239,228 454,642 237,945 311,678
Contract research and development
expenses.................................. -- 3,195 37,056 6,514 8,815
Company-sponsored research and development
expenses.................................. 3,622,102 4,623,468 7,952,331 8,961,796 9,304,327
Selling, general and administrative
expenses.................................. 1,667,066 3,013,796 3,694,038 3,701,410 1,437,599
------------- ------------- ------------ ------------ ----------
Total costs and expenses.................. 5,493,567 7,879,687 12,138,067 12,907,665 11,062,419
Other Income (Expense):
Interest and dividend income................ 697,162 827,780 646,611 1,150,010 1,627,699
Net gains and losses on sales of securities
and derivative instruments................ (579,418) (62,450) 3,555,957 2,473,826 1,867,350
Writedown of marketable securities.......... (4,659,800) -- -- -- --
Other income................................ 258,122 -- 265,593 -- 264,800
------------- ------------- ------------ ------------ ----------
Total Other Income (Expense).............. (4,283,934) 765,330 4,468,161 3,623,836 3,759,849
------------- ------------- ------------ ------------ ----------
Income (loss) before provision for income
taxes, minority interest in subsidiary and
cumulative effect of accounting change...... (3,803,823) (3,805,768) (4,442,418) (6,503,519) 204,152
Minority shareholder interest in subsidiary... -- -- -- (194,178) --
Income tax (benefit) provision................ 25,362 -- -- -- (379,022)
------------- ------------- ------------ ------------ ----------
Income (loss) before cumulative effect of
accounting change........................... (3,829,185) (3,805,768) (4,442,418) (6,309,341) 583,174
Cumulative effect of accounting change*....... -- (7,457,717) -- -- --
------------- ------------- ------------ ------------ ----------
Net income (loss)............................. $ (3,829,185) $ (11,263,485) $ (4,442,418) $ (6,309,341) $ 583,174
============= ============= ============ ============ ==========
Basic and diluted operating income (loss) per
share....................................... $ (0.57) $ (0.56) $ (0.66) $ (0.93) $ 0.09
Cumulative effect of accounting change per
share....................................... -- (1.11) -- -- --
------------- ------------- ------------ ------------ ----------
Basic and diluted net income (loss) per
share....................................... $ (0.57) $ (1.67) $ (0.66) $ (0.93) $ 0.09
------------- ------------- ------------ ------------ ----------
Weighted average shares outstanding:
Basic..................................... 6,701,113 6,758,825 6,766,934 6,752,863 6,744,946
Diluted................................... 6,701,113 6,758,825 6,766,934 6,752,863 6,813,984
------------- ------------- ------------ ------------ ----------

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

* In fiscal 2000, the Company changed its method of accounting for revenue
from licensing arrangements. See Note B in the Notes to the Financial
Statements.

SELECTED FINANCIAL DATA, (CONTINUED)
(RESTATED)

AT SEPTEMBER 30
-------------------------------------------------------------------
2001 2000 1999 1998 1997
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Balance sheet data:
Working capital.................................. $18,734,388 $25,706,905 $22,020,107 $27,278,502 $37,422,235
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Total assets..................................... $27,448,667 $35,667,591 $27,816,359 $34,114,708 $44,976,181
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Stockholders' equity............................. $11,512,294 $14,305,632 $27,054,709 $32,919,398 $43,423,058
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:

THIS ANNUAL REPORT ON FORM 10-K, INCLUDING WITHOUT LIMITATION, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
CONTAINS CERTAIN PROJECTIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS
WHICH INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. WHILE THIS OUTLOOK REPRESENTS
MANAGEMENT'S CURRENT JUDGMENT ON THE FUTURE DIRECTION OF THE BUSINESS OF
ADVANCED MAGNETICS, ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED OR PROJECTED IN ANY FORWARD-LOOKING STATEMENTS, AS A RESULT OF
CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE SECTION BELOW ENTITLED
"CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS ANNUAL
REPORT ON FORM 10-K.

OVERVIEW

Since its inception in November 1981, Advanced Magnetics, Inc. ("Advanced
Magnetics" or the "Company") has focused its efforts on developing its core
superparamagnetic iron oxide particle technology for various applications,
including for use as therapeutic iron compounds for the treatment of chronic
anemia and as contrast agents for utilization in magnetic resonance imaging
("MRI"). The Company has funded its operations with cash from license fees from
corporate alliances, royalties, sales of its products, fees from contract
research performed for third parties, proceeds of financings and income earned
on invested cash. The Company's success will depend, in part, on the Company's
ability to successfully develop, test, produce and market its products, obtain
necessary governmental approvals in a timely manner, attract and retain key
employees, and successfully respond to technological and other changes in the
marketplace.

The Company's operating results may continue to vary significantly from
quarter to quarter or from year to year depending on a number of factors,
including: the timing of payments from corporate alliances; the introduction of
new products by the Company; regulatory approval of product candidates; the
discovery of different applications for existing products and product
candidates; the timing and size of orders from the Company's customers; and the
acceptance of the Company's products. The Company's current planned expense
levels are based in part upon expectations as to future revenue. Consequently,
profits may vary significantly from quarter to quarter or year to year based on
the timing of revenue. Revenue or profits in any period will not necessarily be
indicative of results in subsequent periods and the Company may not achieve
profitability or grow revenue in the future.

A substantial portion of the Company's expenses consists of research and
development expenses. In an effort to reduce expenditures and improve
efficiency, the Company decided to close its Princeton, New Jersey office and
reduce the number of employees engaged in clinical development activities in
September 2000. All of the Company's operating activities have been consolidated
into the Cambridge office in order to improve managerial oversight and
inter-departmental coordination and cooperation. The Company may rely to a
greater degree on contract research and development providers in the future and
expects that research and development expenses will continue to be a significant
portion of the Company's total expenses.

In fiscal 2000, the Company adopted Securities and Exchange Commission
("SEC") Staff Accounting Bulleting No. 101 ("SAB 101"). The effect of applying
this change in accounting principle was a charge of $7,457,717, or $1.11 per
share, in the first quarter of fiscal 2000. This change in accounting principle
reflects the reversal of license fees and milestone payments that had been
recognized in prior years. Recognition of each deferred payment is expected to
occur over the remaining life of the related agreement.

RESULTS OF OPERATIONS

FISCAL 2001 COMPARED TO FISCAL 2000

Based on Statement of Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company has determined that the
decline in value of the common stock of Cytogen Corporation ("Cytogen") to below
its original basis should have been assessed as other-than-temporary and
recorded as a loss in the year ended September 30, 2001. The Company had
originally assessed the decline as temporary and recorded the decline as
unrealized loss in comprehensive income. The Cytogen common stock was received
by the Company as part of a license and marketing agreement and a supply
agreement with Cytogen, and is still retained by the Company. As a result of
this change, the Company has restated its financial statements for the year
ended September 30, 2001 to reflect a net loss of $3,829,185. Additionally, the
Company has revised the presentation of the Statements of Operations for all
periods to exclude interest, dividends and net gains and losses on sales of
securities from revenue and include such amounts as "other income (expense)."
See the "Restatement" section of Note A to the financial statements for more
detail. The financial statements and related notes included in this Annual
Report on Form 10-K/A reflect all such adjustments. It should be noted that
there is no change in total assets, total liabilities or total stockholders'
equity associated with these adjustments and that the loss is a non-cash charge.

REVENUES

Total revenues for the fiscal year ended September 30, 2001 were $5,973,678
compared to $3,308,589 for the fiscal year ended September 30, 2000.

License fee revenues for the fiscal year ended September 30, 2001 were
$4,640,198, consisting of $786,651 in revenue associated with the license and
marketing agreement signed in 1995 with Berlex Laboratories, Inc. ("Berlex") and
$3,853,547 of license fee revenue from Cytogen related to a license and
marketing agreement signed in fiscal 2000. License fee revenues for the fiscal
year ended September 30, 2000 were $1,124,049, consisting of $735,575 in revenue
from Berlex, of which $727,582 was included in the cumulative effect of
accounting change and $388,474 of license fee revenue from Cytogen.

In August 2000, the Company entered into a license and marketing agreement
with Cytogen, which covers Code 7228 for oncology imaging and
Combidex-Registered Trademark-. At the time of signing that agreement, the
Company received shares of common stock of Cytogen with a market value of
$13,546,875 as a non-refundable licensing fee. Approximately $3,800,000 of that
fee was recognized as revenue in fiscal 2001. Approximately $388,000 was
recognized in fiscal 2000. Recognition of the remainder of the fee as revenue
has been deferred and is expected to be recognized as future expenses related to
the development of COMBIDEX and Code 7228 are incurred.

Royalties for the fiscal year ended September 30, 2001 were $700,000 as
compared to $825,000 in fiscal 2000. The decrease in royalties is primarily the
result of decreases in sales of Feridex I.V.-Registered Trademark- by the
Company's Japanese distributor, Eiken, and the Company's U.S. distributor,
Berlex.

Product sales for the fiscal year ended September 30, 2001 were $633,480
compared to $1,253,537 for the fiscal year ended September 30, 2000. The
decrease is primarily the result of reduced sales activity in the marketplace
and the timing of orders for the Company's contrast agents.

There were no contract research and development revenues during the fiscal
year ended September 30, 2001 compared to $106,003 in the fiscal year ended
September 30, 2000. The decrease primarily reflects the completion of certain
development activities, the costs of which were reimbursed under an agreement
with Guerbet S.A. ("Guerbet"), and the completion of work under a grant from the
National Institutes of Health ("NIH") in September 2000.

COSTS AND EXPENSES

The cost of product sales for the fiscal year ended September 30, 2001 was
$204,399 compared to $239,228 for the fiscal year ended September 30, 2000. The
cost of product sales for fiscal 2001 was 32% of product sales and for fiscal
2000 was 19% of product sales. This decrease on an absolute basis is primarily
attributable to the decline in product sales, while the increase in the
percentage basis is largely the result of most product sales in fiscal 2001
being of GastroMARK-Registered Trademark- in bulk form, which has a higher cost
of sales than FERIDEX I.V. No contract-sponsored research and development costs
were incurred during fiscal 2001, compared to $3,195 in fiscal 2000. Such
contract-sponsored research and development costs incurred during fiscal 2000
were primarily related to the provision of development services to Guerbet. The
decrease in costs reflects the completion of such services during fiscal 2000.

Research and development expenses for the fiscal year ended September 30,
2001 were $3,622,102, a decrease of $1,001,366 compared to $4,623,468 for the
fiscal year ended September 30, 2000. The decrease was primarily attributable to
a reduction in direct, company-sponsored research and development programs
related to the clinical development of COMBIDEX and the decision to close the
Company's Princeton, New Jersey office during the last month of fiscal 2000.

Selling, general and administrative expenses for the fiscal year ended
September 30, 2001 were $1,667,066 compared to expenses of $3,013,796 for the
fiscal year ended September 30, 2000. Selling, general and administrative
expenses during the fiscal year ended September 30, 2000 included expenses of
approximately $815,750 related to a proposed and subsequently terminated merger
with Cytogen and the signing of a license and marketing agreement with Cytogen,
and approximately $326,630 in severance expenses and accruals related to the
closing of the Company's clinical development office in Princeton, New Jersey.
These costs did not recur in fiscal 2001.

OTHER INCOME (EXPENSE)

Interest and dividend income was $697,162 and net gains and losses on sales
of securities were $(579,418) for the fiscal year ended September 30, 2001
compared to $827,870 and $(62,450) respectively, for the fiscal year ended
September 30, 2000. Interest income for the fiscal year ended September 30, 2001
was $631,386 compared to $729,805 for the fiscal year ended September 30, 2000.
The decrease was primarily due to a reduction in interest-bearing cash
equivalents and marketable securities. Dividend income of $65,776 for the year
ended September 30, 2001 was $32,199 less than the $97,975 for the fiscal year
ended September 30, 2000. This decrease is primarily due to reduced holdings of
dividend earning securities during the last fiscal year. Included in net gains
and losses on sales of securities for fiscal 2001 is $147,557 in net gains on
derivative activity, principally the use of equity call options.

The Company determined that the decline in the carrying value of Cytogen
common stock below its original basis was an other-than-temporary decline and
recorded a writedown of securities in "other income (expense)" of $4,659,800 for
the fiscal year ended September 30, 2001.

