<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
 X  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF 1934
 
    FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
 
                                       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
 
                            ADVANCED MAGNETICS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 

<TABLE>
<S>                                   <C>
               DELAWARE                             04-2742593
   (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)             IDENTIFICATION NO.)
          725 CONCORD AVENUE                          02138
       CAMBRIDGE, MASSACHUSETTS                     (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE
               OFFICES)
</TABLE>

 
       Registrant's telephone number, including area code: (617) 354-3929
 
        Securities registered pursuant to Section 12(b) of the Act: NONE
 
 Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
                                   VALUE $.01
 
                            ------------------------
 
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. [  ]
 
As of December 8, 1997, there were 6,729,526 shares of the registrant's Common
Stock, $.01 par value, outstanding. The aggregate market value of the
registrant's voting stock held by nonaffiliates as of December 8, 1997 was
approximately $55,883,912.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders, scheduled to be held on February 3, 1998, are incorporated by
reference in Part III hereof.
 
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<PAGE>   2
 

                                     PART I
 

ITEM 1.  BUSINESS:
 
COMPANY OVERVIEW
 
     Advanced Magnetics, Inc., a Delaware corporation ("Advanced Magnetics" or
the "Company"), develops, manufactures and markets organ-specific contrast
agents to improve the diagnostic capabilities of soft tissue magnetic resonance
imaging ("MRI") scans and is developing targeted drug delivery platforms that
deliver therapeutics directly to the liver and other organs including lymph
nodes. Sales of the Company's liver contrast agent, Feridex I.V., have commenced
in Europe and the United States. In September 1997, sales of Feridex I.V.
commenced in Japan. GastroMARK, used for marking of the bowel in MRI procedures,
has been approved for marketing in several European countries and Canada, and
sales commenced in the United States in April 1997. With respect to Combidex,
the Company's contrast agent for the liver, spleen, and lymphatic system, the
Company has completed Phase III trials for Combidex in the United States for
imaging liver lesions and is currently in Phase III trials for lymph node
imaging. The Company hopes to submit a New Drug Application ("NDA") to the
United States Food and Drug Administration "FDA" for both indications in late
1998 or early 1999. Advanced Magnetics is also applying its liver-targeting
technology and expertise to the delivery of therapeutics to the liver.
 
     MRI is a diagnostic imaging technique that is used to identify internal
abnormalities and changes in structure. Contrast agents increase the usefulness
of MRI by allowing radiologists to differentiate structures and organs with
greater diagnostic confidence. The Company believes that MRI studies of the
liver and lymph nodes produced with contrast agents are clearer and permit the
identification of smaller abnormalities than images produced by MRI studies
without contrast agents or imaging using contrast enhanced computed tomography
("CECT"). MRI contrast agents frequently 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. Currently, the primary use
of MRI is for studies of the central nervous system. The Company believes that
the development of effective contrast agents should increase the use of MRI as a
diagnostic imaging technique and allow MRI to be used for a wider range of
applications, in turn generating additional demand for MRI contrast agents.
However, in an era of increasing cost containment pressures, adoption of new
imaging techniques may be slow or may not occur.
 
     Feridex I.V. is the first organ-specific MRI contrast agent designed
specifically for the liver and is marketed in the United States, Europe and
Japan. The liver and the lymphatic system are among the principal sites for
metastasis of many common cancers (including colon, prostate and breast cancer).
CECT is currently the primary imaging technique used to confirm a preliminary or
suspected diagnosis of liver cancer. With respect to the lymphatic system, there
currently are no effective imaging techniques. An MRI contrast agent that
localizes to and causes contrast enhancement of the lymph nodes, such as the
Combidex product the Company has under development, could allow for more
accurate disease diagnosis and monitoring of treatment results. GastroMARK
enhances the contrast between the bowel and other abdominal structures, and
could ultimately increase the use of MRI as an imaging technology for the
abdomen.
 
     To facilitate the marketing and distribution of its contrast agents, the
Company has entered into strategic relationships with certain established
pharmaceutical companies. These relationships, 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"), the leading marketer of MRI contrast
agents, in the United States; and (iv) Mallinckrodt Inc. ("Mallinckrodt"), a
leading manufacturer of contrast agents, in the United States, Canada and
Mexico.
 
     The Company's expertise in organ-specific technology provides it with
biopharmaceutical opportunities beyond its core MRI contrast agent products.
Advanced Magnetics is developing targeted therapeutics technology for the
treatment of liver diseases. The Company believes that arabinogalactan, a
naturally-occurring polysaccharide that binds to the asialoglycoprotein ("ASG")
receptor found in abundance on hepatocytes, the principal cells comprising the
liver, has commercial promise in drug delivery. Advanced
 
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Magnetics hopes to study the efficacy of therapeutic agents combined with
arabinogalactan for the treatment of liver diseases through strategic alliances
with other pharmaceutical companies that the Company may establish.
 
     Advanced Magnetics' knowledge and experience in diagnostics, combined with
the experience of senior management in the diagnostic testing area led to the
acquisition of 81% of the capital stock of Kalisto Biologicals, Inc. ("Kalisto")
in October 1997. Kalisto is an early-stage food testing and veterinary
diagnostics company.
 
     In addition, in September 1997 the Company entered into an option agreement
with Cavitation Control Technology, Inc. ("CAV-CON") to purchase the worldwide
technology rights to CAV-CON's lipid micro-bubble technology.
 
     The Company was incorporated in Delaware in 1981. The Company's principal
offices are located at 61 Mooney Street, Cambridge, Massachusetts 02138, and its
telephone number is (617) 497-2070.
 
MRI CONTRAST AGENTS
 
     OVERVIEW
 
     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, Computerized Tomography
("CT") and MRI. Since the introduction of x-rays, the need for increasingly
accurate and detailed non-invasive visualization of soft tissue has increased.
For example, diagnostic imaging frequently is used to determine whether a cancer
has metastasized and to assist physicians in determining whether a treated
cancer has recurred and the location of metastatic tumors. In addition,
diagnostic imaging is used in the diagnosis of disease and injury conditions
affecting the cardiovascular and central nervous systems and certain joints,
such as the knee and shoulder. In 1994, over 76 million soft tissue and organ
imaging procedures were performed in the United States. 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
and cost. There is no imaging technique that is considered superior to all
others for most or all applications.
 
     Contrast agents play a significant role in improving the quality of
diagnostic images by increasing contrast between different internal structures
or types of tissues in various disease states and medical conditions of
interest. The availability of an effective contrast agent often determines the
choice of imaging technique for a particular procedure. Consequently, contrast
agents, which are administered intravenously or orally, are widely used when
available. Currently available imaging techniques can be of limited usefulness
in visualizing certain soft-tissue structures. For example, clinically useful
diagnostic imaging of small lesions in lymph nodes, a common site of metastasis
for some frequently occurring cancers such as breast cancer, is not currently
available because, the Company believes, there are no effective contrast agents
for differentiating cancerous lymph nodes from other nodes.
 
     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, which represents the
first major advance in imaging since the advent of CT scanning, 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 the radio
frequency signal with the patient's body produces signals that are processed by
a computer to create cross-sectional images. MRI contrast agents currently
marketed in the United States are used primarily in imaging the central nervous
system.
 
     TECHNOLOGY
 
     Advanced Magnetics' core imaging agent technology is based on the design
and manufacture of extremely small, polysaccharide-coated superparamagnetic iron
oxide particles of controlled sizes. The
 
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<PAGE>   4
 
superparamagnetic particles range in size from approximately one-thousandth to
one-twentieth the size of a normal red blood cell. When placed in a magnetic
field, superparamagnetic iron oxide particles become strongly magnetic, but do
not retain their magnetism once the field is removed. The powerful magnetic
properties of the Company's iron oxide particles result in images that show
greater soft tissue contrast to increase the information available to the
reviewing radiologist. The Company's technology and expertise enable it to
synthesize, sterilize and stabilize superparamagnetic particles in a manner
necessary for their use in pharmaceutical products as MRI contrast agents to aid
in the diagnosis of cancer and other diseases. The Company's rights to its
contrast agent technology are derived from and protected by license agreements,
patents, patent applications and trade secrets. See "Patents and Trade Secrets."
 
TARGETED DRUG DELIVERY PLATFORM
 
     OVERVIEW
 
     Effective treatment of organ-specific diseases is often limited by the
inability to deliver sufficient quantities of therapeutic pharmaceuticals to the
affected organ without creating unacceptable levels of toxicity in the rest of
the body. The Company believes the treatment of liver diseases and other
organ-specific diseases would be significantly improved by delivering
therapeutics to the organ while limiting the exposure of the rest of the body to
the drug. The Company discovered that arabinogalactan, a compound it studied to
target contrast agents to the liver, could also be useful in delivering
therapeutic agents to hepatocytes through the asialoglycoprotein ("ASG")
receptor. Hepatocytes are cells which generally comprise approximately 95% of
the total cells of the liver but do not exist in the rest of the body. The
Company has developed several drug conjugates that are in the pre-clinical stage
for the treatment of liver diseases, including hepatitis B.
 
     TECHNOLOGY
 
     The Company's drug delivery technology includes joining a therapeutic agent
to a targeting agent, which binds specifically with certain receptors on the
surface of cells. Receptors are specialized protein structures that will only
bind with specific molecules. Certain receptors are prevalent only or primarily
on specific kinds of cells. For example, the ASG receptor exists primarily on
hepatocytes. After binding with the receptor, the targeting agent and an
attached pharmaceutical are transported into the cell, where the pharmaceutical
causes a therapeutic effect. The Company believes that targeted drug delivery
based on the binding action of targeting agents to receptors offers the
possibility of delivering effective therapeutic doses to affected cells without
general distribution of toxic agents throughout the body.
 