INCOME TAXES

The income tax provision of $25,362 in fiscal 2001 reflects a change in
estimate of the fiscal 2000 alternative minimum tax. There was no income tax
provision or benefit for the fiscal year ended September 30, 2000.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

Previously, the Company had recognized license fee revenue when the fees were
non-refundable, a technology transfer occurred, no explicit commitment or
obligation for scientific achievement existed, and the other portions of the
agreement, principally supply and royalty, were priced at fair value. Under the
new accounting method, applied retroactively to October 1, 1999, these payments
are recorded as deferred revenue to be recognized over the remaining term of the
related agreement. For each of the years ended September 30, 2001 and September
30, 2000, the Company recognized $727,582 in revenue that was included in the
cumulative effect adjustment as of October 1, 1999.

NET LOSSES

In the fiscal year ended September 30, 2001, the Company recorded a net loss
of $(3,829,185), or $(0.57) per share. See the "Restatement" section of Note A
to the financial statements for details of a restatement of net loss. In the
fiscal year ended September 30, 2000, the Company recorded a net loss from
operations of ($3,805,768), or ($0.56) per share, together with a charge related
to the cumulative effect of a change in accounting principle of ($7,457,717), or
($1.11) per share, for a total net loss of ($11,263,485), or ($1.67) per share.

FISCAL 2000 COMPARED TO FISCAL 1999

REVENUES

Total revenues for the fiscal year ended September 30, 2000 were $3,308,589
compared to $3,227,488 for the fiscal year ended September 30, 1999.

License fee revenues for the fiscal year ended September 30, 2000 were
$1,124,049, consisting of $735,575 in revenue associated with the license and
marketing agreement with Berlex, of which $727,582 was included in the
cumulative effect of accounting change adjustment, and $388,474 of license fee
revenue from Cytogen related to a license and marketing agreement. There were no
license fee revenues for the fiscal year ended September 30, 1999.

In August 2000, the Company entered into a license and marketing agreement
with Cytogen, which covers Code 7228 for oncology imaging and COMBIDEX. At the
time of signing that agreement, the Company received shares of common stock of
Cytogen with a market value of $13,546,875 as a non-refundable licensing fee.
Approximately $388,000 of that fee was recognized as revenue in fiscal 2000.
Recognition of the remainder of the fee as revenue has been deferred and is
expected to be recognized as future expenses related to the development of
COMBIDEX and Code 7228 are incurred.

Royalties for the fiscal year ended September 30, 2000 were $825,000 as
compared to $680,000 in fiscal 1999. The increase in royalties is primarily the
result of increases in sales by the Company's Japanese distributor, Eiken.

Product sales for the fiscal year ended September 30, 2000 were $1,253,537
compared to $1,966,059 for the fiscal year ended September 30, 1999. Product
sales in fiscal 1999 included sales of $918,402 at the Company's former
subsidiary, Kalisto Biologicals, Inc. ("Kalisto"), for the nine months that
Kalisto's sales were consolidated. There was an increase of $207,634 in sales of
contrast agent products by the Company in fiscal 2000.

Contract research and development revenues were $106,003 during the fiscal
year ended September 30, 2000 compared to $581,429 in the fiscal year ended
September 30, 1999. The decrease reflects the completion of certain development
activities, the costs of which were reimbursed under an agreement with Guerbet,
and the completion of work under a grant from the NIH.

COSTS AND EXPENSES

The cost of product sales for the fiscal year ended September 30, 2000 was
$239,228 compared to $454,642 for the fiscal year ended September 30, 1999. Cost
of product sales in fiscal 1999 included $326,666 at the Company's former
subsidiary, Kalisto, for the nine months that results from Kalisto were
consolidated. The cost of product sales for fiscal 2000 was 19% of product sales
and for fiscal 1999 was 23% of product sales. This decrease on an absolute and
percentage basis is attributable to divestiture of Kalisto. Kalisto product
sales had a higher cost of sales than the Company's products. Contract-sponsored
research and development costs of $3,195 were incurred during fiscal 2000,
compared to $37,056 in fiscal 1999, and relate to costs incurred providing
development services to Guerbet. The decrease in costs reflects the completion
of such services during fiscal 2000.

Research and development expenses for the fiscal year ended September 30,
2000 were $4,623,468, a decrease of $3,328,863 compared to $7,952,331 for the
fiscal year ended September 30, 1999. The decrease was primarily attributable to
a reduction in direct, company-sponsored research and development programs
related to the clinical development of COMBIDEX.

Selling, general and administrative expenses for the fiscal year ended
September 30, 2000 were $3,013,796 compared to expenses of $3,694,038 for the
fiscal year ended September 30, 1999. Selling, general and administrative
expenses during the fiscal year ended September 30, 2000 included one-time
charges of approximately $815,750 related to a proposed and subsequently
terminated merger with Cytogen and the subsequent signing of a license and
marketing agreement with Cytogen, and approximately $326,630 in severance
expenses and accruals related to the closing of the clinical development office
in Princeton, New Jersey.

OTHER INCOME (EXPENSE)

Interest and dividend income was $827,780 and net gains and losses on sales
of securities were $(62,450) for the fiscal year ended September 30, 2000
compared to $646,611 and $3,555,977, respectively, for the fiscal year ended
September 30, 1999. Interest income for the fiscal year ended September 30, 2000
was $729,805 compared to $534,733 for the fiscal year ended September 30, 1999
due to an increase in interest-bearing cash equivalents. Dividend income of
$97,975 for the year ended September 30, 2000 was $13,903 less than the $111,878
for the fiscal year ended September 30, 1999. This decrease is due primarily to
reduced holdings of dividend earning securities during fiscal 2000.

INCOME TAXES

There was no income tax provision or benefit for the fiscal years ended
September 30, 2000 or 1999.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

In fiscal 2000, the Company adopted SAB 101. The effect of applying this
change in accounting principle was a charge of $7,457,717, or $1.11 per share.
This cumulative change in accounting principle reflects the reversal of license
fees and milestone payments that had been recognized in prior years. Previously,
the Company had recognized license fee revenue when the fees were
non-refundable, a technology transfer occurred, no explicit commitment or
obligation for scientific achievement existed, and the other portions of the
agreement, principally supply and royalty, were priced at fair value. Under the
new accounting method applied retroactively to October 1, 1999, these payments
are recorded as deferred revenue to be recognized over the remaining term of the
related agreement. For the year ended September 30, 2000, the Company recognized
$727,582 in revenue that was included in the cumulative effect adjustment as of
October 1, 1999.

NET LOSSES

In the fiscal year ended September 30, 2000, the Company recorded a net loss
from operations of ($3,805,768), or ($0.56) per share, together with a charge
related to the cumulative effect of the change in accounting principle of
($7,457,717), or ($1.11) per share, for a total net loss of ($11,263,485), or
($1.67) per share. In the fiscal year ended September 30, 1999, the Company
recorded a net loss of ($4,442,418), or ($0.66) per share.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations primarily
through cash generated from operations and investing activities and through
corporate alliance agreements.

At September 30, 2001, the Company's cash and cash equivalents totaled
$11,741,861, compared with $16,120,738 at September 30, 2000. In addition, the
Company had marketable securities of $10,912,382 at September 30, 2001,
including $1,987,200 in shares of Cytogen common stock as compared to
$14,051,850 on September 30, 2000, which included $7,572,000 in shares of
Cytogen. An additional 500,000 shares of Cytogen common stock were placed in
escrow, in connection with a license and marketing agreement, and will be
released to the Company upon satisfaction of certain milestones under the
agreement.

Net cash used in operating activities was $3,466,239 in the fiscal year
ended September 30, 2001 compared to net cash used in operating activities of
$3,587,508 in the fiscal year ended September 30, 2000.

Cash used in investing activities was $474,591 for the fiscal year ended
September 30, 2001 compared to $2,593,642 provided by investing activities in
the fiscal year ended September 30, 2000. Cash used in investing activities in
the fiscal year ended September 30, 2001 included proceeds from the sale of
marketable securities of $13,196,124 and United States Treasury Notes of
$12,000,000 offset by the purchase of marketable securities of $13,821,980 and
United States Treasury Notes of $11,766,961. Cash provided by investing
activities in the fiscal year ended September 30, 2000 included proceeds from
the sale of marketable securities of $4,433,874 offset by the purchase of
marketable securities of $1,744,075.

In November 2000, the Board of Directors authorized the purchase of up to
1,000,000 shares of the Company's common stock on the open market at prevailing
market prices. Cash used in financing activities was $438,047 for the fiscal
year ended September 30, 2001 and included proceeds of $14,875 from the issuance
by the Company of common stock offset by the purchase by the Company of 144,700
shares of the Company's common stock on the open market for $452,922. Cash
provided by financing activities was $61,968 from the issuance of common stock
by the Company during the fiscal year ended September 30, 2000. There were no
purchases by the Company of the Company's common stock during the fiscal year
ended September 30, 2000.

Capital expenditures in the fiscal year ended September 30, 2001 were
$80,808 compared to $36,333 in the fiscal year ended September 30, 2000. The
capital expenditures in both years related to the continuation of the Company's
efforts to upgrade laboratory, production and computer equipment. The Company
has no current commitment for any significant expenditures on property, plant
and equipment.

The Company's future capital requirements will depend on many factors,
including, but not limited to: continued scientific progress in its research and
development programs; the magnitude of its research and development programs;
progress with clinical trials for its therapeutic and diagnostic products; the
magnitude of product sales; the time involved in obtaining regulatory approvals;
the costs involved in filing, prosecuting and enforcing patent claims; the
competing technological and market developments; and the ability of the Company
to establish additional development and marketing

arrangements to provide funding for research and development and to conduct
clinical trials, obtain regulatory approvals, and manufacture and market certain
of the Company's products.

The Company expects to incur continued research and development expenses and
other costs, including costs related to clinical studies, in order to
commercialize additional products based upon its core superparamagnetic iron
oxide particle technology. The Company may require additional funds to fund
operations, complete new product development, conduct clinical trials and
manufacture and market its products. Management believes that funds for future
needs can be generated from existing cash balances, cash generated from
investing activities and cash generated from operations. In addition, the
Company will consider, from time to time, various financing alternatives and may
seek to raise additional capital through equity or debt financing or to enter
into corporate alliance arrangements. There can be no assurance, however, that
funding will be available on terms acceptable to the Company, if at all.

The foregoing discussion includes forward-looking statements that are
subject to risks and uncertainties and actual results may differ materially from
those currently anticipated depending on a variety of factors including those
discussed below. See "Certain Factors That May Affect Future Results."

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard No. 141, ("SFAS 141"), "Business
Combinations." This statement eliminates the pooling-of-interest method of
accounting for business combinations, and requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method. In addition, intangible assets shall be recognized as assets apart from
goodwill if they meet certain criteria. The provisions of SFAS 141 apply to all
business combinations initiated after June 30, 2001. At the present time,
adoption of this standard is not expected to have a material impact on the
financial position or results of operations of the Company.

In June 2001, the FASB issued Statement of Financial Accounting Standard No.
142, ("SFAS 142"), "Goodwill and Other Intangible Assets." Under this statement,
goodwill will not be amortized and is to be reviewed for impairment and charged
to expense only in the period in which goodwill's recorded value exceeds its
fair value. Additionally, entities will be required to review goodwill and
indefinite-lived intangible assets for impairment on an annual basis. The
provisions of SFAS 142 are required to be applied in fiscal years beginning
after December 15, 2001. At the present time, adoption of this standard is not
expected to have a material impact on the financial position or results of
operations of the Company.

In June 2001, the FASB issued Statement of Financial Accounting Standard No.
143, ("SFAS 143"), "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets." The objectives of SFAS 143 were to establish accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. The provisions of SFAS 143 shall be
effective for financial statements issued for fiscal years beginning after June
15, 2002. At the present time, adoption of this standard is not expected to have
a material impact on the financial position or results of operations of the
Company.

In October 2001, the FASB issued Statement of Financial Accounting Standard
No. 144, ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 applies to all long-lived assets (including discontinued
operations). SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. At the present time, adoption of this
standard is not expected to have a material impact on the financial position or
results of operations of the Company.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

THE FOLLOWING IS A SUMMARY DESCRIPTION OF SOME OF THE MATERIAL RISKS AND
UNCERTAINTIES THAT MAY AFFECT OUR BUSINESS, INCLUDING OUR FUTURE FINANCIAL AND
OPERATIONAL RESULTS. IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT
ON FORM 10-K, THE FOLLOWING STATEMENTS SHOULD BE CAREFULLY CONSIDERED IN
EVALUATING OUR COMPANY.

WE NEED TO OBTAIN THE NECESSARY REGULATORY APPROVALS IN ORDER TO MARKET AND SELL
OUR PRODUCTS

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 require many years and the expenditure
of substantial resources. Data obtained from pre-clinical testing and clinical
trials are subject to varying interpretations, which can delay, limit or prevent
regulatory approval by the United States Food and Drug Administration, the FDA,
or similar regulatory bodies in foreign countries. In addition, changes in FDA
or foreign regulatory approval policies or requirements may occur or new
regulations may be promulgated which may result in our 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.

One of our product candidates, Code 7228, is currently in Phase II clinical
trials as a compound for use in iron replacement therapy and as a contrast agent
for Magnetic Resonance Angiography. Before applying for FDA approval to market
Code 7228, we must conduct larger-scale human clinical trials that further
demonstrate the safety and efficacy of Code 7228 to the satisfaction of the FDA
or other regulatory authorities. We may not be able to successfully complete
these clinical trials for Code 7228, or, if completed, we may not be able to
obtain regulatory approval. Although we have filed a New Drug Application, an
NDA, and received an "approvable" letter from the FDA for COMBIDEX for lymph
node indications, final approval remains subject to the satisfaction of certain
conditions imposed by the FDA and labeling must be resolved. We can give no
assurance that the NDA for COMBIDEX will be approved, or, if approved, that it
will be approved for the indication that we are seeking. In addition, we may
also be required to demonstrate that our proposed products represent an improved
form of treatment over existing therapies or diagnostics and we may be unable to
do so without conducting further clinical studies, if at all. Final regulatory
approvals may not be obtained for COMBIDEX or Code 7228 or any other products
developed by us. Failure to obtain requisite governmental approvals or failure
to obtain approvals of the scope requested could delay and may preclude us or
our licensees or other collaborators from marketing our products or limit the
commercial use of our products.

Regulatory approvals may entail limitations on the indicated uses of our
products and impose labeling requirements which may adversely impact our ability
to market our products. Even if regulatory approval is obtained, 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 delay in approving
or its refusal to approve a product, 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 seriously harm our business, financial condition and results
of operations.

OUR ABILITY TO COMPLETE THE DEVELOPMENT OF OUR PRODUCT CANDIDATES IS UNCERTAIN

Code 7228, COMBIDEX, or any other future product candidates, may require
significant additional research and development efforts before
commercialization. Although Code 7228 is currently in Phase II clinical studies,
and while we have filed an NDA for COMBIDEX and received an "approvable" letter
for its principal indication, the diagnosis of lymph node disease, significant
additional development efforts, including additional human clinical testing, may
be required prior to approval of these products for commercial sale. The
development of new pharmaceutical products is highly uncertain and subject to a
variety of inherent risks of failure, including the following:

- Our products 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;

- Our products may be too difficult or costly to manufacture on a large
scale, to develop into commercially viable products or to market;

- Other parties may claim proprietary rights to our product technology that
prevent us from marketing our products; and

- Our products may not be widely adopted or commercially successful.

In addition, although we have dedicated significant resources to our
research and development efforts, we may not be successful in finding new
applications for our technology or in expanding the indications for our current
products or product candidates for development into future product candidates.
As a result of these and other risks and uncertainties, our development programs
may not be completed successfully. Any delays or failures in the development of
our current or future product candidates could have a material adverse effect on
our business, financial condition and results of operations.

WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL BE ACCEPTED IN THE MARKETPLACE

We can give no assurance that any of our products will achieve market
acceptance or become commercially successful. If our products do not receive
market acceptance for any reason, it may adversely affect our business,
financial condition and results of operations. 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 treatment or diagnostic
methods; and

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

For example, even if we obtain regulatory approval to sell our products,
physicians and health care payers 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 seem more cost-effective than our products. We can give no
assurance that physicians, patients, third-party payers or the medical community
in general will accept and use any products that we may develop.

To date, we have not generated significant revenues on royalties from the
sale of our approved products by our marketing alliances. Although on the market
since 1996 and 1997 respectively, FERIDEX I.V. and GASTROMARK still represent a
new technology platform for physicians to adopt. COMBIDEX and Code 7228, if
approved, may also represent new technologies or may represent alternatives to
existing products that might not be adopted by the medical community. If our
approved products, or future products, are not adopted by physicians, revenues
will be delayed or fail to materialize. Any delays or

failures in the adoption of our products could have a material adverse effect on
our business, financial condition and results of operations.

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 has been to enter into strategic alliances with various
corporate partners, licensees, and other collaborators. We rely on a limited
number of marketing and distribution alliances to market and sell our approved
products, FERIDEX I.V. and GASTROMARK, both in the U.S. and in foreign
countries, and we depend on this limited number of strategic alliances for a
significant portion of our revenue. Two companies were responsible for
approximately 78% of our revenue during the fiscal year ended September 30,
2001, with Cytogen representing approximately 64% of our revenue in fiscal 2001.
A decrease in revenue from any of our significant marketing and distribution
alliances could have a material adverse effect on our revenue. In some cases, we
have granted exclusive rights to these alliances. If these alliances are not
successful in marketing our products, or if these alliances fail to meet minimum
sales requirements or projections, our ability to generate revenue would be
harmed. In addition, we might incur additional costs in an attempt to enforce
our contractual rights, renegotiate agreements, find new alliances or market our
own products. In some cases, we are dependent upon some of our collaborators to
conduct pre-clinical and clinical testing, to obtain FDA and foreign regulatory
approvals and to manufacture and market our products. We may not derive any
revenues or profits from these arrangements and we may not be able to enter into
future collaborative relationships even if we desire to do so. 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. In addition, many of
our corporate alliances 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 our competitors. Given
these and other risks, our current and future collaborative efforts may not be
successful. Failure of these efforts could delay our product development or
impair commercialization of our products.

WE CANNOT BE CERTAIN ABOUT THE RESULTS AND PROGRESS OF OUR CLINICAL TRIALS

Before obtaining regulatory approvals for the commercial sale of any of our
product candidates, we must demonstrate through extensive pre-clinical testing
and human clinical trials that the product is safe and efficacious. If our
products fail in pre-clinical studies or clinical trials there will be an
adverse effect on our business, financial condition and results of operations.
In addition, the results from pre-clinical testing and early clinical trials of
products under development by us may not be predictive of results obtained in
subsequent clinical trials. 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
development. There can be no assurance that our clinical trials will demonstrate
sufficient safety and effectiveness to obtain regulatory approvals.

In addition, the completion rate of our clinical trials depends on a number
of risks and uncertainties, such as patient enrollment. Clinical trials are
often conducted with patients in the most advanced stages of disease. During the
course of treatment, these patients can die or suffer adverse medical effects
for reasons that may not be related to the product being tested, but which can
nevertheless adversely affect clinical trial results or approvals by the FDA.
Clinical testing of pharmaceutical products is itself subject to approvals by
various governmental regulatory authorities. We may not be permitted by
regulatory authorities to commence or continue clinical trials. Any delays in or
termination of our clinical trial efforts could negatively affect our future
prospects and stock price.

OUR SUCCESS DEPENDS ON OUR ABILITY TO MAINTAIN THE PROPRIETARY NATURE OF OUR
TECHNOLOGY

The patent positions of pharmaceutical and biopharmaceutical firms,
including our company, are generally uncertain and involve complex legal and
factual questions. To date, no consistent policy has emerged regarding the
breadth of biotechnology patent claims that are granted by the United States
Patent and Trademark Office or enforced by the federal courts. 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 of 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. We also cannot be sure that we will develop additional
proprietary products that are patentable. 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, invalidated or
circumvented. Future patent interference proceedings involving either our
patents or patents of our licensors may have a material adverse effect on our
business. 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 have a material adverse
effect on our business, financial condition and results of operations.

In the future, we may be required to obtain additional licenses to patents
or other proprietary rights of others. 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, manufacturing 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 have a material adverse effect on our ability to sell our products
commercially.

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 alliances, collaborators, employees and
consultants. These agreements, however, may be breached. We may not have
adequate remedies for any such breach, 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 LACK MARKETING AND SALES EXPERIENCE

We have limited experience in marketing and selling our products and product
candidates and rely on our corporate alliances to market and sell FERIDEX I.V.
and GASTROMARK and have agreed to do so, pending FDA approval, for Code 7228 for
oncology applications, and for COMBIDEX. In order to achieve commercial success
for any product candidate approved by the FDA for which we do not have a
marketing alliance, we may have to develop a marketing and sales force or enter
into arrangements with others to market and sell our products. We may not be
successful in attracting and retaining qualified marketing and sales personnel
and may not be able to enter into marketing and sales agreements with others on
acceptable terms, if at all. Furthermore, we, or our corporate alliances, may
not be successful in marketing and selling our products.

OUR SUCCESS IS DEPENDENT ON THIRD-PARTY REIMBURSEMENT POLICIES AND DECISIONS

In both the United States and foreign markets, our ability to commercialize
our products may 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
payers. Significant uncertainty exists as to the reimbursement status of newly-
approved health care products, products used for indications not approved by the
FDA and products which have competitors for their approved indications. If the
government or third-party payers do not approve our products and related
treatments for reimbursement, or 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, and our ability to generate revenue may be materially adversely
affected. Even if third-party payers make reimbursement available, these payers'
reimbursement policies may adversely affect us and our corporate alliances'
ability to sell our products on a profitable basis.

In the United States, there has been, and we expect that there will continue
to be, a number of federal and state proposals to reform the health care system.
The trend toward managed healthcare in the United States, the growth of
organizations such as health maintenance organizations, and 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
adversely affect our business, financial condition and results of operations. In
addition, legislation and regulations affecting the pricing of pharmaceuticals
may change in ways adverse to us that may affect the marketing of our current or
future products. While we cannot predict the likelihood of any of these
legislative or regulatory proposals, if the government or an agency adopts these
proposals they could materially adversely affect our business, financial
condition and results of operations.

WE NEED TO MAINTAIN 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 alliances, and Code 7228 for use in
human clinical trails, in our Massachusetts facility. We intend to, pending FDA
approval, manufacture COMBIDEX formulated drug product at our Massachusetts
facility as well. This facility is subject to current Good Manufacturing
Practices, cGMP, regulations prescribed by the FDA. 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 have a material
adverse effect on our business, financial condition and results of operations.
In addition, we are dependent on contract manufacturers for the final production
of COMBIDEX. In the event that we are unable to obtain or retain final
manufacturing for COMBIDEX, we will not be able to develop and commercialize
this product as planned. In addition, 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. We also cannot give any assurance that such manufacturers will be
able to deliver required quantities of product that conform to specifications in
a timely manner.

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 have many competitors, many of
which have substantially greater capital and other resources than we do and
represent significant competition for us. These companies may succeed in
developing technologies and products that are 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 the area of iron therapeutics, there
are several iron replacement therapy products on the market with which Code 7228
will compete, if approved. These products have already received

regulatory marketing approval. We can give no assurance that we will be able to
successfully complete Phase II clinical trials for Code 7228 for iron
replacement therapy, or, if completed, that we will be able to obtain regulatory
approval. In addition, developments by others may render our products or product
candidates or technologies obsolete or noncompetitive. Furthermore, our
collaborators or customers may choose to use competing technologies or products.

WE MAY NEED SUBSTANTIAL ADDITIONAL CAPITAL TO GROW AND OPERATE OUR BUSINESS AND
WE ARE UNCERTAIN ABOUT OBTAINING FUTURE FINANCING

We have expended and will continue to expend substantial funds to complete
the research, development, clinical trials, regulatory approvals and other
activities necessary to achieve final commercialization of our products. It is
possible that we may need additional financing to satisfy our capital and
operating requirements relating to the development, manufacturing and marketing
of our products. We may seek such financing through arrangements with
collaborative alliances or through public or private sales of our securities,
including equity securities. We may not be able to obtain financing on
acceptable terms, if at all. Any additional equity financings could be dilutive
to our stockholders. If adequate additional funds are not available, we may be
required to curtail significantly one or more of our research and development
programs or obtain funds through arrangements with collaborative alliances or
others that may require us to relinquish rights to certain of our products or
product candidates on terms that we might otherwise find unacceptable.