     In its first targeted drug delivery proof of principle project, the Company
has completed animal testing of a potential therapeutic product for hepatitis B
composed of arabinogalactan and vidarabine monophosphate ("AraAMP"). Vidarabine
("AraA"), an antiviral agent which is used in the United States and abroad for
the treatment of herpes simplex, has not been approved for treatment of
hepatitis B in the United States because, although it is an effective agent
against the hepatitis virus, when administered systemically in an unconjugated
form, it is often toxic to the bone marrow, blood cells and peripheral nervous
system in the dosage regimen necessary to treat the hepatitis B virus. AraA and
other nucleoside products must be phosphorylated with three phosphate ions in
order to have a therapeutic effect. When AraA is injected directly, however,
many molecules of AraA do not become phosphorylated. The Company believes that
much of the toxicity associated with AraA results from toxic compounds created
when the drug breaks down in the body. The Company has discovered that AraA,
when phosphorylated with one phosphate (monophosphate) and chemically linked
with arabinogalactan prior to injection, shows far greater therapeutic effect in
animals and reduced toxicity. Toxicity is reduced because (i) less therapeutic
compound is needed since AraAMP is directed by the arabinogalactan to
hepatocytes through the ASG receptor, (ii) the probability of successful
triphosphorylation is increased by the targeted delivery of the monophosphate to
the cell and (iii) the arabinogalactan AraAMP conjugate does not, the Company
believes, metabolize into any toxic product during its short blood half-life.
 
     The Company believes that the delivery and use enhancements seen when
AraAMP is attached to arabinogalactan may be obtained with other therapeutic
agents. The attachment of a variety of therapeutic
 
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<PAGE>   5
 
agents to arabinogalactan, such as ribavirin and acyclovir, is an active area of
research for Advanced Magnetics and may lead to a series of
arabinogalactan-delivered pharmaceuticals for the treatment of such liver
diseases as hepatitis B, hepatitis C, hepatitis D and liver cancer. The Company
is attempting to establish strategic alliances with other pharmaceutical
companies to exploit the advantages of its drug delivery platform and
polysaccharide conjugation technology.
 
     The Company holds three United States patents and a notice of allowance for
a European patent covering the delivery of therapeutic agents with
arabinogalactan. A fourth patent covering the use of arabinogalactan with
radiotherapy has issued in the United States. The Company has also developed a
proprietary purification scheme for purifying arabinogalactan that enables it to
manufacture a pharmaceutical grade of arabinogalactan suitable for use in
therapeutic products. See "Patents and Trade Secrets."
 
PRODUCTS UNDER DEVELOPMENT
 
     The following table summarizes potential applications, marketing partners
and the current United States and foreign status for each of the Company's
products.
 
                 ADVANCED MAGNETICS PRODUCTS UNDER DEVELOPMENT
 

<TABLE>
<CAPTION>
                                            MARKETING
    PRODUCT           APPLICATIONS          PARTNERS          UNITED STATES STATUS         FOREIGN STATUS
- ----------------   ------------------   -----------------   ------------------------   -----------------------
<S>                <C>                  <C>                 <C>                        <C>
CONTRAST AGENTS
Feridex I.V.       Diagnosis of liver   Berlex (United      Marketing of product       Approved and marketed
                   lesions              States), Eiken      began in October 1996.     in most EU countries.
                                        (Japan), Guerbet                               Launched in Japan in
                                        (Western Europe                                September 1997.
                                        and Brazil)
Combidex           Diagnosis of         Guerbet (Western    Phase III liver/spleen     Phase III clinical
                   lesions of the       Europe and          trials completed. Phase    trials for lymphatic
                   liver, spleen and    Brazil), Eiken      III clinical trials for    imaging, currently
                   lymphatic system     (Japan)             lymph nodes, currently     underway, to be
                                                            underway, to be            completed in 1998. CPMP
                                                            completed in early 1998.   filing anticipated in
                                                            NDA anticipated late       1999.
                                                            1998/early 1999.
GastroMARK         Marking of the       Guerbet (Western    Marketing of product       Approved and marketed
                   bowel in abdominal   Europe and          began in April 1997.       in many European
                   imaging              Brazil),                                       countries, including
                                        Mallinckrodt                                   France. Approved in
                                        (United States,                                Canada.
                                        Canada and
                                        Mexico)
TARGETED DRUG DELIVERY PRODUCTS
AraAMP-            Therapeutic for      --                  Pre-clinical research      --
arabinogalactan    hepatitis B                              completed. Strategic
conjugate                                                   partner being sought.
Ribavirin-         Therapeutic for      --                  Pre-clinical research in   --
arabinogalactan    hepatitis C                              progress.
conjugate
</TABLE>

 
     "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" refer to 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. For a further description of the substantial regulatory
requirements subsequent to the completion of preclinical testing, see
"Government Regulation and Reimbursement."
 
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CONTRAST AGENTS
 
     Feridex I.V.  The liver is a principal site for metastasis of primary
cancer originating in other parts of the body, particularly cancer of the colon,
a common cancer in the United States. Diagnosis of metastasis at an early stage
can be difficult because small tumors are frequently not accompanied by
detectable physical symptoms. Identification of metastatic tumors in the liver
has a significant impact on physicians' treatment plans for cancer. The Company
believes that Feridex I.V. will allow for MRI scans of liver tumors that may not
be visible with CT scanning or ultrasound, the most widely used techniques for
liver imaging, and that a substantial number of liver scans will now be done
using MRI instead of, or in addition to, CT scanning and ultrasound.
 
     Marketing of Feridex I.V. began in October 1996 by Berlex Laboratories in
the United States. Feridex I.V. was approved in August 1994 by the European
Union's (the "EU") Committee for Proprietary Medicinal Products and most of the
member states of the EU have since issued local approvals to market the product.
Guerbet has begun marketing the product in Europe. 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. Berlex Laboratories is the Company's
exclusive marketing partner for Feridex I.V. in the United States. See
"Licensing and Marketing Arrangements."
 
     Combidex.  The Company believes that Combidex will be useful in diagnostic
imaging of the liver, spleen and lymph nodes. Lymph nodes are frequently sites
for metastases of different types of cancer, particularly breast cancer and
prostate cancer, and efficient imaging of lymph nodes could play a major role in
determining appropriate courses of treatment. There are currently no available
noninvasive methods for distinguishing between lymph nodes enlarged by tumorous
infiltration as opposed to inflammation. Since CT, the only imaging modality
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 one centimeter in size are assumed to be normal. The Company believes that
Combidex will enable doctors using MRI to distinguish between cancerous and non-
cancerous enlarged lymph nodes because its accumulation in normal lymph node
tissue permits differentiation between normal and tumor-infiltrated nodes. The
Company also believes that Combidex can be used to identify tumors in the liver
and spleen because tumors generally are hypovascular when compared to
surrounding tissues.
 
     The Company has completed Phase III studies using Combidex to image the
liver. Phase III trials using Combidex to image lymph nodes are currently
underway. The Company expects the lymph node trials to be completed in 1998. The
Company expects to file an NDA for both indications in late 1998 or early 1999.
 
     Of the approximately 576 patients and subjects who were administered
Combidex during its product development, one suffered an allergic reaction and
died in January 1996. There can be no assurance that this death or any
subsequent death that may occur during the clinical trials for this product
would not have an adverse effect on the Company's ability to continue clinical
trials or obtain regulatory approvals for Combidex or otherwise have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factor-Potential Product Liability; Uncertainties Related
to Insurance."
 
     The Company has granted exclusive rights to market and sell Combidex in
Western Europe and Brazil to Guerbet. See "Licensing and Marketing
Arrangements."
 
     GastroMARK.  MRI imaging 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, including the pancreas and
pelvis.
 
     In April 1997, the Company's marketing partner, Mallinckrodt, launched
GastroMARK in the United States. The Company has licensed the manufacturing and
marketing rights to GastroMARK on an exclusive
 
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basis to Guerbet in Western Europe and Brazil. During fiscal 1993, Guerbet
received marketing approval for the product in several European countries
including France, and marketing of the product in Europe has begun. See
"Licensing and Marketing Arrangements."
 
TARGETED DRUG-DELIVERY PRODUCTS
 
     The Company believes that arabinogalactan will prove useful in delivering
therapeutic pharmaceuticals to the liver because of its lack of toxicity and
high specificity for hepatocytes. The Company believes that the delivery and use
enhancements seen in pre-clinical research using araAMP may be obtainable with
other therapeutic agents. The attachment of a variety of therapeutic agents to
arabinogalactan, such as ribavirin and acyclovir, is an active area of research
for Advanced Magnetics and may lead to a series of arabinogalactan-based
pharmaceuticals for the treatment of such liver diseases as hepatitis B,
hepatitis C, hepatitis D and liver cancer. The Company is seeking strategic
partners in this area.
 
LICENSING AND MARKETING ARRANGEMENTS
 
     BERLEX.  In February 1995, the Company entered into a license and marketing
agreement and supply agreement with Berlex, granting Berlex exclusive marketing
rights to Feridex I.V. in the United States. Under the terms of the agreements,
Berlex paid a $5,000,000 license fee upon execution of the agreements and paid
an additional $5,000,000 license fee in October 1996 upon the Company's delivery
of FDA-approved product to Berlex. In addition, the Company receives payments
for manufacturing the agent and royalties on sales of the agent. These
agreements expire in 2010 but can be terminated earlier upon the occurrence of
certain specified events.
 
     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 (under the tradename
Endorem) and Brazil. Guerbet is responsible for conducting clinical trials and
securing the necessary regulatory approvals in the countries in its territory.
Guerbet paid the Company license fees and is required 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 are 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
(under the tradename Lumirem) and Brazil to manufacture and sell GastroMARK and
any future Advanced Magnetics MRI contrast agents that Guerbet decides to
market, including Combidex. Under the terms of this second distribution
agreement, Guerbet paid the Company a license fee in 1989. In addition, Guerbet
will pay the Company both royalties and a percentage of net sales as the
purchase price for the active ingredient. 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 specified events such as
nonperformance, insolvency or assignment without consent.
 