WE ARE EXPOSED TO POTENTIAL PRODUCT LIABILITY CLAIMS AND WE MAY NOT BE ABLE TO
OBTAIN SUFFICIENT INSURANCE COVERAGE

We maintain product liability insurance coverage for claims arising from the
use of our products in clinical trials and commercial use. However, coverage is
becoming increasingly expensive 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 have a material
adverse effect on our business, financial condition and results of operations.
We may not be able to obtain commercially reasonable product liability insurance
for any product approved for marketing in the future. Furthermore, we can give
no assurance that insurance coverage and our resources would 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 have a
material adverse effect on our business, financial condition and results of
operations, including the reduction or elimination of our resources, whether or
not the plaintiffs in such claims ultimately prevail.

OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY EMPLOYEES

Because of the specialized nature of our business, we are highly dependent
on our ability to attract and retain qualified scientific and technical
personnel for the research and development activities conducted or sponsored by
us. Furthermore, our possible expansion into areas and activities requiring
additional expertise, such as product distribution and marketing and sales, may
require the addition of new management personnel and the development of
additional expertise by existing management personnel. 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 limits on our business
operations.

OUR STOCK PRICE IS VOLATILE

The market prices for securities of biopharmaceutical and pharmaceutical
companies, including ours, have historically been highly volatile. Fluctuations
in operating results may cause the market price of our common stock to be
volatile. In addition, the market prices for securities of biopharmaceutical and
pharmaceutical companies have from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of such
companies. Various factors and events, including announcements by us or our
competitors concerning technological innovations, new products, clinical trial
results, agreements with collaborators, governmental regulations, developments
in patent or other proprietary rights, or public concern regarding the safety of
products developed by us or others, may have a significant impact on the market
price of our common stock and dividend policy.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

The Company owns financial instruments that are sensitive to market risks as
part of its investment portfolio. The investment portfolio is used to preserve
the Company's capital until it is required to fund operations, including the
Company's research and development activities, and includes shares of Cytogen
common stock received as a license fee. None of these market-risk sensitive
instruments are held for trading purposes. The investment portfolio contains
instruments that are subject to a decline in equity markets.

Equity Market Risk--The Company's investment portfolio includes marketable
securities classified as available for sale and cash and cash equivalents.
Marketable securities include publicly-traded stocks of domestic issuers.
Assuming a decline of 15% in the market for domestic stocks generally, the
Company's equity investments may be expected to decline a corresponding 15%,
resulting in a hypothetical reduction of the value of the total assets of the
Company (as of September 30, 2001) of approximately 6%. For the fiscal year
ended September 30, 2000, the Company assumed a decline of 10% in the market for
domestic stocks generally. Assuming this 10% decline in the market for domestic
stocks generally, the Company's equity investments may be expected to decline a
corresponding 10%, resulting in a hypothetical reduction of the value of the
total assets of the Company (as of September 30, 2001) of approximately 4% as
compared to a hypothetical reduction of the value of the total assets of the
Company (as of September 30, 2000) of approximately the same percentage. In
addition, at September 30, 2001, over 40% of the Company's marketable securities
consisted of two publicly-traded stocks, one of which was Cytogen common stock,
shares of which were received by the Company as a non-refundable up-front
licensing fee as part of a license and marketing agreement entered into in the
last quarter of fiscal 2000. The use of a 15% estimate in the decline of equity
securities is strictly for estimation and evaluation purposes only and was
changed from last year's estimate of 10% as the Company believes 15% better
reflects reasonably possible near-term changes in the market for equity
securities. The value of the Company's assets may rise or fall by a greater or
smaller amount depending on actual general market performances and the value of
individual securities owned by the Company. The Company manages its equity
market risk exposure through diversification across industries and positions in
cash and cash equivalents. In addition to publicly-traded stocks, the Company
held significant cash and cash equivalents in its investment portfolio at
September 30, 2001 and 2000. These positions are intended to reduce the
Company's equity market risk. A significant decrease in the value of the
Company's overall investment portfolio could have a material adverse effect on
the Company's business, results of operations or financial condition.

ITEM 8. FINANCIAL STATEMENTS:

The Company's Financial Statements and related Report of Independent
Accountants are presented in the following pages. The financial statements
included in this Item 8 are as follows:

Report of Independent Accountants

Financial Statements:

Balance Sheets (restated)--September 30, 2001 and 2000

Statements of Operations (restated)--for the years ended September 30, 2001,
2000 and 1999

Statements of Comprehensive Income (restated)--for the years ended
September 30, 2001, 2000 and 1999

Statements of Stockholders' Equity (restated)--for the years ended
September 30, 2001, 2000 and 1999

Statements of Cash Flows (restated)--for the years ended September 30, 2001,
2000 and 1999

Reconciliation of Net Income (Loss) to Net Cash Used in Operating Activities
(restated)--for the years ended September 30, 2001, 2000 and 1999

Notes to Financial Statements (restated)

INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants........................... 35

Balance Sheets (restated)--September 30, 2001 and 2000...... 36

Statements of Operations (restated)--for the years ended
September 30, 2001, 2000 and 1999......................... 37

Statements of Comprehensive Income (restated)--for the years
ended September 30, 2001, 2000 and 1999................... 38

Statements of Stockholders' Equity (restated)--for the years
ended September 30, 2001, 2000 and 1999................... 39

Statements of Cash Flow (restated)--for the years ended
September 30, 2001, 2000 and 1999......................... 40

Reconciliation of Net Income (Loss) to Net Cash Used in
Operating Activities (restated)--for the years ended
September 30, 2001, 2000 and 1999......................... 41

Notes to Financial Statements (restated).................... 42

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Advanced Magnetics, Inc.:

In our opinion, the accompanying balance sheets and the related statements of
operations, comprehensive income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Advanced Magnetics,
Inc. at September 30, 2001 and September 30, 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2001 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

As discussed under the heading "Restatement" in Note A, the financial
statements for the fiscal year ended September 30, 2001 have been restated to
recognize an other-than-temporary decline in value of marketable securities and
the Company has revised the presentation of the Statements of Operations to
exclude interest, dividends and net gains and losses on sales of securities from
revenue and include such amounts as "other income (expense)" for all years
presented.

As discussed in Note B to the financial statements, in fiscal 2000 the
Company changed its method of accounting for revenue from license agreements.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 14, 2001, except as to the information
presented under the heading "Restatement" in Note A,
which is as of January 24, 2002.

ADVANCED MAGNETICS, INC.

BALANCE SHEETS

SEPTEMBER 30,
-----------------------------
2001 2000
------------- -------------
(RESTATED)

ASSETS
Current assets:
Cash and cash equivalents................................... $ 11,741,861 $ 16,120,738
Marketable securities....................................... 10,912,382 14,051,850
Accounts receivable......................................... 317,970 639,740
Inventories................................................. 87,421 91,456
Prepaid expenses............................................ 166,743 187,481
------------- -------------
Total current assets...................................... 23,226,377 31,091,265
Property, plant and equipment:
Land........................................................ 360,000 360,000
Buildings................................................... 4,654,047 4,618,296
Laboratory equipment........................................ 6,846,193 8,013,973
Furniture and fixtures...................................... 792,484 782,525
------------- -------------
12,652,724 13,774,794
Less--accumulated depreciation and amortization............. (8,914,026) (9,620,094)
------------- -------------
Net property, plant and equipment........................... 3,738,698 4,154,700
Other assets................................................ 483,592 421,626
------------- -------------
Total assets.............................................. $ 27,448,667 $ 35,667,591
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 163,942 $ 611,891
Accrued expenses............................................ 382,122 848,483
Deferred revenues........................................... 3,945,925 3,923,986
------------- -------------
Total current liabilities................................. 4,491,989 5,384,360
Long-term liabilities:
Deferred revenues........................................... 11,444,384 15,977,599
------------- -------------
Total liabilities......................................... 15,936,373 21,361,959
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, authorized
2,000,000 shares; none issued............................. -- --
Common stock, par value $.01 per share, authorized
15,000,000 shares; issued and outstanding 6,633,895
shares as of September 30, 2001 and 6,773,932 shares as of
September 30, 2000........................................ 66,339 67,739
Additional paid-in capital.................................. 43,830,473 44,267,120
Retained deficit............................................ (31,939,731) (28,110,546)
Accumulated other comprehensive income (loss)............... (444,787) (1,918,681)
------------- -------------
Total stockholders' equity................................ 11,512,294 14,305,632
------------- -------------
Total liabilities and stockholders' equity.............. $ 27,448,667 $ 35,667,591
============= =============

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

ADVANCED MAGNETICS, INC.

STATEMENTS OF OPERATIONS

(RESTATED)

FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
2001 2000 1999
------------ ------------- ------------

Revenues:
License fees...................................... $ 4,640,198 $ 1,124,049 $ --
Royalties......................................... 700,000 825,000 680,000
Product sales..................................... 633,480 1,253,537 1,966,059
Contract research and development................. -- 106,003 581,429
------------ ------------- ------------
Total revenues.................................. 5,973,678 3,308,589 3,227,488
Costs and expenses:
Cost of product sales............................. 204,399 239,228 454,642
Contract research and development expenses........ -- 3,195 37,056
Company-sponsored research and development
expenses........................................ 3,622,102 4,623,468 7,952,331
Selling, general and administrative expenses...... 1,667,066 3,013,796 3,694,038
------------ ------------- ------------
Total costs and expenses........................ 5,493,567 7,879,687 12,138,067
Other income (expense):
Interest and dividend income...................... 697,162 827,780 646,611
Net gains and losses on sales of securities and
derivative instruments.......................... (579,418) (62,450) 3,555,957
Writedown of marketable securities................ (4,659,800) -- --
Other income...................................... 258,122 -- 265,593
------------ ------------- ------------
Total other income (expense).................... (4,283,934) 765,330 4,468,161
------------ ------------- ------------
Income (loss) before cumulative effect of accounting
change and provision for income taxes............. (3,803,823) (3,805,768) (4,442,418)
Provision for income taxes.......................... 25,362 -- --
------------ ------------- ------------
Income (loss) before cumulative effect of accounting
change............................................ (3,829,185) (3,805,768) (4,442,418)
Cumulative effect of accounting change (Note B)..... -- (7,457,717) --
------------ ------------- ------------
Net income (loss)................................... $ (3,829,185) $ (11,263,485) $ (4,442,418)
============ ============= ============
Basic and diluted income (loss) before cumulative
effect of accounting change per share............. $ (0.57) $ (0.56) $ (0.66)
Cumulative effect of accounting change per share.... -- (1.11) --
------------ ------------- ------------
Basic and diluted net income (loss) per share....... $ (0.57) $ (1.67) $ (0.66)
============ ============= ============
Weighted average shares outstanding:
Basic............................................. 6,701,113 6,758,825 6,766,934
------------ ------------- ------------
Diluted........................................... 6,701,113 6,758,825 6,766,934
------------ ------------- ------------
Pro forma amounts assuming accounting change was
applied retroactively:
Net income (loss)................................. $ -- $ (3,805,768) $ (4,039,639)
Basic and diluted net income (loss) per share..... $ -- $ (0.56) $ (0.60)

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

ADVANCED MAGNETICS, INC.

STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
2001 2000 1999
------------ ------------- ------------
(RESTATED)

Net income (loss)................................... $ (3,829,185) $ (11,263,485) $ (4,442,418)
------------ ------------- ------------
Other comprehensive income:
Unrealized gains (losses) on securities........... (3,765,324) (1,610,010) 2,206,167
Reclassification adjustment for (gains) losses
included in net income.......................... 5,239,218 62,450 (3,555,957)
------------ ------------- ------------
Other comprehensive income (loss)................... 1,473,894 (1,547,560) (1,349,790)
------------ ------------- ------------
Comprehensive income (loss)......................... $ (2,355,291) $ (12,811,045) $ (5,792,208)
============ ============= ============

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

ADVANCED MAGNETICS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED SEPTEMBER 30, 1999, 2000 AND 2001

ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL RETAINED COMPREHENSIVE TOTAL
-------------------- PAID-IN EARNINGS INCOME STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) (LOSS) EQUITY
--------- -------- ----------- ------------ ------------- -------------

Balance at September 30,
1998......................... 6,767,358 $67,674 $44,277,698 $(12,404,643) $ 978,669 $32,919,398
========= ======= =========== ============ =========== ===========
Shares issued in connection
with the exercise of stock
options...................... 1,329 13 10,397 -- -- 10,410
Shares surrendered in
connection with the exercise
of stock options............. (1,027) (10) (10,388) -- -- (10,398)
Shares issued in connection
with employee stock purchase
plan......................... 2,267 23 7,435 -- -- 7,458
Common shares repurchased...... (17,900) (179) (79,772) -- -- (79,951)
Other comprehensive income
(loss)....................... -- -- -- -- (1,349,790) (1,349,790)
Net loss....................... -- -- -- (4,442,418) -- (4,442,418)
--------- ------- ----------- ------------ ----------- -----------
Balance at September 30,
1999......................... 6,752,027 $67,521 $44,205,370 $(16,847,061) $ (371,121) $27,054,709
--------- ------- ----------- ------------ ----------- -----------
Shares issued in connection
with the exercise of stock
options...................... 5,250 52 20,956 -- -- 21,008
Shares surrendered in
connection with the exercise
of stock options............. (2,488) (25) (17,967) -- -- (17,992)
Shares issued in connection
with employee stock purchase
plan......................... 19,143 191 58,761 -- -- 58,952
Common shares repurchased...... -- -- -- -- -- --
Other comprehensive income
(loss)....................... -- -- -- -- (1,547,560) (1,547,560)
Net loss....................... -- -- -- (11,263,485) -- (11,263,485)
--------- ------- ----------- ------------ ----------- -----------
Balance at September 30,
2000......................... 6,773,932 $67,739 $44,267,120 $(28,110,546) $(1,918,681) $14,305,632
--------- ------- ----------- ------------ ----------- -----------
Shares issued in connection
with the exercise of stock
options...................... -- -- -- -- -- --
Shares surrendered in
connection with the exercise
of stock options............. -- -- -- -- -- --
Shares issued in connection
with employee stock purchase
plan......................... 4,663 47 14,828 -- -- 14,875
Common shares repurchased...... (144,700) (1,447) (451,475) -- -- (452,922)
Other comprehensive income
(loss) (restated)............ -- -- -- -- 1,473,894 1,473,894
Net loss (restated)............ -- -- -- (3,829,185) -- (3,829,185)
--------- ------- ----------- ------------ ----------- -----------
Balance at September 30, 2001
(restated)................... 6,633,895 $66,339 $43,830,473 $(31,939,731) $ (444,787) $11,512,294
========= ======= =========== ============ =========== ===========

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

ADVANCED MAGNETICS, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------
2001 2000 1999
------------ ----------- ------------
(RESTATED)

Cash flows from operating activities:
Cash received from customers......................... $ 1,198,034 $ 1,615,566 $ 2,834,912
Cash paid to suppliers and employees................. (5,956,859) (6,624,397) (11,369,713)
Dividends and interest received...................... 464,124 827,782 670,440
Royalties received................................... 723,214 593,541 699,269
Net proceeds from insurance settlement............... -- -- 371,561
Income taxes (paid) refunded......................... (94,752) -- 60,000
Other income......................................... 200,000 -- --
------------ ----------- ------------
Net cash used in operating activities................ (3,466,239) (3,587,508) (6,733,531)
Cash flows from investing activities:
Proceeds from sales of marketable securities......... 13,196,124 4,433,874 11,305,551
Proceeds from notes and bonds maturing............... 12,000,000 -- 7,500,000
Purchase of marketable securities.................... (13,821,980) (1,744,075) (2,291,869)
Purchase of notes and bonds.......................... (11,766,961) -- --
Capital expenditures................................. (80,808) (36,333) (280,891)
Proceeds from sale of fixed assets................... 61,000 -- --
(Increase) decrease in other assets.................. (61,966) (59,824) (57,565)
Cash sold in divestiture............................. -- -- (20,823)
------------ ----------- ------------
Net cash provided by (used in) investing
activities......................................... (474,591) 2,593,642 16,154,403
Cash flows from financing activities:
Proceeds from issuances of common stock, net......... 14,875 61,968 7,470
Purchase of treasury stock........................... (452,922) -- (79,951)
------------ ----------- ------------
Net cash (used in) provided by financing
activities......................................... (438,047) 61,968 (72,481)
------------ ----------- ------------
Net (decrease) increase in cash and cash
equivalents........................................ (4,378,877) (931,898) 9,348,391
Cash and cash equivalents at beginning of year....... 16,120,738 17,052,636 7,704,245
------------ ----------- ------------
Cash and cash equivalents at end of year............. $ 11,741,861 $16,120,738 $ 17,052,636
============ =========== ============
Supplemental data:
Non-cash operating activities:
Marketable securities received in licensing and
marketing agreements............................. -- $13,546,875 --

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

ADVANCED MAGNETICS, INC.

RECONCILIATION OF NET INCOME (LOSS)

TO NET CASH USED IN OPERATING ACTIVITIES

FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------
2001 2000 1999
----------- ------------ -----------
(RESTATED)

Net income (loss)..................................... $(3,829,185) $(11,263,485) $(4,442,418)
----------- ------------ -----------
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Non-cash reduction in value of investment in
subsidiary.......................................... -- -- 155,967
Non-cash license fee revenue.......................... (4,582,541) (1,116,056) --
Cumulative effect of accounting change................ -- 7,457,717 --
Depreciation.......................................... 493,933 554,434 817,299
Accretion of U. S. Treasury Notes discount............ (233,038) -- (15,358)
(Increase) decrease in accounts receivable............ 321,770 8,462 339,116
(Increase) decrease in inventories.................... 4,035 (10,976) 368,150
(Increase) decrease in prepaid expenses............... 20,738 8,174 33,330
Gains of disposal of fixed assets..................... (58,122) -- --
Increase (decrease) in accounts payable and accrued
expenses............................................ (914,310) 698,724 (443,260)
Increase (decrease) in deferred revenues.............. 71,263 13,048 --
Increase (decrease) in income taxes payable........... -- -- 9,600
Net realized (gains) losses on sales of marketable
securities.......................................... 579,418 62,450 (3,555,957)
Writedown of marketable securities.................... 4,659,800 -- --
----------- ------------ -----------
Total adjustments............................. 362,946 7,675,977 (2,291,113)
----------- ------------ -----------
Net cash used in operating activities................. $(3,466,239) $ (3,587,508) $(6,733,531)
=========== ============ ===========

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

NOTES TO FINANCIAL STATEMENTS

A. SUMMARY OF ACCOUNTING POLICIES:

BUSINESS

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

The Company is subject to risks common to companies in the industry
including, but not limited to, development by the Company or its competitors of
new technological innovations, uncertainty of product development and
commercialization, dependence on key personnel and collaborative relationships,
market acceptance of products, uncertainties related to third-party
reimbursement, product liability, protection of proprietary technology, and
compliance with FDA and other government regulations.

RESTATEMENT

Based on Statement of Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company has determined that a
decline of $4,659,800 in value of the common stock of Cytogen Corporation
("Cytogen") to below its original basis should have been assessed as other than
temporary and recorded as a loss in the year ended September 30, 2001. The
Company had originally assessed the decline as temporary and recorded the
decline as unrealized loss in comprehensive income. The Cytogen common stock was
received by the Company as part of a license and marketing agreement and a
supply agreement with Cytogen. As a result of this change, the Company has
restated its financial statements for the year ended September 30, 2001 to
reflect a net loss of $3,829,185. Additionally, the Company has revised its
presentation of the Statements of Operations for the years ended September 30,
2001, 2000 and 1999 to exclude $117,744, $765,330 and $4,202,568, respectively,
of interest, dividends and net gains and losses on sales of securities from
revenue and include such amounts as "other income (expense)." The financial
statements and related notes included in this Annual Report on Form 10-K/A
reflect all such adjustments. It should be noted that there is no change in
total assets, total liabilities or total stockholders' equity associated with
these adjustments and that the loss is a non-cash charge. The impact of the
adjustment for fiscal 2001 is as follows:

AMOUNT
PREVIOUSLY AS RESTATED AND
REPORTED REVISED
STATEMENTS OF OPERATIONS, FOR THE YEAR ENDED SEPTEMBER 30, 2001 ----------- ---------------

Total revenues............................................... $ 6,091,422 $ 5,973,678
Total costs and expenses..................................... 5,493,567 5,493,567
Income/(loss) before tax..................................... 855,977 (3,803,823)
Net income/(loss)............................................ 830,615 (3,829,185)
Basic/diluted net income/(loss) per share.................... 0.12 (0.57)

Diluted weighted average shares outstanding.................. 6,722,742 6,701,113

BALANCE SHEET, AS OF SEPTEMBER 30, 2001
Retained deficit............................................. (27,279,931) (31,939,731)
Accumulated other comprehensive income (loss)................ (5,104,587) (444,787)
Total stockholders' equity................................... 11,512,294 11,512,294

CONSOLIDATION POLICY

The Company consolidated its majority-owned subsidiary until the date of
divestiture in July 1999. All intercompany transactions until that time have
been eliminated.

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
significantly differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash on hand, money market funds and
marketable securities having a maturity of less than three months at the date
acquired. Substantially all of the cash and cash equivalents at September 30,
2001 and 2000 were held in a money market account.

MARKETABLE SECURITIES AND DERIVATIVE ACTIVITIES

The Company's portfolio at September 30, 2001 and 2000 consists of
securities classified as available-for-sale which are recorded at fair market
value. The fair values of marketable securities are based on quoted market
prices. Net unrealized gains and losses on marketable securities (excluding
other than temporary losses) are recorded as a separate component of
stockholders' equity entitled Accumulated Other Comprehensive Income. All
derivatives are recognized on the balance sheet at their fair value. Derivative
instruments entered into by the Company are primarily trading instruments and
the changes in the fair value of these instruments are reported in
current-period earnings. There were no open derivative contracts at
September 30, 2001 and 2000. Interest income is accrued as earned. Dividend
income is accrued on the ex-dividend date, and net realized gains and losses are
computed on the basis of average cost and are recognized when realized.

Marketable securities are considered to be impaired when a decline in fair
value below cost basis is determined to be other-than-temporary. The Company
employs a methodology in evaluating whether a decline in fair value below cost
basis is other-than-temporary that considers available evidence regarding its
marketable securities. In the event that the cost basis of a security exceeds
its fair value, the Company evaluates, among other factors, the duration of the
period that, and extent to which, the fair value is less than cost basis; the
financial health of and business outlook for the investee, including industry
and sector performance, changes in technology, and operational and financing
cash flow factors; overall market conditions and trends; and the Company's
intent and ability to hold the investment. Once a decline in fair value is
determined to be other-than-temporary, a writedown is recorded and a new cost
basis in the security is established.

INVENTORIES

Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. The cost of additions and
improvements is charged to the property accounts while maintenance and repairs
are expensed as incurred. Upon sale or other disposition of property and
equipment, the cost and related depreciation are removed from the accounts and
any resulting gain or loss is reflected in Other Income.

DEPRECIATION

Depreciation is recorded by the straight line method based on rates
sufficient to provide for retirement over estimated useful lives as follows:
buildings--40 years; laboratory equipment and furniture and fixtures--5 years;
and leasehold improvements--over the life of the lease.

REVENUE RECOGNITION

Product revenue is recognized upon shipment to the customer and satisfaction
of all obligations. Royalty revenue is recognized as the related product sales
are recognized. The terms of product development agreements entered into between
the Company and its collaborative alliances may include non-refundable license
fees, payments based on the achievement of certain milestones and royalties on
any product sales derived from collaborations. Non-refundable license fees, with
respect to product development agreements and collaborations, are recognized
over the term of the agreement as earned or, in cases where project costs are
estimable, recognized on a percentage of completion basis as related costs are
incurred. Milestone payments, which are not refundable, are recognized as
revenue on a retrospective basis. Accordingly, upon achievement of the
milestone, a portion of the milestone payment equal to the percentage of
collaboration completed through that date would be recognized. The remainder
would be recognized as services are performed over the remaining term of the
collaboration.

OTHER INCOME

Other Income in the year ended September 30, 2001 includes amounts for the
settlement of a claim against an investor and gains from the sale of certain
capital assets. Other Income in the year ended September 30, 1999 includes gains
on insurance settlements, loss on sale of subsidiary and other items.

INCOME TAXES

The provision for income taxes includes federal and state income taxes
currently payable (including alternative minimum taxes) and deferred income
taxes arising from the recognition of certain income and expenses in different
periods for financial and tax reporting purposes.