     MALLINCKRODT.  In 1990, the Company entered into a manufacturing and
distribution agreement for GastroMARK with Mallinckrodt Medical, Inc. Under this
agreement, Mallinckrodt received the exclusive right to manufacture and
co-market GastroMARK in the United States, Canada and Mexico. The Company may
also sell the product through its own direct sales personnel. Mallinckrodt has
paid $1,850,000 under the contract, including $500,000 during fiscal year 1997
upon FDA approval of the NDA. Additionally, the Company will receive royalties
based on Mallinckrodt's GastroMARK sales and a percentage of sales for supplying
the active ingredient. The agreement is perpetual but terminable upon specified
events such as nonperformance, insolvency or assignment without consent.
 
     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 is responsible for conducting clinical
trials and securing the necessary regulatory approval in Japan. Under the terms
of the agreement, Eiken paid the Company a license fee of $1,500,000. In
addition, Eiken is required to pay royalties
 
                                        7

<PAGE>   8
 
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 are obtained.
 
     In 1990, the Company entered into a manufacturing and distribution
agreement with Eiken, granting Eiken the exclusive right in Japan to manufacture
and distribute GastroMARK and Combidex. In addition, for a period of 180 days
after the Company files an NDA for any future Advanced Magnetics MRI contrast
agents 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 specified events such as
nonperformance, insolvency or assignment without consent. Due to market
conditions in Japan, Eiken has decided not to market GastroMARK.
 
     SQUIBB DIAGNOSTICS.  In 1991, the Company entered into agreements with
Squibb Diagnostics, a division of Bristol-Myers Squibb Co. ("Squibb
Diagnostics") covering certain technology and the manufacturing and marketing of
certain contrast agents including Combidex, which agreements have since been
terminated. Under agreements returning the products and technology rights to
Advanced Magnetics, the Company is obligated to pay Squibb Diagnostics up to a
maximum of $2,750,000 in royalties in connection with product sales of Combidex.
 
MANUFACTURING AND SUPPLY ARRANGEMENTS
 
     The Company's Cambridge, Massachusetts facility is registered with the FDA
and is subject to "Good Manufacturing Practices" ("GMP") as prescribed by the
FDA. The Company currently manufactures Feridex I.V. bulk product for sale to
Guerbet, manufactures Feridex I.V. finished product for sale to Berlex and
GastroMARK bulk product for sale to Guerbet and Mallinckrodt. The Company also
manufactures Combidex for pre-clinical and clinical testing. The Company expects
to utilize contract manufacturers from time to time if appropriate.
 
     The manufacture of the Company's therapeutic products currently in research
and development would require the continuous availability of commercial grade
arabinogalactan, a naturally occurring polysaccharide that is commercially
available, which the Company purifies at its Cambridge facility into a
pharmaceutical grade material.
 
PATENTS AND TRADE SECRETS
 
     The Company considers the protection of its technology to be material to
its business. The Company's policy is to aggressively protect its competitive
technological position by a variety of means, including applying for patents in
the United States and in appropriate foreign countries. The Company has been
granted 26 United States patents and has pending several patent applications.
The Company has filed counterpart patent applications in several foreign
countries. In addition, the Company is a party to various license agreements,
including nonexclusive cross-licensing arrangements covering MRI imaging
technology with Nycomed Imaging A.S. of Oslo, Norway ("Nycomed") and Schering AG
("Schering"). 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 issue on
pending applications, no assurance to this effect can be given.
 
     The patent positions of pharmaceuticals and biopharmaceutical firms,
including Advanced Magnetics, are generally uncertain and involve complex legal
and factual questions. There can be no assurance that any claims which are
included in pending or future patent applications will issue, that any issued
patents will provide the Company with competitive advantages or will not be
challenged by others, or that the existing or future patents of third parties
will not have an adverse effect on the ability of the Company to commercialize
its products.
 
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<PAGE>   9
 
     The Company believes it has a strong intellectual property position
regarding arabinogalactan for use in targeting therapeutic compounds. It has
three U.S. patents and a notice of allowance for a European patent covering the
delivery of therapeutic agents with arabinogalactan. A fourth patent covering
the use of arabinogalactan with radiotherapy has issued in the United States.
Additional therapeutic applications are pending, but there is no assurance that
any additional patents will issue to the Company.
 
     The Company also intends to rely on its trade secrets, know-how, continuing
technological innovations and licensing opportunities to maintain and develop
its competitive position. Although the Company seeks to protect its proprietary
information, there can be no assurance that others will not independently
develop the same or similar information, design around the patents, obtain
unauthorized access to the Company's proprietary information or misuse
information to which the Company has granted access. Litigation may be necessary
to enforce any patents issued to the Company or to determine the scope of other
person's proprietary rights in court or administrative proceedings. Any
litigation or administrative proceeding could result in substantial costs to the
Company and distraction of the Company's management. An adverse ruling in any
litigation or administrative proceeding could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
COMPETITION
 
     The pharmaceutical and biopharmaceutical industries are subject to intense
competition and rapid technological change. The Company expects competition in
the development of new MRI contrast agents to increase substantially. Certain
companies, including 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. 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. There can be no assurance that the Company will be able to
compete successfully with these companies.
 
     The Company believes that its ability to compete successfully in the MRI
contrast agent market will depend on a number of factors including the
development of efficacious products, timely receipt of regulatory approvals and
product manufacturing at commercially acceptable costs. In addition, the
Company's MRI contrast agents represent a new approach to imaging certain organs
and market acceptance of both MRI as an appropriate technique for such organs,
and 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 will offer advantages over competing MRI, CT or X-ray contrast agents,
there can be no assurance that there will be greater acceptance of its products
over other contrast agents. In addition, 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. There can be no
assurance that the Company will be able to successfully develop efficacious
products, obtain timely regulatory approvals, manufacture products at
commercially acceptable costs, gain satisfactory market acceptance or otherwise
successfully compete in the future.
 
     There are several MRI contrast agents for imaging lesions of the liver in
various phases of human testing in the United States and abroad. Schering has
two products in development, Resovist, a carboxydextran superparamagnetic iron
oxide formulation, and Eovist, a chelated gadolinium compound. The Company
believes that Resovist is nearing approval in Europe and that Eovist has
completed Phase II trials in Europe. The Company does not know the status of
Resovist or Eovist in Japan. On December 1, 1997 the FDA approved Teslascan,
Nycomed's MnDPDP product for MRI of liver lesions. The Company believes that
Bracco S.p.A. is conducting clinical trials in Europe and the United States for
Gadolinium BOPTA, a chelated gadolinium compound for MR imaging of liver
lesions. The Company does not know the status of this product.
 
     In the area of oral contrast agents, Pharmacyclics, Inc. filed an NDA in
late 1995 for GADOLITE, its gadolinium-based product candidate. Bracco S.p.A.
has filed an NDA in the United States for Lumenhance,
 
                                        9

<PAGE>   10
 
its liposomal encapsulated oral manganese compound. In October 1997, the FDA
approved Ferriselz(R), an oral MRI agent from Oncomenbrane Inc. The Company
believes that GastroMARK, being first to market with a safe and effective
product should have a competitive advantage. There can be no assurance, however,
that these competitive products or other products developed by the Company's
competitors will not be more effective than any products developed by the
Company or render the Company's technology obsolete.
 
     Many of the Company's competitors have substantially greater capital,
research and development, manufacturing and marketing resources and experience
than the Company. Such companies may succeed in developing technologies and
products that are more effective or less costly than any that may be developed
by the Company and may also prove to be more successful than the Company in
production and marketing. There can be no assurance that Advanced Magnetics will
successfully develop any proposed drug delivery products, obtain required
regulatory approvals or gain satisfactory market acceptance for such products.
Furthermore, there can be no assurance that products developed by the Company's
competitors will not be more effective than any products developed by the
Company, render the Company's technology obsolete or gain greater market
acceptance.
 
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 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 and the expenditure of substantial
resources. Failure to obtain requisite governmental approvals or failure to
obtain approvals of the scope requested 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 a contrast agent or therapeutic drug, may be marketed in the United
States include: (a) pre-clinical laboratory tests, in vivo pre-clinical studies
and formulation studies; (b) the submission to the FDA of a request for
authorization to conduct clinical trials subject to an Investigational New Drug
("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 and production uses of the pharmaceutical; 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
and formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Pre-clinical test results are submitted to the FDA as a
part of the IND. 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 human beings, 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 complete
manufacturing information are submitted in an
 
                                       10

<PAGE>   11
 
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.
 
     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 preclinical 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. 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.
 
     If an NDA is submitted to the FDA, there can be no assurance that such
application will be reviewed and approved by the FDA in a timely manner, if at
all. Among the conditions for NDA approval is the requirement that a prospective
manufacturer's manufacturing procedures conform to GMP requirements, which must
be followed at all times. In complying with those 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. 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. Finally, product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
 
     Among the conditions for NDA approval is the requirement that a prospective
manufacturer's manufacturing procedures conform to GMP requirements, which must
be followed at all times. In complying with those 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. Domestic manufacturing establishments are subject to periodic
inspections by the FDA in order to assess, among other things, GMP compliance.
To supply product for use in the United States, foreign manufacturing
establishments must comply with GMP and are subject to periodic inspection by
the FDA or by regulatory authorities in certain of such countries under
reciprocal agreements with the FDA. Failure to maintain compliance with GMP
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.
 
     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 Nuclear Regulatory Commission ("NRC") 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 NRC 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.
 
                                       11

<PAGE>   12
 
     In both the United States and foreign markets, the Company's ability to
commercialize its products successfully also 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 payors. Significant uncertainty exists as to the
reimbursement status of newly approved health care products and products used
for indications not approved by the FDA. If adequate reimbursement levels are
not maintained by government and other third-party payors 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
 
     One customer accounted for approximately 54% of the Company's revenues in
fiscal 1997. Revenues in fiscal 1997, 1996 and 1995, from customers and
licensees outside of the United States, principally in Europe, accounted for 6%,
3% and 23%, respectively, of the Company's total revenues.
 
YEAR 2000 COMPLIANCE
 
     The Company does not expect that Year 2000 issues will have a material
effect on the Company's results of operations or financial condition.
 