INCOME (LOSS) PER SHARE

The weighted average common and common equivalent shares used in the
computation of basic and diluted earnings per share is presented below.
Aggregate options of 701,700 (weighted average exercise price of $6.56) for 2001
have not been included in the calculation of weighted average shares since their
effect would be anti-dilutive, given the net loss.

Aggregate options of 479,506 (weighted average exercise price of $8.97), and
473,833 options (weighted average exercise price of $9.47) for 2000 and 1999,
respectively, have not been included in the calculation of weighted average
shares since their effect would be anti-dilutive, given the net loss in those
years.

FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
2001 2000 1999
------------ ------------- ------------
(RESTATED)

Numerator:
Net income (loss)................................... $ (3,829,185) $ (11,263,485) $ (4,442,418)
============ ============= ============
Denominator:
Weighted average number of common shares issued and
outstanding....................................... 6,701,113 6,758,825 6,766,934
Assumed exercise of options reduced by the number of
shares which could have been purchased with the
proceeds of those options......................... -- -- --
------------ ------------- ------------
Weighted average common and common equivalent
shares............................................ 6,701,113 6,758,825 6,766,934
Basic and diluted net income (loss) per share....... $ (0.57) $ (1.67) $ (0.66)

RECLASSIFICATIONS

Certain amounts from the prior fiscal years have been reclassified to
conform to the current year's presentation.

B. CUMULATIVE EFFECT OF ACCOUNTING CHANGE:

In fiscal 2000, the Company adopted SEC Staff Accounting Bulleting No. 101
("SAB 101"). The effect of applying this change in accounting principle is a
cumulative charge of $7,457,717, or $1.11 per share. This cumulative change in
accounting principle reflects the reversal of license fees and milestone
payments that had been recognized in prior years. Previously, the Company had
recognized license fee revenue when the fees were non-refundable, a technology
transfer occurred, no explicit commitment or obligation for scientific
achievement existed, and the other portions of the agreement, principally supply
and royalty, were priced at fair value. Under the new accounting method applied
retroactively to October 1, 1999, each payment is recorded as deferred revenue
to be recognized over the remaining term of the related agreement. For each of
the years ended September 30, 2001 and September 30, 2000, the Company
recognized $727,582 in revenue that was included in the cumulative effect
adjustment as of October 1, 1999.

C. MARKETABLE SECURITIES:

The cost and fair value of the marketable securities portfolio at
September 30 are as follows:

2001 2001 2000 2000
----------- ----------- ----------- -----------
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
(RESTATED)

Common stock.............. $11,357,169 $10,912,382 $15,970,531 $14,051,850
----------- ----------- ----------- -----------
$11,357,169 $10,912,382 $15,970,531 $14,051,850
=========== =========== =========== ===========

At September 30, 2001, gross unrealized holding losses were $444,787. At
September 30, 2000, gross unrealized holding losses were $1,918,681. At
September 30, 2001 and 2000, the net unrealized holding losses (excluding
other-than-temporary losses) have been recorded as a separate component of
stockholders' equity, entitled Accumulated Other Comprehensive Income. At
September 30, 2001, over 40% of the Company's balance in marketable securities
was held in two common stocks, including $1,987,200 in the common stock of
Cytogen. There were no open derivative contracts at September 30, 2001 or 2000.

During the year ended September 30, 2001, gross realized gains and gross
realized losses on the sale of marketable securities and derivative instruments
were $2,066,851 and $2,646,269, respectively, resulting in a net realized loss
of $579,418. During the year ended September 30, 2000, gross realized gains and
gross realized losses on the sale of marketable securities were $101,325 and
$163,775, respectively, resulting in a net realized loss of $62,450. During the
year ended September 30, 1999, gross realized gains and gross realized losses on
the sale of marketable securities were $4,796,165 and $1,240,208, respectively,
resulting in a net realized gain of $3,555,957. During the year ended September
30, 2001, the Company realized $147,557 in net gains on trading in call options
on domestic equity instruments.

The Company has evaluated the carrying value of its shares of Cytogen common
stock below the original basis of such shares. As a result, the Company
determined that the decline in value was other-than-temporary and recorded a
$4,659,800 writedown of the shares to a new cost basis of $1,987,200.

Interest, dividends and net gains (losses) on sales of securities and
derivative instruments and writedown of marketable securities consist of the
following:

FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------
2001 2000 1999
----------- -------- ----------

Interest income........................... $ 631,386 $729,805 $ 534,733
Dividend income........................... 65,776 97,975 111,878
----------- -------- ----------
Total..................................... 697,162 827,780 646,611
=========== ======== ==========

Net gains (losses) on sales of securities
and derivative instruments.............. $ (579,418) $(62,450) $3,555,957
Writedown of marketable securities........ $(4,659,800) -- --

D. INVENTORIES:

The Company's inventories consisted entirely of raw materials of $87,421 at
September 30, 2001 and $91,456 at September 30, 2000.

E. COMMITMENTS:

The Company leases laboratory, office and warehouse space under various
agreements expiring in fiscal 2003. Rental expenses for the years ended
September 30, 2001, 2000 and 1999 amounted to

$228,899, $326,347 and $411,245, respectively. Future minimum lease payments for
fiscal 2002 and 2003 amount to $153,200 and $12,800, respectively.

F. ACCRUED EXPENSES:

Accrued expenses consist of the following at September 30:

2001 2000
-------- --------

Salaries and other compensation......................... $176,291 $223,367
License and royalty fees................................ 30,204 33,952
Clinical trials......................................... -- 85,000
Professional fees....................................... 158,450 188,000
Other................................................... 17,177 318,164
-------- --------
Totals.................................................. $382,122 $848,483
======== ========

G. INCOME TAXES:

Deferred tax assets and deferred tax liabilities are recognized based on
temporary differences between the financial reporting and tax basis of assets
and liabilities using statutory rates. A valuation allowance is recorded against
deferred tax assets if it is more likely than not that some or all of the
deferred tax assets will not be realized.

There was a current federal income tax provision for the year ended
September 30, 2001 of $25,362. There was no income tax provision or benefit for
the years ended September 30, 2000 and 1999. The current federal income tax
provision is comprised solely of alternative minimum tax.

A reconciliation of the statutory U.S. federal income tax rate to the
Company's effective tax rate is as follows:

FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(RESTATED)

Statutory U.S. federal tax rate................. 34.0% 34.0% 34.0%
State taxes, net of federal benefit............. 6.3% 6.3% 6.3%
Permanent items................................. 0.4% 0.2% (0.3%)
Other........................................... 0.1% (1.7%) (1.0%)
Valuation allowance............................. (41.4%) (38.8%) (39.0%)
------- ------- -------
(0.6%) 0.0% 0.0%
------- ------- -------

The components of the deferred tax assets and liabilities at September 30,
were as follows:

2001 2000 1999
------------ ------------ ------------
(RESTATED)

Assets
Net operating loss carryforwards................... $ 6,514,907 $ 4,649,480 $ 9,397,988
Research and experimentation tax credit
carryforward..................................... 3,173,364 3,041,904 3,004,518
Deductible intangibles............................. 79,915 90,116 102,016
Deferred revenue................................... 6,197,677 8,014,368 --
Writedown of marketable securities................. 1,876,501 -- --
Other.............................................. 507,130 403,165 316,120

Liabilities
Property, plant and equipment depreciation......... (45,777) (135,586) (200,415)
Other.............................................. (775,597) (85,842) (70,142)
------------ ------------ ------------
17,528,120 15,977,605 12,550,085
Valuation allowance................................ (17,528,120) (15,977,605) (12,550,085)
------------ ------------ ------------
Net deferred taxes................................... $ -- $ -- $ --
============ ============ ============

Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets. Realization of
favorable tax attributes is, therefore, reflected as a tax benefit in the
provision for income taxes.

At September 30, 2001, the Company had unused net operating loss (NOL)
carryforwards for federal income tax purposes of approximately $17,103,762 which
begin to expire in fiscal 2008. The Company also has unused state NOL
carryforwards of approximately $11,158,331 which begin to expire in fiscal 2002.
The Company also has federal research and experimentation credits of
approximately $2,778,170 which expire in fiscal 2004.

H. STOCK PLANS:

The Company's 2000 Stock Plan (the "2000 Stock Plan"), approved by the
shareholders, provides for the grant of options to the Company's directors,
officers, employees and consultants to purchase up to an aggregate of 1,000,000
shares of common stock at a price determined by the Board of Directors. No
options have been granted under the 2000 Stock Plan as of September 30, 2001.
The number of shares available for future grants at September 30, 2001 was
1,000,000.

The Company's 1993 Stock Plan (the "1993 Stock Plan"), approved by the
shareholders, provides for the grant of options to the Company's 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. The
maximum term of the options under the 1993 Stock Plan is ten years, with limited
exceptions. The number of shares available for future grants at September 30,
2001 was 28,375.

The Company's 1983 Stock Option Plan (the "1983 Plan") does not allow for
option grants after June 1993. The 1983 Plan provided for the grant of options
to the Company's employees, and mandatory grants to outside directors upon
initial election to the Board of Directors, to purchase up to 900,000 shares of
common stock at a price equal to at least the fair market value, or 90% of the
fair market value, of the stock at the date of grant for incentive stock options
and non-statutory stock options, respectively. The maximum terms of incentive
stock options and non-statutory options under the 1983 Plan are ten years and
ten years plus thirty days, respectively.

On November 5, 1991, the Company's Board of Directors adopted the 1992
Non-Employee Director Stock Option Plan (the "1992 Plan") which the shareholders
subsequently approved. The 1992 Plan provides for the grant to each non-employee
director holding such position on November 5, 1991, on such date, and on each
fifth anniversary thereof, of an option to purchase 5,000 shares of common stock
up to an aggregate of 100,000 shares at a price equal to the fair market value
of the stock at the date of the grant, vesting in equal installments over a five
year period. The 1992 Plan also provides for the grant to new members of the
Board of Directors, on the date of each such director's election, and on each
fifth anniversary thereof, of an option to purchase 5,000 shares of common
stock. A total of 5,000 stock options, with an exercise price of $3.20, were
granted to a new director during fiscal year 2001 under the 1992 Plan. No grants
may be made under this plan after November 4, 2001.

On November 10, 1992, the Company's Board of Directors adopted the 1993
Non-Employee Director Stock Option Plan (the "1993 Plan") which the shareholders
subsequently approved. The 1993 Plan provides for the grant to each non-employee
director holding such position on November 10, 1992, on such date, and on each
sixth anniversary thereof, of an option to purchase 5,000 shares of common stock
up to an aggregate of 100,000 shares at a price equal to the fair market value
of the stock at the date of the grant, vesting in equal installments over a five
year period. The 1993 Plan also provides for the grant to new members of the
Board of Directors, on the date of each such director's election, and on each
sixth anniversary thereof, of an option to purchase 5,000 shares of common
stock. Under this plan, options to purchase 25,000 shares of common stock at a
price of $9.625 per share were granted on November 10, 1998 and options to
purchase a total of 5,000 shares of common stock at a price of $3.20 were
granted to a new director during fiscal year 2001. No grants may be made under
this plan after November 10, 2002.

The Company provides the disclosure provisions of SFAS 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") and applies Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock option plans.

Stock option activity for the years ended September 30, 2001, 2000 and 1999
is as follows:

2001 2000 1999
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------

Outstanding at beginning of year....... 479,506 $8.97 473,833 $9.47 408,649 $11.30
Granted................................ 299,500 $3.21 47,500 $3.50 144,000 $ 5.04
Exercised.............................. -- $ -- (5,250) $4.00 (1,329) $ 7.83
Canceled............................... (77,306) $8.53 (36,577) $9.12 (77,487) $10.28
------- ----- ------- ----- ------- ------
Outstanding at end of year............. 701,700 $6.56 479,506 $8.97 473,833 $ 9.47
======= ===== ======= ===== ======= ======
Options exercisable at year-end........ 321,341 $9.52 288,411 $9.65 169,620 $11.33
======= ===== ======= ===== ======= ======
Weighted average fair value of options
granted during the year.............. $ 1.88 $ 1.90 $ 2.38
======= ======= =======

The fair value of each option granted during 2001, 2000 and 1999 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: (1) expected life of 5.0 years in
2001, 2000 and 1999 (2) expected volatility of 64.6% in 2001, 55.2% in 2000, and
47.6% in 1999 (3) risk-free interest rates of 4.68%, 4.98%, 4.71% and 5.81% in
2001, 6.12% in 2000, and 5.38% and 4.74% in 1999 and (4) no dividend yield.