EMPLOYEES
 
     As of December 8, 1997, the Company had approximately 59 full-time
employees, 49 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 there can be no assurance that such success will
continue.
 
     None of the Company's employees is represented by a labor union, and the
Company considers its relations with its employees to be excellent.
 
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 partners), clinical trial subjects,
patients, pharmaceutical companies or others. At this time, the Company is a
defendant in a lawsuit arising from the death of a clinical trial subject who
was administered Combidex and suffered an allergic reaction. The Company
maintains product liability insurance coverage for claims such as this arising
from the use of its products in clinical trials, as well as claims arising from
FDA-approved commercial usage. However, coverage is becoming increasingly
expensive and no assurance can be given that the Company will be able to
maintain insurance at a reasonable cost. There can be no assurance that the
Company's insurance will provide sufficient amounts to protect the Company
against losses due to liability that could have a material adverse effect on the
Company's business, financial conditions and results of operations. The Company
maintains product liability insurance covering the sale of its products approved
for commercial marketing but there can be no assurance that the Company will be
able to obtain commercially reasonable product liability insurance for any
product approved for marketing in the future or that insurance coverage and the
resources of the Company would be sufficient to satisfy any liability resulting
from product liability claims. A product liability claim or series of claims
brought against the Company could have a material adverse effect on its
business, financial condition and results of operations, whether or not the
plaintiffs in such claims ultimately prevail.
 

I
TEM 2.  PROPERTIES:
 
     The Company's principal pharmaceutical manufacturing and research and
development operations are located in a modern Company-owned building of
approximately 25,000 square feet in Cambridge, Massachusetts. The Company has
leased two additional premises in Cambridge of approximately 18,000 total square
feet to be used for manufacturing, warehousing and executive office space. One
lease expires on October 31, 2000 and the other lease expires on November 30,
2000. In addition, the Company has leased premises of approximately 5,200 square
feet in Princeton, New Jersey used by the Company's clinical development group
as a general business and administrative office. This lease expires on September
5, 1998. Kalisto Biologicals, Inc. has leased approximately 12,000 square feet
of space through October 31, 2001. The
 
                                       12

<PAGE>   13
 
Company believes these facilities are adequate for its current and anticipated
short-term needs and that it will be able to enter into lease extensions or to
lease comparable space, if necessary. However, the acquisition and required
regulatory approvals for additional pharmaceutical manufacturing space can be
time consuming and expensive. There is no assurance that if the Company desired
to expand its manufacturing capacity it would be able to do so on a timely
basis, if at all.
 

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. In
addition, the complaint also alleges state law claims for breach of contract,
breach of good faith and fair dealing, breach of implied contract,
misappropriation of trade secrets, conversion, negligent misrepresentation,
misrepresentation, unjust enrichment and unfair trade practices. While the
outcome of the action cannot be determined, the Company believes the action is
without merit and intends to defend the action vigorously. There can be no
assurance, however, that the Company will be able to defend successfully this
action and the failure by the Company to prevail for any reason could have an
adverse effect on the Company's future business, financial condition and results
of operations.
 
     The Company and certain of its officers were sued in David D. Stark v.
Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee Josephson,
Civil Action No. 93-02846-C, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County. This case involves claims of
breach of contract, breach of good faith and fair dealing, breach of implied
contract, unjust enrichment and unfair trade practices that were originally
dismissed by, but later remanded to, the Federal Court in the above-mentioned
action, as well as a new count alleging tortious interference with contractual
or advantageous relations. The Superior Court granted partial summary judgment
in the Company's favor and dismissed the unfair trade practices and tort counts.
The Superior Court has stayed the action. While the outcome of the action cannot
be determined, the Company believes the action is without merit and intends to
defend the action vigorously. There can be no assurance, however, that the
Company will be able to defend successfully this action and the failure by the
Company to prevail for any reason could have an adverse effect on the Company's
future business, financial condition and results of operations.
 

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, 1997.
 

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 1997 and
1996.
 

<TABLE>
<CAPTION>
                                                FISCAL QUARTER
                                     -------------------------------------
                                     FIRST     SECOND     THIRD     FOURTH
                                     -----     ------     -----     ------
            <S>                      <C>       <C>        <C>       <C>
            1997 High............     $17 5/8  $19 1/2    $13 3/4   $12 5/16
                 Low.............     $14 1/2  $12 3/4    $10 1/2   $10
            1996 High............     $29 1/2  $30        $23       $19 7/8
                 Low.............     $24      $19 1/2    $16 1/8   $16 1/4
</TABLE>

 
     On December 8, 1997 there were approximately 302 shareholders of record.
The Company believes that the number of beneficial holders of Common Stock
exceeds 2,145. The last reported sale price of the Common Stock on December 8,
1997 was $9.25 per share. The Company has never declared or paid a cash dividend
on its capital stock.
 
                                       13

<PAGE>   14
 

ITEM 6.  SELECTED FINANCIAL DATA:
 
                            SELECTED FINANCIAL DATA
 

<TABLE>
<CAPTION>
                                                                    FOR THE YEARS ENDED SEPTEMBER 30,
                                                    ------------------------------------------------------------------
                                                       1997          1996          1995          1994          1993
                                                    ----------    ----------    ----------    ----------    ----------
<S>                                                 <C>           <C>           <C>           <C>           <C>
Statement of Operations Data:
Revenues:
  License fees...................................   $5,500,000    $       --    $5,000,000    $5,505,000    $1,010,000
  Royalties......................................      363,445        50,000       189,493        15,924       906,138
  Product sales..................................    1,580,357        12,762     2,120,457       280,975     3,836,300
  Contract research and development..............       62,920         6,810            --            --       402,911
  Interest, dividends and net gains and losses on
    sales of securities..........................    3,495,049     1,761,450     2,287,311     1,845,005     2,823,102
                                                    ----------    ----------    ----------    ----------    ----------
    Total revenues...............................   11,001,771     1,831,022     9,597,261     7,646,904     8,978,451
Costs and Expenses:
  Cost of product sales..........................      311,678         2,550       425,187        54,983     1,525,564
  Contract research and development expenses.....        8,815            --            --            --       193,391
  Company-sponsored research and development
    expenses.....................................    9,304,327     9,671,897     8,601,791     6,621,929     6,863,229
  Charge (credit) for purchase of in-process
    research and development*....................           --            --      (380,000)      760,000            --
  Selling, general and administrative
    expenses.....................................    1,437,599     1,871,568     1,759,348     1,963,480     2,777,840
                                                    ----------    ----------    ----------    ----------    ----------
    Total cost and expenses......................   11,062,419    11,546,015    10,406,326     9,400,392    11,360,024
Other Income:
  Other income...................................      264,800            --            --            --            --
  Gain on sale of in vitro product line**........           --            --     3,404,527     2,649,580            --
                                                    ----------    ----------    ----------    ----------    ----------
Income (loss) before provision for income
  taxes..........................................      204,152    (9,714,993)    2,595,462       896,092    (2,381,573)
Income tax (benefit) provision...................     (379,022)           --       400,000         8,000            --
                                                    ----------    ----------    ----------    ----------    ----------
Income (loss) before cumulative effect of
  accounting change..............................      583,174    (9,714,993)    2,195,462       888,092    (2,381,573)
Cumulative effect of accounting change...........           --            --       117,540            --            --
                                                    ----------    ----------    ----------    ----------    ----------
Net income (loss)................................   $  583,174    $(9,714,993)  $2,313,002    $  888,092    $(2,381,573)
                                                    ==========    ==========    ==========    ==========    ==========
Net income (loss) per share before cumulative
  effect of accounting change....................   $     0.09    $    (1.44)   $     0.32    $     0.13    $    (0.36)
Cumulative effect of accounting change...........           --            --          0.02            --            --
                                                    ----------    ----------    ----------    ----------    ----------
Income (loss) per share..........................   $     0.09    $    (1.44)   $     0.34    $     0.13    $    (0.36)
                                                    ----------    ----------    ----------    ----------    ----------
Weighted average number of common and common
  equivalent shares..............................    6,805,232     6,762,748     6,870,839     6,806,525     6,651,061
                                                    ----------    ----------    ----------    ----------    ----------
</TABLE>

 
*  In August 1994, the Company reacquired the development and marketing rights
   to the MRI contrast agent Combidex previously licensed to Squibb Diagnostics,
   a Division of Bristol Myers Squibb Company, Inc., and recorded a related
   $760,000 charge for the purchase of in-process research and development. In
   the first fiscal quarter of 1995, a credit for $380,000 was recorded to the
   purchase of in-process research and development.
 
** On October 15, 1993, the Company sold its in vitro product line to PerSeptive
   Biosystems, Inc.
 

<TABLE>
<CAPTION>
                                                                             AT SEPTEMBER 30,
                                                    ------------------------------------------------------------------
                                                       1997          1996          1995          1994          1993
                                                    ----------    ----------    ----------    ----------    ----------
<S>                                                 <C>           <C>           <C>           <C>           <C>
Balance sheet data:
Working capital..................................   $37,422,235   $33,605,818   $41,985,100   $38,891,406   $37,547,326
                                                    ----------    ----------    ----------    ----------    ----------
Total assets.....................................   $44,976,181   $41,066,373   $50,843,222   $46,672,700   $45,877,548
                                                    ----------    ----------    ----------    ----------    ----------
Stockholders' equity.............................   $43,423,058   $40,132,545   $49,071,072   $45,451,475   $44,654,428
                                                    ----------    ----------    ----------    ----------    ----------
</TABLE>

 
                                       14

<PAGE>   15
 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS:
 
OVERVIEW
 
     Since its inception in November 1981, Advanced Magnetics, Inc., (the
"Company") has focused its efforts on developing its core superparamagnetic iron
oxide particle technology to develop magnetic resonance imaging ("MRI") contrast
agents and its core polysaccharide technology for targeted delivery of
therapeutics. The Company has funded its operations with cash from license fees
from corporate partners, royalties, sales of its products, fees from contract
research performed for third parties, the proceeds of financings and income
earned on invested cash. The Company's success in the market for diagnostic and
therapeutic products will depend, in part, on the Company's ability to
successfully develop, test, produce and market its products; obtain necessary
governmental approvals in a timely manner; attract and 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 partners and research grants;
the introduction of new products by the Company; 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 there can be no assurance that the Company will maintain profitability or
that revenue growth can be sustained in the future.
 