The following table summarizes information about stock options outstanding
and exercisable at September 30, 2001:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------------------------------- ----------- ---------------- -------- ----------- --------

$3.05-$4.58........................... 401,750 8.3 $ 3.34 80,375 $ 3.80
$4.59-$6.86........................... 21,000 9.8 $ 4.79 -- $ 4.79
$6.87-$10.29.......................... 20,000 7.1 $ 9.63 8,000 $ 9.63
$10.30-$12.24......................... 258,950 4.9 $11.46 232,966 $11.49
------- --- ------ ------- ------
$3.05-$12.24.......................... 701,700 7.0 $ 6.56 321,341 $ 9.52
======= === ====== ======= ======

EMPLOYEE STOCK PURCHASE PLAN:

The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan")
provides for the issuance of up to 150,000 shares of common stock to employees
of the Company. Under the terms of the Purchase Plan, eligible employees may
purchase shares in five annual offerings, the last of which ends in 2002,
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. The fourth offering under the Purchase Plan ended on May 31, 2001 and
4,663 shares of common stock were purchased by eligible employees at a price of
approximately $3.19 per share. As of September 30, 2001, 31,949 shares have been
issued under the Purchase Plan.

Had the Company adopted SFAS 123, the weighted average fair value for each
purchase right granted during fiscal 2001, 2000 and 1999 would have been $1.17,
$1.56, and $1.57, respectively.

PRO FORMA DISCLOSURES

Had compensation cost for the Company's 2001, 2000 and 1999 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income (loss) and net income (loss) per share would approximate
the pro forma amounts below:

2001 2000 1999
------------ ------------- ------------
(RESTATED)

Net income (loss)...................... As reported $ (3,829,185) $ (11,263,485) $ (4,442,418)
Pro forma $ (4,036,714) $ (11,840,095) $ (4,902,679)

Basic and diluted net income........... As reported $ (0.57) $ (1.67) $ (0.66)
(Loss) per share....................... Pro forma $ (0.60) $ (1.75) $ (0.72)

The effects of applying SFAS 123 in this pro-forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to fiscal
1996, and additional awards in future years are anticipated.

I. EMPLOYEE SAVINGS PLAN:

The Company provides a 401(k) Plan to employees of the Company by which they
may defer compensation for income tax purposes under Section 401(k) of the
Internal Revenue Code. Each employee may elect to defer a percentage of his or
her salary on a pre-tax basis up to a specified maximum percentage. The Company
matches every dollar each employee contributes to the 401(k) Plan up to six
percent of each employee's salary to a maximum of $2,000 annually per employee.
Salary deferred by employees and contributions by the Company to the 401(k) Plan
are not taxable to employees until withdrawn from the 401(k) Plan and
contributions are deductible by the Company when made. The amount of the
Company's matching contribution for the 401(k) Plan was $45,690, $64,524, and
$95,753 for 2001, 2000 and 1999, respectively.

J. COMMON STOCK TRANSACTIONS:

In November 1997, the Board of Directors extended the authorization granted
in May 1996 to purchase 250,000 shares of the Company's common stock in the
aggregate on the open market. In November 2000, the Board of Directors
authorized the purchase of up to 1,000,000 shares, including the number
previously authorized, of the Company's common stock on the open market at
prevailing market prices. Cumulatively, through September 30, 2001, the Company
had purchased 266,900 shares for $2,027,166. All shares have been retired.

K. PREFERRED STOCK:

Preferred Stock may be issued from time to time in one or more series. The
rights, preferences, restrictions, qualifications and limitations of such stock
shall be determined by the Board of Directors.

L. BUSINESS CUSTOMERS:

The Company's operations are located solely within the United States. The
Company is focused principally on developing and manufacturing iron replacement
therapeutics and MRI contrast agents. Since July 1999, the Company's revenues
have been attributable to one principal business segment. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. Two customers accounted for 64% and 14%, respectively, of the
Company's revenues in fiscal 2001. Three customers accounted for approximately
33%, 27% and 17%, respectively, of the Company's revenues in fiscal 2000. Two
customers accounted for 35% and 30%, respectively, of the Company's revenues in
fiscal 1999.

In fiscal 2001, 2000 and 1999, revenues from customers and licensees outside
of the United States, principally in Europe, amounted to 20%, 49% and 53%,
respectively, of the Company's total revenues.

M. BUSINESS SEGMENTS:

During fiscal 1999, the Company adopted FASB Statement of Financial
Accounting Standard No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information." Prior to the divestiture of the
majority-owned subsidiary, Kalisto Biologicals, Inc., in July 1999, the Company
had two business segments under the "management approach" as defined in SFAS
131, the original business and the majority-owned subsidiary.

Information concerning the operations in these reportable segments is
included in the segment information table below.

SEGMENT INFORMATION
(RESTATED)

FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
2001 2000 1999
------------ ------------- ------------

REVENUES:
Advanced Magnetics, Inc............................. $ 5,973,678 $ 3,308,589 $ 2,309,086
Kalisto Biologicals, Inc............................ -- -- 918,402
------------ ------------- ------------
Total........................................... $ 5,973,678 $ 3,308,589 $ 3,227,488

DEPRECIATION EXPENSE:
Advanced Magnetics, Inc............................. $ 493,933 $ 554,434 $ 764,861
Kalisto Biologicals, Inc............................ -- -- 52,438
------------ ------------- ------------
Total........................................... $ 493,933 $ 554,434 $ 817,299

NET INCOME (LOSS):
Advanced Magnetics, Inc............................. $ (3,829,185) $ (11,263,485) $ (3,476,742)
Kalisto Biologicals, Inc............................ -- -- (965,676)
Eliminations and adjustments........................ -- -- --
------------ ------------- ------------
Total........................................... $ (3,829,185) $ (11,263,485) $ (4,442,418)

SEGMENT ASSETS:
Advanced Magnetics, Inc............................. $ 27,448,667 $ 35,667,591
Kalisto Biologicals, Inc............................ -- --
Eliminations and adjustments........................ -- --
------------ -------------
Total........................................... $ 27,448,667 $ 35,667,591

N. LEGAL PROCEEDINGS:

action and the failure by the Company to prevail for any reason could have an
adverse effect on its future business, financial condition and results of
operations.

The Company and certain of its officers were sued in DAVID D. STARK, M.D. V.
ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V. GROMAN AND LEE
JOSEPHSON,Civil Action No. 93-02846-C, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County on May 17, 1993. This case
involves claims of breach of contract, breach of good faith and fair dealing,
breach of implied contract, misappropriation of trade secrets, conversion,
negligent misrepresentation, misrepresentation, unjust enrichment, unfair trade
practices and tortious interference with contractual or advantageous relations.
The Superior Court granted partial summary judgment in the Company's favor and
dismissed the unfair trade practices and tort counts. The plaintiff's contract
claims have been dismissed with prejudice and final judgment was entered against
the plaintiff. The plaintiff filed an appeal in DAVID D. STARK, M.D. V. ADVANCED
MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V. GROMAN AND LEE JOSEPHSON, Appeal
No. 98-P-1749, in the Massachusetts Appeals Court, on January 25, 1999. On
October 13, 2000, the Massachusetts Appeals Court reversed the grant of partial
summary judgment in the Company's favor and remanded the case to the Superior
Court. While the outcome of the action cannot be determined, the Company
believes the action is without merit and intends to defend the action
vigorously. The Company may not be able to successfully defend this action and
the failure by the Company to prevail for any reason could have an adverse
effect on its future business, financial condition and results of operations.

The Company filed suit on October 7, 1997 against Sanofi
Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA
(collectively, "Defendants") in the Superior Court of the Commonwealth of
Massachusetts in an action entitled ADVANCED MAGNETICS, INC. V. SANOFI
PHARMACEUTICALS, INC. AND SANOFI SA, Civil Action No. 97-5222B. The Company
claimed that the Defendants tortiously interfered with a license, supply and
marketing agreement (the "Agreement"), and, in an amended complaint claimed
unfair competition and breach of contract, and sought unspecified monetary
damages. In addition, the Company sought a declaration that the Defendants did
not have any rights under the Agreement and that the Company had not breached
the Agreement. Sanofi Pharmaceuticals, Inc. filed counterclaims against the
Company seeking compensatory damages and multiple damages as a result of the
Company's alleged breach of the Agreement. On October 29, 2001, the Company and
the Defendants executed a settlement agreement. On November 1, 2001, a
Stipulation of Dismissal with Prejudice was filed with the Superior Court of the
Commonwealth of Massachusetts which resulted in the final dismissal of all
claims and counterclaims of all parties.

O. AGREEMENTS:

To facilitate the marketing and distribution of its contrast agents, the
Company has entered into strategic relationships with certain established
pharmaceutical companies. These companies, both in the United States and abroad,
include: (i) Guerbet S.A. ("Guerbet"), a leading European producer of contrast
agents, in western Europe and Brazil; (ii) Eiken Chemical Co., Ltd. ("Eiken"),
one of Japan's leading medical diagnostics manufacturers, in Japan;
(iii) Berlex Laboratories, Inc. ("Berlex"), a leading marketer of MRI contrast
agents, in the United States; (iv) Cytogen Corporation ("Cytogen"), a U.S.
marketer of oncology products, in the United States; and (v) Mallinckrodt Inc.
("Mallinckrodt"), a unit of Tyco, Inc. and a leading manufacturer of contrast
agents, in the United States, Canada and Mexico.

In February 1995, the Company entered into a licensing 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.
Under the terms of the agreements, Berlex paid a $5,000,000 non-refundable
license fee in fiscal 1995 and an additional $5,000,000 non-refundable license
fee in October 1996 upon the FDA's marketing approval of FERIDEX I.V. In
addition, the Company receives payments for manufacturing the product and
royalties on sales. Under the terms of the agreements, Berlex pays for 60% of
ongoing development expenses related to FERIDEX I.V. These agreements expire

in 2010 but can be terminated earlier upon the occurrence of certain specified
events. Under the terms of the license and marketing agreement, the Company has
the right to terminate the exclusive marketing rights based on the failure of
Berlex to achieve minimum sales targets, but has not exercised that right at
this time.

In August 2000, the Company entered into a license and marketing agreement
and a supply agreement with Cytogen. The Company granted Cytogen the exclusive
right to market and sell in the United States COMBIDEX, Code 7228 for oncology
applications and agreed to grant to Cytogen the exclusive right to market and
sell FERIDEX I.V. if the Company's existing marketing arrangement for
FERIDEX I.V. terminates for any reason. Upon signing of the agreements, the
Company received 1,500,000 shares of Cytogen common stock as a non-refundable
license fee. An additional 500,000 shares of Cytogen common stock were placed in
escrow and will be released to the Company upon satisfaction of certain
milestones under the agreements. Cytogen has agreed to pay the Company for
manufacturing and supplying the products and royalties on sales, if any. These
agreements have an initial ten-year term with automatic five-year extensions,
but can be terminated earlier upon the occurrence of certain specified events.

In 1988, the Company entered into a manufacturing and distribution agreement
with Eiken, granting Eiken the exclusive right to manufacture and distribute
FERIDEX I.V. in Japan. Eiken was responsible for conducting clinical trials and
securing the necessary regulatory approval in Japan which was received in 1997.
Under the terms of the agreement, Eiken paid the Company a license fee of
$1,500,000. In addition, Eiken pays royalties based upon sales. The agreement
terminates on the later of (i) the expiration of the last to expire technology
patent or (ii) ten years after the date all necessary approvals were obtained.

In 1987, the Company entered into a supply and distribution agreement with
Guerbet. Under this agreement, Guerbet has been appointed the exclusive
distributor of FERIDEX I.V. in western Europe and Brazil (under the tradename
Endorem-TM-). Guerbet is responsible for conducting clinical trials and securing
the necessary regulatory approvals in the countries in its territory. Under the
terms of this agreement, Guerbet paid the Company license fees and is obligated
to pay royalties based on sales. The Company is entitled to receive an
additional percentage of Guerbet's sales in return for selling to Guerbet its
requirements for the active ingredient used in ENDOREM. The agreement terminates
on the later of (i) the expiration of the last to expire technology patent or
(ii) ten years after the date all necessary approvals were obtained in France.

fee in 1989. In addition, Guerbet has agreed to pay the Company royalties and a
percentage of net sales as the purchase price for the active ingredient of the
licensed products. The Company is required to sell to Guerbet its requirements
for the active ingredient used in the contrast agents. The agreement is
perpetual but terminable upon certain specified events.

In 1990, the Company entered into a manufacturing and distribution agreement
with Mallinckrodt granting Mallinckrodt a product license and co-marketing
rights to GASTROMARK in the United States, Canada and Mexico. Under the terms of
the agreement, the Company reserved the right to sell GASTROMARK through its own
direct sales personnel. Mallinckrodt paid $1,350,000 in license fees and a
$500,000 non-refundable milestone payment upon FDA marketing approval of
GASTROMARK. In addition, the Company receives royalties based on Mallinckrodt's
GASTROMARK sales as well as a percentage of sales for supplying the active
ingredient. The agreement is perpetual but terminable upon certain specified
events.

In 1994, under an agreement with Squibb Diagnostics, a division of
Bristol-Myers Squibb Co., the Company reacquired the development and marketing
rights to COMBIDEX, which had previously been licensed to Squibb Diagnostics.
Pursuant to this agreement, the Company is obligated to pay up to a maximum of
$2,750,000 in royalties to Squibb Diagnostics in connection with the Company's
product sales of COMBIDEX.

P. RELATED PARTY TRANSACTIONS:

During the fiscal years ended September 30, 2001, 2000 and 1999, the Company
paid approximately $73,737, $16,600 and $33,329, respectively, to Fahnestock &
Co. Inc. and $445 in fiscal 2001 to Ingalls & Snyder LLC as commissions on
transactions involving its investments in securities. Mr. Leslie Goldstein, a
shareholder and former member of the Company's Board of Directors and the
brother of Jerome Goldstein, President, Chairman of the Board and CEO of the
Company, was employed by SRG Associates, a division of Fahnestock & Co. Inc.,
and now by Ingalls & Snyder LLC as an investment analyst and advisor. During
fiscal year 2001, the Company paid approximately $26,800 to the firm of White &
McDermott, P.C. for its services as outside counsel to the Company. Ms. Rachel
Goldstein Konforty, an associate of White & McDermott, P.C., is a shareholder of
the Company and the daughter of Jerome Goldstein.

Q. CONSOLIDATED QUARTERLY FINANCIAL DATA--UNAUDITED:

The following table provides quarterly data for the fiscal years ended
September 30, 2001, and 2000.

QUARTERLY FINANCIAL DATA
(RESTATED)*
FISCAL 2001 QUARTERS ENDED
------------------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DEC. 31, 2000
------------- ---------- --------- -------------

License fees................................. $ 1,447,929 $1,143,902 $964,707 $ 1,083,660
Royalties.................................... 100,000 200,000 200,000 200,000
Product sales................................ 191,519 127,002 49,915 265,044
Research and development services............ -- -- -- --
----------- ---------- --------- -----------
Total revenues......................... 1,739,448 1,470,904 1,214,622 1,548,704
Cost of product sales........................ 78,904 53,606 25,474 46,415
Cost of contract research.................... -- -- -- --
Operating expenses........................... 1,605,278 1,221,261 1,304,255 1,158,374
Other (income) expenses...................... 4,603,866 (533,306) (672,711) 886,085
Income taxes................................. -- 25,362 -- --
----------- ---------- --------- -----------
Net income (loss)............................ $(4,548,600) $ 703,981 $557,604 $ (542,170)
=========== ========== ========= ===========
Net income (loss) per share.................. $ (0.68) $ 0.11 $ 0.08 $ (0.08)

FISCAL 2000 QUARTERS ENDED (AS AMENDED**)
------------------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DEC. 31, 2000
------------- ---------- --------- -------------

License fees................................. $ 572,367 $ 183,894 $183,894 $ 183,894
Royalties.................................... 201,754 200,000 260,000 163,246
Product sales................................ 475,096 616,911 161,530 --
Research and development services............ -- -- 95,008 10,995
----------- ---------- --------- -----------
Total revenues......................... 1,249,217 1,000,805 700,432 358,135
Cost of product sales........................ 133,079 43,195 62,954 --
Cost of contract research.................... -- -- -- 3,195
Operating expenses........................... 2,580,540 1,553,488 1,664,705 1,838,531
Other (income) expenses...................... 163,775 197,122 168,588 235,845
----------- ---------- --------- -----------
Cumulative effect of accounting change
(loss)..................................... -- -- -- (7,457,717)
----------- ---------- --------- -----------
Net income (loss)............................ $(1,300,627) $ (398,756) $(858,639) $(8,705,463)
=========== ========== ========= ===========
Net income (loss) per share.................. $ (0.19) $ (0.06) $ (0.13) $ (1.29)

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

* Previously reported net income of $111,200 and $0.01 per share for the
quarter ended September 30, 2001 have been restated to reflect an
other-than-temporary decline of $4,659,800 in value of Cytogen common stock
as a loss in "other income (expense)." Previously reported revenues of
$1,737,260, $1,804,210, $1,887,333 and $662,619 for the quarters ended
fiscal 2001 have been revised to exclude $(2,188), $333,306, $672,711 and
$(886,085), respectively, of interest, dividends and net gains and losses
and include such amounts as "other income (expense)." Previously reported
revenues of $1,412,992, $1,197,927, $869,020 and $593,980 for the quarters
ended fiscal 2000 have been revised to exclude interest, dividends, and net
gains and losses of $163,775, $197,122, $168,588 and $235,845, respectively,
and include such amounts as "other income (expense)."

** to reflect cumulative effect of accounting change (see Note B)

R. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

In June 2001, the FASB issued Statement of Financial Accounting Standard No.
141, ("SFAS 141"), "Business Combinations." This statement eliminates the
pooling-of-interest method of accounting for business combinations, and requires
that all business combinations initiated after June 30, 2001 be accounted for
under the purchase method. In addition, intangible assets shall be recognized as
assets apart from goodwill if they meet certain criteria. The provisions of SFAS
141 apply to all business combinations initiated after June 30, 2001. At the
present time, adoption of this standard is not expected to have a material
impact on the financial position or results of operations of the Company.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:

The information concerning directors of the Company required under this item
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than
120 days after the close of the Company's fiscal year ended September 30, 2001,
under the heading "Election of Directors."

The information required by this item, with respect to executive officers of
the registrant, can be found in Part I hereof.

ITEM 11. EXECUTIVE COMPENSATION:

The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended September 30, 2001, under the headings "How are the
Company's Directors Compensated?" and "How Were the Company's Executive Officers
Compensated in Fiscal Year 2001?"

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission within 120 days after the close of the Company's
fiscal year ended September 30, 2001, under the heading "Certain Relationships
and Related Transactions."

PART IV

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

(a) The following documents are filed as part of this Annual Report on
Form 10-K:

1. Financial Statements.

Balance Sheets (restated)--September 30, 2001 and 2000

Statements of Operations (restated)--for the years ended
September 30, 2001, 2000 and 1999

Statements of Comprehensive Income (restated)--for the years ended
September 30, 2001, 2000 and 1999

Statements of Stockholders' Equity (restated)--for the years ended
September 30, 2001, 2000 and 1999

Statements of Cash Flows (restated)--for the years ended
September 30, 2001, 2000 and 1999

Reconciliation of Net Income (Loss) to Net Cash Used in Operating
Activities (restated)--for the years ended September 30, 2001, 2000
and 1999

Notes to Financial Statements (restated)

2. Financial Statement Schedules. No financial statement schedules have
been submitted because they are not required, not applicable, or because
the information required is included in the financial statements or the
notes thereto.

3. Exhibit Index.

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

3.1 Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000, File No. 0-14732).
3.2 By-Laws of the Company, as amended (incorporated herein by
reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2000, File
No. 0-14732).
4.1 Specimen certificate representing the Company's Common Stock
(incorporated by reference to Exhibit 6 to the Company's
Registration Statement on Form 8-A, Reg. No. 1-10865).
4.2 Description of Capital Stock contained in Exhibits 3.1 and
3.2.
10.1* 1983 Stock Option Plan of the Company, as amended on
November 13, 1990 (incorporated herein by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1990, File No. 0-14732).
10.2* 1992 Non-Employee Director Stock Option Plan (incorporated
herein by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1991, File No. 0-14732).
10.3* 1993 Stock Plan, as amended on February 2, 1999
(incorporated herein by reference to the exhibits to the
Company's definitive proxy statement for the fiscal year
ended September 30, 1998, File No. 0-14732).
10.4* 1993 Non-Employee Director Stock Option Plan (incorporated
herein by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1992, File No. 0-14732).

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

10.5 1997 Employee Stock Purchase Plan (incorporated herein by
reference to the exhibits to the Company's definitive proxy
statement for the fiscal year ended September 30, 1996, File
No. 0-14732).
10.6 Clinical Testing, Supply and Marketing Agreement between the
Company and Guerbet S.A. dated May 22, 1987 (incorporated
herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1987, File No. 0-14732) (confidential treatment previously
granted).
10.7 Clinical Testing, Supply and Marketing Agreement between the
Company and Eiken Chemical Co., Ltd. dated August 30, 1988
(incorporated herein by reference to the exhibits to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 988, File No. 0-14732) (confidential
treatment previously granted).
10.8 Contrast Agent Agreement between the Company and Guerbet
S.A. dated September 29, 1989 (incorporated herein by
reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1989, File
No. 0-14732) (confidential treatment previously granted).
10.9 Contrast Agent Agreement between the Company and Eiken
Chemical Co., Ltd. dated March 27, 1990 (incorporated herein
by reference to Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1990,
File No. 0-14732) (confidential treatment previously
granted).
10.10 Amendment to Clinical Testing, Supply and Marketing
Agreement between the Company and Eiken Chemical Co., Ltd.
dated September 29, 1990 (incorporated herein by reference
to Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1990, File No.
0-14732) (confidential treatment previously granted).
10.11 License, Supply and Marketing Agreement between the Company
and Mallinckrodt Medical, Inc. dated June 28, 1990
(incorporated herein by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1990, File No. 0-14732) (confidential
treatment previously granted).
10.12 Technology License Agreement between the Company and Squibb
Diagnostics, dated February 5, 1991 (incorporated herein by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1991, File
No. 0-14732) (confidential treatment previously granted).
10.13 Agreement of Amendment to Clinical Testing, Supply and
Marketing Agreement between the Company and Guerbet, S.A.,
dated August 13, 1990 (incorporated herein by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1991, File No.
0-14732).
10.14 Termination Agreement dated August 30, 1994 between the
Company and Bristol-Myers Squibb Co. (incorporated herein by
reference to Exhibit 10.26 to the Company's Annual Report on
Form 10-K, for the fiscal year ended September 30, 1994,
File No. 0-14732)
10.15 License and Marketing Agreement between the Company and
Berlex Laboratories, Inc. dated as of February 1, 1995
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, as amended, for the
fiscal quarter ended December 31, 1994, File No. 0-14732)
(confidential treatment previously granted).
10.16 Supply Agreement between the Company and Berlex
Laboratories, Inc. dated as of February 1, 1995
(incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q, as amended, for the
fiscal quarter ended December 31, 1994, File No. 0-14732)
(confidential treatment previously granted).

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

10.17 License and Marketing Agreement between the Company and
Cytogen Corporation dated August 25, 2000 (incorporated
herein by reference to Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
2000, File No. 0-14732) (confidential treatment previously
granted).
10.18 Supply Agreement between the Company and Cytogen Corporation
dated August 25, 2000 (incorporated herein by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 2000, File No.
0-14732) (confidential treatment previously granted).
23.1++ Consent of PricewaterhouseCoopers LLP, independent
accountants.

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

++ Exhibits marked with a double plus sign are filed herewith.

* Exhibits marked with a single asterisk reference management contracts,
compensatory plans or arrangements, filed in response to Item 14(a)(3) of
the instructions to Form 10-K.

The other exhibits listed have previously been filed with the Securities and
Exchange Commission and are incorporated herein by reference, as indicated.

(b) Reports on Form 8-K: Not applicable.

(d) Financial Statement Schedules. The Company hereby files as financial
statement schedules to this Form 10-K those financial statement schedules
listed in Item 14(a)(2) above.

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/ JEROME GOLDSTEIN
-----------------------------------------
Jerome Goldstein
CHAIRMAN OF THE BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER, PRESIDENT AND
TREASURER

Date: January 28, 2002