     A substantial portion of the Company's expenses consists of research and
development expenses. The Company expects its research and development expenses
to remain the same as it completes Combidex clinical trials and associated
toxicology and pharmacology studies and devotes resources to developing
additional contrast agents and its targeted drug delivery programs.
 
SALE OF IN VITRO PRODUCT LINE
 
     On October 15, 1993 the Company sold its in vitro product line to
PerSeptive Biosystems, Inc. ("PerSeptive") for 151,759 shares of PerSeptive
common stock which was worth $4,156,674 as of that date, plus an additional
earn-out amount based on PerSeptive's fiscal 1995 revenues. The amount of the
earn-out at September 30, 1995 was $3,404,527 which PerSeptive satisfied by
issuing 373,080 shares of PerSeptive common stock. The Company recognized
pre-tax gains on this sale of $3,404,527 and $2,649,580 in fiscal 1995 and 1994,
respectively. As of the end of fiscal 1996, the Company had sold all of its
holdings of PerSeptive common stock.
 
RESULTS OF OPERATIONS
 
FISCAL 1997 COMPARED TO FISCAL 1996
 
     Revenues
 
     Total revenues for the fiscal year ended September 30, 1997 were
$11,001,771 compared to $1,831,022 for the fiscal year ended September 30, 1996.
 
     There were license fee revenues for the fiscal year ended September 30,
1997 of $5,500,000 and none for the fiscal year ended September 30, 1996. The
Company received a non-refundable milestone payment of $5,000,000 in October
1996 from Berlex Laboratories, Inc. ("Berlex"), as a result of Berlex's market
launch of Feridex I.V. in the United States, under an agreement (the "Berlex
Agreement") granting Berlex a product license and exclusive marketing rights to
the Company's Feridex I.V. MRI contrast agent in the United States. The Company
received a non-refundable milestone payment of $500,000 in December 1996 from
Mallinckrodt Inc. ("Mallinckrodt") as a result of the FDA's marketing approval
of GastroMARK under an agreement (the "Mallinckrodt Agreement") granting
Mallinckrodt a product license and co-marketing rights to the Company's
GastroMARK MRI contrast agent in North America.
 
                                       15

<PAGE>   16
 
     Royalties for the fiscal year ended September 30, 1997 were $363,445 as
compared to $50,000 in fiscal 1996. Royalties in fiscal 1997 reflect product
sales in the United States of the Company's Feridex I.V. liver MRI contrast
agent by Berlex and product sales in North America of GastroMARK oral MRI
contrast agent by Mallinckrodt as well as increased product sales in Europe by
Guerbet S.A. ("Guerbet") of Feridex I.V. (under the trade name Endorem) and
GastroMARK (under the trade name Lumirem) as compared to fiscal 1996.
 
     Product sales for the fiscal year ended September 30, 1997 were $1,580,357
compared to $12,762 for the fiscal year ended September 30, 1996 which resulted
primarily from the initial product launch by Berlex in the United States of
Feridex I.V. and by Mallinckrodt in North America of GastroMARK in the 1997
fiscal year.
 
     Interest, dividends and net gains and losses on sales of securities
resulted in revenues of $3,495,049 for the fiscal year ended September 30, 1997
compared to $1,761,450 for the fiscal year ended September 30, 1996.
 
     Interest income for the fiscal year ended September 30, 1997 was $1,385,670
compared to $1,400,597 for the fiscal year ended September 30, 1996. Dividend
income of $242,029 for the year ended September 30, 1997 was $112,471 less than
the $354,500 for the fiscal year ended September 30, 1996. There was a net gain
on sales of securities of $1,867,350 for the fiscal year ended September 30,
1997 compared to a net gain of $6,353 for the fiscal year ended September 30,
1996. The increase was primarily attributable to gains realized on the sale of a
certain security.
 
     Costs and Expenses
 
     The cost of product sales for the fiscal year ended September 30, 1997 was
$311,678 compared to $2,550 for the fiscal year ended September 30, 1996. The
cost of product sales for the fiscal year ended September 30, 1997 related
primarily to the introduction in the United States of Feridex I.V. and
GastroMARK. The cost of product sales for both fiscal years was 20% of product
sales.
 
     Research and development expenses for the fiscal year ended September 30,
1997 were $9,304,327, a decrease of 4% compared to $9,671,897 for the fiscal
year ended September 30, 1996. The decrease was primarily attributable to
reduced staffing. The Company expects that expenditures for research and
development for fiscal 1998 will continue at present levels. In addition, the
Company made payments of $800,000 in accordance with its agreements to license
technology from a third party based on the achievement of certain milestones.
 
     Selling, general and administrative expenses for the fiscal year ended
September 30, 1997 were $1,437,599, a decrease of 23% from $1,871,568 for the
fiscal year ended September 30, 1996. The decrease was primarily attributable to
expenses associated with a proposed, but later terminated, public offering of
the Company's common stock during fiscal 1996.
 
     Other
 
     Other income of $264,800 was recognized during the fiscal year ended
September 30, 1997 as the result of an insurance settlement for flood damages in
the research and development laboratory in October 1996.
 
     Income Taxes
 
     The income tax benefit resulted from payments from the Internal Revenue
Service for contingent refunds. There was no income tax provision for the fiscal
year ended September 30, 1997 due to the applicable net operating loss
carry-forwards. There was no income tax provision for the fiscal year ended
September 30, 1996 due to a net operating loss.
 
     Earnings
 
     In the fiscal year ended September 30, 1997, the Company recorded a net
profit of $583,174 or $0.09 per share. In the fiscal year ended September 30,
1996, the Company recorded a net loss of ($9,714,993) or ($1.44) per share.
 
                                       16

<PAGE>   17
 
RESULTS OF OPERATIONS
 
FISCAL 1996 COMPARED TO FISCAL 1995
 
     Revenues
 
     Total revenues for the fiscal year ended September 30, 1996 were $1,831,022
compared to $9,597,261 for the fiscal year ended September 30, 1995.
 
     There were no license fee revenues for the fiscal year ended September 30,
1996 compared to $5,000,000 for the fiscal year ended September 30, 1995. The
Company received a non-refundable $5,000,000 license fee on February 1, 1995
from Berlex under the Berlex Agreement granting Berlex a product license and
exclusive marketing rights to the Company's Feridex I.V. MRI contrast agent in
the United States.
 
     Royalties for the fiscal year ended September 30, 1996 were $50,000
relating to product sales in Europe by Guerbet of the Company's Feridex I.V.
(marketed in Europe under the trade name Endorem) and GastroMARK (marketed in
Europe under the trade name Lumirem) MRI contrast agents. Royalties of $50,000
in the fiscal year ended September 30, 1996 as compared with $189,493 in fiscal
1995 reflect lower sales in Europe of Feridex I.V. in fiscal 1996.
 
     Product sales for the fiscal year ended September 30, 1996 were $12,762
compared to $2,120,457 for the fiscal year ended September 30, 1995 which
resulted primarily from the initial product launch by Guerbet in Europe of
Feridex I.V. in fiscal 1995. Although Guerbet marketed and sold the Company's
product during fiscal 1996, a sufficient level of inventory from 1995 existed to
satisfy 1996 customer needs.
 
     Interest, dividends and net gains and losses on sales of securities
resulted in revenues of $1,761,450 for the fiscal year ended September 30, 1996
compared to $2,287,311 for the fiscal year ended September 30, 1995.
 
     Interest income for the fiscal year ended September 30, 1996 was $1,400,597
compared to $1,644,328 for the fiscal year ended September 30, 1995. The
decrease was primarily due to the maturity of United States Treasury Notes and
lower interest rates earned on money market accounts in fiscal 1996. Dividend
income of $354,500 for the year ended September 30, 1996 was $233,516 less than
the $588,016 for the fiscal year ended September 30, 1995. The decrease was
primarily due to a reduction in funds invested in dividend paying preferred
stock. There was a net gain on sales of securities of $6,353 for the fiscal year
ended September 30, 1996 compared to a net gain of $54,967 for the fiscal year
ended September 30, 1995.
 
     Costs and Expenses
 
     The cost of product sales for the fiscal year ended September 30, 1996 was
$2,550 compared to $425,187 for the fiscal year ended September 30, 1995. The
cost of product sales for the fiscal year ended September 30, 1995 related
primarily to the introduction in Europe of Feridex I.V. The cost of product
sales for both fiscal years was 20% of product sales.
 
     Research and development expenses for the fiscal year ended September 30,
1996 were $9,671,897, an increase of 12% compared to $8,601,791 for the fiscal
year ended September 30, 1995. The increase was primarily a result of costs
associated with Phase III human clinical trials for the Company's Combidex
contrast agent used in imaging lymph nodes, liver, spleen and blood perfusion
and preclinical developments of the Company's targeted drug delivery programs.
In addition, the Company made payments of $725,000 in accordance with its
agreements to license technology from third parties, of which $400,000 was based
on the achievement of certain milestones.
 
     Selling, general and administrative expenses for the fiscal year ended
September 30, 1996 were $1,871,568, an increase of 6% from $1,759,348 for the
fiscal year ended September 30, 1995. The increase was primarily attributable to
expenses associated with a proposed, but later terminated, public offering of
the Company's common stock.
 
                                       17

<PAGE>   18
 
     Other
 
     The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in the
fiscal year ended September 30, 1995. As a result, the Company recorded a
cumulative effect of accounting change of $117,540 during the year ended
September 30, 1995.
 
     Income Taxes
 
     There was no income tax provision for the fiscal year ended September 30,
1996 due to an operating loss. The income tax provision for the fiscal year
ended September 30, 1995 was $400,000. The tax rate was lower than the 34%
statutory rate as a result of the tax benefit of temporary differences and
dividend income exclusions.
 
     Earnings
 
     In the fiscal year ended September 30, 1996, the Company recorded a net
loss of $9,714,993 or ($1.44) per share. In the fiscal year ended September 30,
1995, the Company recorded a net profit of $2,195,462 or $0.32 per share before
the cumulative effect of accounting change. Including the cumulative effect of
accounting change of $117,540 or $0.02 per share, net income was $2,313,002 or
$0.34 per share for the fiscal year ended September 30, 1995.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     At September 30, 1997, the Company's cash and cash equivalents totaled
$10,724,740, compared with $10,805,842 at September 30, 1996. In addition, the
Company had marketable securities of $27,365,765 at September 30, 1997 as
compared to $23,271,169 on September 30, 1996. Net cash used in operating
activities was $202,281 in the fiscal year ended September 30, 1997 compared to
net cash used in operating activities of $7,430,470 in the fiscal year ended
September 30, 1996, a decrease of $7,228,189. The decrease in cash used in
operating activities was due primarily to a net profit of $583,174 for the year
ended September 30, 1997, compared with a net loss of $9,714,993 in the fiscal
year ended September 30, 1996. Cash provided by investing activities was
$803,333 for the fiscal year ended September 30, 1997 compared to $17,337,281
provided by investing activities in the fiscal year ended September 30, 1996.
Cash provided by investing activities in the fiscal year ended September 30,
1997 included the investment of $20,380,048 in marketable securities which was
mostly offset by $12,500,000 from maturing United States Treasury notes and
$9,270,016 from the sale of marketable securities. Cash provided by investing
activities in the fiscal year ended September 30, 1996 included the purchase of
marketable securities of $2,378,934. Proceeds from United States Treasury notes
maturing was $9,499,911 and proceeds from the sale of marketable securities was
$10,733,541 in the fiscal year ended September 30, 1996. Cash used in financing
activities was $682,154 for the fiscal year ended September 30, 1997 and
included proceeds of $179,445 from the issuances of common stock offset by the
purchase of 61,300 shares of the Company's common stock on the open market for
$861,599. In May 1996, the Board of Directors authorized the purchase of up to
250,000 shares of the Company's common stock on the open market at prevailing
market prices.
 
     Capital expenditures in the fiscal year ended September 30, 1997 were
$533,590 compared to $466,452 in the fiscal year ended September 30, 1996.
Capital expenditures of $533,590 in the fiscal year ended September 30, 1997
continued the Company's efforts to upgrade laboratory and production equipment.
The Company has no current commitment for any significant expenditures on
property, plant and equipment. The Company expects that expenditures for
research and development for fiscal 1998 will continue at present levels.
 
     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 partnering
arrangements. There can be no assurance, however, that funding will be available
on terms acceptable to the Company, if at all.
 
                                       18

<PAGE>   19
 
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
     The FASB issued Statement No. 128 ("SFAS 128"), "Earnings per Share." This
statement modifies the way in which earnings per share ("EPS") is calculated and
disclosed. Currently, the Company discloses primary EPS. Upon adoption of this
standard for the fiscal period ending December 31, 1997, the Company will
disclose basic and diluted EPS. Basic EPS excludes common stock equivalents and
is computed by dividing income available to common shareholders by the weighted
average number of Common Shares outstanding for the period. The Company believes
the implementation of SFAS 128 will not have a material impact on the earnings
per share calculation.
 
     The FASB recently issued Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. While not mandating a specific financial
statement format, the statement requires that an amount representing total
comprehensive income be reported. The statement will become effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods is required for comparative purposes. The Company
believes the implementation of SFAS 130 may have a material impact on results of
operations.
 
     The FASB also issued Statement No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." This statement, which
supersedes Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise," changes the way public companies report information about segments.
The statement, which is based on the management approach to segment reporting,
includes requirements to report segment information quarterly and entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenues. The statement
is effective for periods beginning after December 15, 1997. Restatement for
earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year;
however, in subsequent years, interim period information must be presented on a
comparative basis. The Company is currently evaluating this statement and its
effect on financial statement disclosures.
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
 
     The Company does not provide forecasts of its future financial performance.
However, from time to time, information provided by the Company or statements
made by its employees may contain "forward looking" information that involves
risks and uncertainties. In particular, statements contained in this Form 10-K
that are not historical facts (including, but not limited to statements
contained in this Item 7 relating to liquidity and capital resources) constitute
forward looking statements and are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
of operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, without limitation, the risks, uncertainties
and other information discussed below and within this Form 10-K, as well as the
accuracy of the Company's internal estimates of revenue and operating expense
levels. The following discussion of the Company's risk factors should be read in
conjunction with the financial statements and related notes thereto. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
 
     Early Stage of Product Commercialization; Uncertainty of Product
Development.  The Company has not generated significant revenues from the sale
of its products. Feridex I.V. and GastroMARK have only recently been approved
for sale in the United States, Feridex I.V. has only recently been approved for
sale in Japan, and the sale of Feridex I.V. and GastroMARK has only recently
begun in certain European countries. While the Company is conducting human
clinical testing of Combidex, this product and the Company's other product
candidates, in particular its targeted therapeutic products, may require
significant additional research and development efforts, including extensive
human clinical testing, prior to submission of any regulatory application for
commercial sale of such products. Such products are not expected to be
commercially available for several years, if at all. The development of new
pharmaceutical products is highly uncertain and no assurance can be given that
any of the Company's development programs will be completed successfully, that
 
                                       19

<PAGE>   20
 
required regulatory approvals will be obtained on a timely basis, if at all, or
that any product, including Feridex I.V., will be commercially successful.
 
     The Company's long term viability and growth will depend on the successful
commercialization of products resulting from its research activities. If any of
the Company's development programs are not completed successfully, required
regulatory approvals are not obtained or products for which approvals are
obtained are not commercially successful, the Company's business, financial
condition and results of operations could be materially adversely affected.
 
     Need for Future Funding; Uncertainty of Access to Capital.  The Company has
expended and will continue to expend substantial funds to complete the research,
development, clinical trials, regulatory approvals and other activities through
final commercialization of its products. It is possible that the Company may
need additional financing to satisfy its capital and operating requirements
relating to the development, manufacturing and marketing of its products. The
Company may seek such financing through arrangements with collaborative partners
and through public or private sales of the Company's securities, including
equity securities. No assurance can be given that such financing will be
available to the Company on acceptable terms, if at all. Any additional equity
financings could be dilutive to the Company's stockholders. If adequate
additional funds are not available, the Company may be required to curtail
significantly one or more of its research and development programs or obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its products and product
candidates on terms that it might otherwise find unacceptable.
 
     Government Regulation; No Assurance of Regulatory Approval.  Prior to
marketing, every product candidate must undergo an extensive regulatory approval
process in the United States and in every country in which the Company intends
to test and market its product candidates and products. This regulatory process
includes testing and clinical trials of such product candidate to demonstrate
safety and efficacy and can require many years and the expenditure of
substantial resources in the United States and in foreign countries in which
approval is sought. Data obtained from preclinical testing and clinical trials
are subject to varying interpretations, which can delay, limit or prevent FDA
approval. In addition, changes in FDA approval policies or requirements may
occur or new regulations may be promulgated which may result in delay or failure
to receive FDA approval. Similar delays or failures may be encountered in
foreign countries. Delays and related costs in obtaining regulatory approvals
could have a material adverse effect on the Company's business, financial
condition and results of operation. Although the Company has received approval
in the United States and in certain foreign countries to market Feridex I.V. and
GastroMARK, there can be no assurance that further regulatory approvals will be
obtained for any products developed by the Company. Failure to obtain requisite
governmental approvals or failure to obtain approvals of the scope requested
could delay and may preclude the Company or its licensees or other collaborators
from marketing the Company's products or limit the commercial use of the
products and could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     Regulatory approvals may entail limitations on the indicated uses of such
products and impose labeling requirements which may adversely impact the
Company's ability to market its products. Even if regulatory approval is
obtained, a marketed product and its manufacturer are subject to continuing
regulatory review. Noncompliance with regulatory requirements at any stage of
the approval process may result in various 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. Any such adverse consequences could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
     Uncertainties Relating to Clinical Trials; Technological
Uncertainty.  Before obtaining regulatory approvals for the commercial sale of
any of its contrast agents or other product candidates, the Company must
demonstrate through extensive preclinical testing and human clinical trials that
the product is safe and efficacious. The results from preclinical testing and
early clinical trials of products under development by the Company may not be
predictive of results obtained in subsequent clinical trials. Clinical trials
are often conducted with patients in the most advanced stages of disease. During
the course of treatment, these patients
 
                                       20

<PAGE>   21
 
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
product is itself subject to approvals by various governmental regulatory
authorities. There can be no assurance that Advanced Magnetics will be permitted
by regulatory authorities to commence or continue clinical trials. Any delays in
or termination of the Company's clinical trial efforts could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
     Many of the Company's products are subject to technological uncertainty.
Only two of the Company's products, Feridex I.V. and GastroMARK, have been
approved for sale in the United States. Obtaining regulatory approval for
products consisting of arabinogalactan connected to any other therapeutic
compound may be more difficult than obtaining approval for a single compound
because it could be more difficult to determine the safety and efficacy of the
two compounds together. The Company's MRI contrast agents may cause adverse
reactions, including death, in certain persons under certain conditions. There
can be no assurances that these factors will not adversely affect the
development or commercialization of the Company's products.
 
     Dependence on Collaborative Relationships.  The Company's strategy for the
development and commercialization of its contrast agent product candidates has
been to enter into strategic alliances with various corporate partners,
licensees, and other collaborators. In some cases, the Company is dependent upon
these collaborators to conduct preclinical and clinical testing, to obtain
regulatory approvals and to manufacture and market products. There can be no
assurance that any revenues or profits will continue or that the Company will be
able to enter into future collaborative relationships even if it desires to do
so. If any of the Company's collaborators breaches its agreement with the
Company or otherwise fails to perform, such event could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     Competition and Risk of Technological Obsolescence.  The pharmaceutical and
biopharmaceutical industries are subject to intense competition and rapid
technological change. The Company has many competitors, many of which have
substantially greater capital and other resources than the Company and represent
significant competition for Advanced Magnetics. Such companies may succeed in
developing technologies and products that are more effective or less costly than
any that may be developed by the Company, and such companies may be more
successful than the Company in developing, manufacturing and marketing products.
In addition, the Company's MRI contrast agents represent a new approach to
imaging certain organs, and market acceptance of both MRI as an appropriate
imaging technique for such organs and the Company's products is critical to the
Company's ability to compete successfully. There can be no assurance that the
Company will be able to compete successfully in the future or that developments
by others will not render the Company's products or product candidates or
technologies obsolete or noncompetitive or that the Company's collaborators or
customers will not choose to use competing technologies or products.
 
     Uncertainty Regarding Patents and Proprietary Rights.  The patent positions
of pharmaceutical and biopharmaceutical companies, including Advanced Magnetics,
are generally uncertain and involve complex legal and factual questions. Because
of the substantial length of time and expense associated with bringing new
products through development and regulatory approval to the marketplace, the
pharmaceutical and biopharmaceutical industries place considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. There can be no assurance as to the success or timeliness in
obtaining any such patents, that the breadth of the claims obtained will provide
any significant protection of the Company's technology, or that the degree of
protection afforded by patents for licensed technologies or for future
discoveries will be adequate to protect the Company's proprietary technology.
Moreover, no assurance can be given that patents issued to Advanced Magnetics
will not be contested, invalidated or circumvented. There can be no assurance
that future patent interferences involving patents of either the Company or its
licensors will not have a material adverse effect on the Company's business.
Moreover, there can be no assurance that claims of infringement or violation of
the proprietary rights of others will not be asserted against the Company. If
Advanced Magnetics is required to defend against such claims or to protect its
own proprietary rights against others, the Company may incur substantial costs
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
                                       21

<PAGE>   22
 
     In the future, Advanced Magnetics may be required to obtain additional
licenses to patents or other proprietary rights of others. There can be no
assurance that any such licenses will be available on acceptable terms, if at
all. The failure to obtain such licenses could result in delays in marketing the
Company's products or the inability to proceed with the development,
manufacturing or sale of product candidates requiring such licenses. In
addition, the termination of any of the Company's existing licensing
arrangements could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators, employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any such breach or
that the Company's trade secrets will not otherwise become known or be
independently discovered by its competitors. In addition, the Company 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 the Company's products, thereby substantially
reducing the value of the Company's proprietary rights.
 
     Uncertainty of Third-Party Reimbursement.  In both the United States and
foreign markets, the Company's ability to commercialize its 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 payors. In the United
States, there has been, and the Company expects that there will continue to be,
a number of federal and state proposals to reform the health care system.
Significant uncertainty exists as to the reimbursement status of both
newly-approved health care products and products used for indications not
approved by the FDA. If adequate reimbursement levels are not maintained by
government and other third-party payors for the Company's products and related
treatments, the Company's business, financial condition and results of
operations may be materially adversely affected.
 
     Limited Manufacturing Experience and Capacity.  Advanced Magnetics has no
experience in manufacturing targeted therapeutic products and limited experience
in manufacturing contrast agents in commercial quantities. Currently, the
Company manufactures bulk Feridex I.V. product for sale by Guerbet, Feridex I.V.
finished product and GastroMARK bulk product in its Massachusetts facilities.
These facilities are subject to current Good Manufacturing Practices ("GMP")
regulations prescribed by the FDA. There can be no assurance that the Company
will be able to continue to operate at commercial scale in compliance with the
GMP regulations. Failure to operate in compliance with such GMP 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 Company is dependent on contract
manufacturers for the production of certain of its product candidates. In the
event that the Company is unable to obtain or retain manufacturing for its
product candidates, it will not be able to develop and commercialize its
products as planned. There can be no assurance that the Company will be able to
enter into agreements for the manufacture of future products with manufacturers
whose facilities and procedures comply with GMP and other regulatory
requirements or that such manufacturer will be able to deliver required
quantities of product that conform to specifications in a timely manner.
 
     Lack of Marketing and Sales History.  Advanced Magnetics has limited
experience in marketing and selling its current products and product candidates
and relies on its corporate partners to market and sell currently approved and
commercially available products. In order to achieve commercial success for any
product candidate approved by the FDA for which the Company does not have a
marketing partner, Advanced Magnetics may have to establish a marketing and
sales force or enter into arrangements with others to market and sell its
products. There can be no assurance that Advanced Magnetics will be successful
in attracting and retaining qualified marketing and sales personnel or that it
will be able to enter into marketing and sales agreements with others on
acceptable terms, if at all. Furthermore, there can be no assurance that
Advanced Magnetics or its corporate partners will be successful in marketing and
selling the Company's products.
 
                                       22

<PAGE>   23
 
     Potential Product Liability; Uncertainties Related to Insurance.  The use
of any of the Company's product candidates 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. At this time, the Company is a
defendant in a lawsuit arising from the death of a clinical trial subject who
was administered Combidex and suffered an allergic reaction. The Company
maintains product liability insurance coverage for claims arising from the use
of its products in clinical trials. However, coverage is becoming increasingly
expensive and no assurance can be given that the Company will be able to
maintain insurance at a reasonable cost. Furthermore, there can be no assurance
that the Company's insurance will provide sufficient coverage amounts to protect
the Company against losses due to liability that could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company presently maintains product liability insurance covering the sale of
Feridex I.V., but there can be no assurance that the Company will be able to
obtain commercially reasonable product liability insurance for any product
presently being marketed or for any product approved for marketing in the future
or that insurance coverage and the resources of the Company would be sufficient
to satisfy any liability resulting from product liability claims. A product
liability claim or series of claims brought against the Company could have a
material adverse effect on its business, financial condition and results of
operations, whether or not the plaintiffs in such claims ultimately prevail.
 
     Attraction and Retention of Key Employees.  Because of the specialized
nature of its business, Advanced Magnetics is highly dependent on its ability to
attract and retain qualified scientific and technical personnel for the research
and development activities conducted or sponsored by the Company. In addition,
the Company is substantially dependent upon Jerome Goldstein, its Chairman of
the Board and Chief Executive Officer, and upon Leonard Baum, President and
Chief Operating Officer. The loss of Mr. Goldstein, Mr. Baum or other certain
key executive officers could be detrimental to the Company. Furthermore, the
Company's anticipated growth and expansion into areas and activities requiring
additional expertise, such as clinical testing, regulatory compliance,
manufacturing and marketing, 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
the Company's activities, and there can be no assurance that the Company will be
able to continue to attract and retain the qualified personnel necessary for the
development of its business. The failure to attract and retain such personnel or
to develop such expertise could adversely affect the Company's business,
financial condition and results of operations.
 
     Volatility of Common Stock Price.  The market prices for securities of
biopharmaceutical and pharmaceutical companies, including the Company, have
historically been highly volatile. Such fluctuations in operating results may
cause the market price of the Company's 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 the Company or
its competitors concerning technological innovations, new products, clinical
trial results, agreements with collaborators, governmental regulations,
developments in patent or other proprietary rights, public concern regarding the
safety of drugs developed by the Company or others, may have a significant
impact on the market price of the Company's Common Stock and dividend policy.
 

I
TEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
 
     The Company's Financial Statements and related Report of Independent
Accountants are presented in the following pages. The financial statements filed
in this Item 8 are as follows:
 
     Report of Independent Accountants
 
     Financial Statements:
 
        Balance Sheets -- September 30, 1997 and 1996
 
        Statements of Operations -- for the years ended September 30, 1997, 1996
        and 1995
 
        Statements of Stockholders' Equity -- for the years ended September 30,
        1997, 1996 and 1995
 
                                       23

<PAGE>   24
 
        Statements of Cash Flow -- for the years ended September 30, 1997, 1996
        and 1995
 
        Reconciliation of Net Income (Loss) to Net Cash Used in Operating
        Activities -- for the years ended September 30, 1997, 1996 and 1995
 

        Notes to Financial Statements
 

I
TEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE:
 
     Not applicable.
 
                                       24

<PAGE>   25
 
                            ADVANCED MAGNETICS, INC.
 
                         INDEX TO FINANCIAL STATEMENTS
 

<TABLE>
<S>                                                                                    <C>
Report of Independent Accountants......................................................     26
Balance Sheets.........................................................................     27
Statements of Operations...............................................................     28
Statements of Stockholders' Equity.....................................................     29
Statements of Cash Flows...............................................................     30
Reconciliation of Net Income (Loss) to Net Cash Provided by (Used in) Operating
  Activities...........................................................................     31
Notes to Financial Statements..........................................................     32

</TABLE>

 
                                       25

<PAGE>   26
 

                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Directors and Stockholders of Advanced Magnetics, Inc.:
 
     We have audited the accompanying balance sheets of Advanced Magnetics, Inc.
as of September 30, 1997 and 1996 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Magnetics, Inc. as
of September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
 
                                            COOPERS & LYBRAND L.L.P.
 
Boston, Massachusetts
November 6, 1997

 
                                       26

<PAGE>   27
 
                            ADVANCED MAGNETICS, INC.
 
                                 BALANCE SHEETS
 

<TABLE>
<CAPTION>
                                                                           SEPTEMBER 30,
                                                                    ---------------------------
                                                                       1997            1996
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................    $10,724,740     $10,805,842
Marketable securities...........................................     27,365,765      23,271,169
Accounts receivable.............................................        546,807         149,235
Inventories.....................................................        113,178         182,166
Prepaid expenses................................................        224,868         131,234
                                                                     ----------      ----------
  Total current assets..........................................     38,975,358      34,539,646
 
Property, plant and equipment:
Land............................................................        360,000         360,000
Buildings.......................................................      4,356,295       4,320,766
Laboratory equipment............................................      7,722,445       7,316,534
Furniture and fixtures..........................................        645,299         553,149
                                                                     ----------      ----------
                                                                     13,084,039      12,550,449
Less -- accumulated depreciation and amortization...............     (7,332,118)     (6,219,579)
                                                                     ----------      ----------
Net property, plant and equipment...............................      5,751,921       6,330,870
 
Other assets....................................................        248,902         195,857
                                                                     ----------      ----------
  Total assets..................................................    $44,976,181     $41,066,373
                                                                     ==========      ==========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................    $   443,925     $   383,335
Accrued expenses................................................      1,059,070         500,365
Income taxes payable............................................         50,128          50,128
                                                                     ----------      ----------
  Total current liabilities.....................................      1,553,123         933,828
 
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 6,740,626 shares as of
  September 30, 1997 and 6,761,612 shares as of September 30,
  1996..........................................................         67,406          67,616
Additional paid-in capital......................................     44,244,558      44,926,502
Retained earnings (deficit).....................................     (6,095,302)     (6,678,476)
Net unrealized gains on marketable securities...................      5,206,396       1,816,903
                                                                     ----------      ----------
  Total stockholders' equity....................................     43,423,058      40,132,545
                                                                     ----------      ----------
     Total liabilities and stockholders' equity.................    $44,976,181     $41,066,373
                                                                     ==========      ==========
</TABLE>

 
    The accompanying notes are an integral part of the financial statements.
 
                                       27

<PAGE>   28
 
                            ADVANCED MAGNETICS, INC.
 
                            STATEMENTS OF OPERATIONS
 

<TABLE>
<CAPTION>
                                                           FOR THE YEARS ENDED SEPTEMBER 30,
                                                      -------------------------------------------
                                                         1997            1996            1995
                                                      -----------     -----------     -----------
<S>                                                   <C>             <C>             <C>
Revenues:
License fees......................................    $ 5,500,000     $        --     $ 5,000,000
Royalties.........................................        363,445          50,000         189,493
Product sales.....................................      1,580,357          12,762       2,120,457
Contract research and development.................         62,920           6,810              --
Interest, dividends and net gains and losses on
  sales of securities.............................      3,495,049       1,761,450       2,287,311
                                                       ----------      ----------      ----------
     Total revenues...............................     11,001,771       1,831,022       9,597,261
 
Costs and expenses:
Cost of product sales.............................        311,678           2,550         425,187
Contract research and development expenses........          8,815              --              --
Company-sponsored research and development
  expenses........................................      9,304,327       9,671,897       8,601,791
Credit for purchase of in-process research and
  development.....................................             --              --        (380,000)
Selling, general and administrative expenses......      1,437,599       1,871,568       1,759,348
                                                       ----------      ----------      ----------
     Total cost and expenses......................     11,062,419      11,546,015      10,406,326
 
Other income:
  Other income....................................        264,800              --              --
  Gain on sale of in vitro product line...........             --              --       3,404,527
                                                       ----------      ----------      ----------
Income (loss) before provision for income taxes
  and cumulative effect of accounting change......        204,152      (9,714,993)      2,595,462
Income tax (benefit) provision....................       (379,022)             --         400,000
                                                       ----------      ----------      ----------
Income (loss) before cumulative effect of
  accounting change...............................        583,174      (9,714,993)      2,195,462
Cumulative effect of accounting change............             --              --         117,540
                                                       ----------      ----------      ----------
Net income (loss).................................    $   583,174     $(9,714,993)    $ 2,313,002
                                                       ==========      ==========      ==========
Net income (loss) per share before cumulative
  effect of accounting change.....................    $      0.09     $     (1.44)    $      0.32
Cumulative effect of accounting change............             --              --            0.02
                                                       ----------      ----------      ----------
Net income (loss) per share.......................    $      0.09     $     (1.44)    $      0.34
                                                       ==========      ==========      ==========
Weighted average number of common and common
  equivalent shares...............................      6,805,232       6,762,748       6,870,839
                                                       ----------      ----------      ----------
</TABLE>

 
    The accompanying notes are an integral part of the financial statements.
 
                                       28

<PAGE>   29
 
                            ADVANCED MAGNETICS, INC.
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
               For the years ended September 30, 1995, 1996, 1997
 

<TABLE>
<CAPTION>
                                                                                                       NET
                                                                                                    UNREALIZED
                                                  COMMON STOCK        ADDITIONAL      RETAINED       GAINS ON        TOTAL
                                              --------------------      PAID-IN       EARNINGS      MARKETABLE    STOCKHOLDERS'
                                               SHARES      AMOUNT       CAPITAL       (DEFICIT)     SECURITIES      EQUITY
                                              ---------    -------    -----------    -----------    ----------    -----------
<S>                                           <C>          <C>        <C>            <C>            <C>           <C>
Balance at September 30, 1994...............  6,712,572    $67,126    $44,660,834    $   723,515            --    $45,451,475
Shares issued in connection with the
  exercise of stock options.................     29,494        295        207,060             --            --        207,355
Shares surrendered in connection with the
  exercise of stock options.................     (1,476)       (15)       (24,588)            --            --        (24,603)
Shares issued in connection with employee
  stock purchase plan.......................     12,823        128        130,666             --            --        130,794
Repurchase of warrants......................         --         --        120,000             --            --        120,000
Net change in unrealized gains on marketable
  securities................................         --         --             --             --    $  873,049        873,049
Net income..................................         --         --             --      2,313,002            --      2,313,002
                                              ---------    -------    -----------    ------------   ----------    -----------
Balance at September 30, 1995...............  6,753,413     67,534     45,093,972      3,036,517       873,049     49,071,072
Shares issued in connection with the
  exercise of stock options.................     26,445        264        185,697             --            --        185,961
Shares surrendered in connection with the
  exercise of stock options.................       (921)        (9)       (18,463)            --            --        (18,472)
Shares issued in connection with employee
  stock purchase plan.......................      8,875         89        141,379             --            --        141,468
Common shares repurchased...................    (26,200)      (262)      (476,083)            --            --       (476,345)
Net change in unrealized gains on marketable
  securities................................         --         --             --             --       943,854        943,854
Net loss....................................         --         --             --     (9,714,993)           --     (9,714,993)
                                              ---------    -------    -----------    ------------   ----------    -----------
Balance at September 30, 1996...............  6,761,612     67,616     44,926,502     (6,678,476)    1,816,903     40,132,545
Shares issued in connection with the
  exercise of stock options.................     42,450        425        271,148             --            --        271,573
Shares surrendered in connection with the
  exercise of stock options.................    (13,757)      (138)      (209,289)            --            --       (209,427)
Shares issued in connection with employee
  stock purchase plan.......................     11,621        116        117,183             --            --        117,299
Common shares repurchased...................    (61,300)      (613)      (860,986)            --            --       (861,599)
Net change in unrealized gains on marketable
  securities................................         --         --             --             --     3,389,493      3,389,493
Net income..................................         --         --             --        583,174            --        583,174
                                              ---------    -------    -----------    ------------   ----------    -----------
Balance at September 30, 1997...............  6,740,626    $67,406    $44,244,558    $(6,095,302)   $5,206,396    $43,423,058
                                              =========    =======    ===========    ============   ==========    ===========
</TABLE>

 
    The accompanying notes are an integral part of the financial statements.
 
                                       29

<PAGE>   30
 
                            ADVANCED MAGNETICS, INC.
 
                            STATEMENTS OF CASH FLOWS
 

<TABLE>
<CAPTION>
                                                           FOR THE YEARS ENDED SEPTEMBER 30,
                                                      -------------------------------------------
                                                         1997            1996            1995
                                                      -----------     -----------     -----------
<S>                                                   <C>             <C>             <C>
Cash flows from operating activities:
Cash received from customers......................    $ 7,043,429     $ 1,330,567     $ 5,380,513
Cash paid to suppliers and employees..............     (9,330,973)    (10,850,727)     (8,920,459)
Dividends and interest received...................      1,441,441       2,099,445       1,876,214
Net proceeds from insurance settlement............        264,800              --              --
Income taxes paid.................................             --         (20,000)       (250,000)
Income tax refund.................................        379,022          10,245              --
                                                       ----------      ----------      ----------
Net cash used in operating activities.............       (202,281)     (7,430,470)     (1,913,732)
 
Cash flows from investing activities:
Proceeds from sales of marketable securities......      9,270,016      10,733,541       1,440,796
Proceeds from notes and bonds maturing............     12,500,000       9,499,911       3,000,000
Purchase of marketable securities.................    (20,380,048)     (2,378,934)     (6,703,475)
Capital expenditures..............................       (533,590)       (466,452)     (1,484,382)
(Increase) decrease in other assets...............        (53,045)        (50,785)        (48,526)
                                                       ----------      ----------      ----------
Net cash provided by (used in) investing
  activities......................................        803,333      17,337,281      (3,795,587)
 
Cash flows from financing activities:
Proceeds from issuances of common stock, net......        179,445         308,957         313,545
Purchase of treasury stock........................       (861,599)       (476,345)             --
                                                       ----------      ----------      ----------
Net cash (used in) provided by financing
  activities......................................       (682,154)       (167,388)        313,545
                                                       ----------      ----------      ----------
Net (decrease) increase in cash and cash
  equivalents.....................................        (81,102)      9,739,423      (5,395,774)
Cash and cash equivalents at beginning of year....     10,805,842       1,066,419       6,462,193
                                                       ----------      ----------      ----------
Cash and cash equivalents at end of year..........    $10,724,740     $10,805,842     $ 1,066,419
                                                       ==========      ==========      ==========
</TABLE>

 
    The accompanying notes are an integral part of the financial statements.
 
                                       30

<PAGE>   31
 
                            ADVANCED MAGNETICS, INC.
 
                      Reconciliation of Net Income (Loss)
             to Net Cash Provided by (Used in) Operating Activities
 

<TABLE>
<CAPTION>
                                                           FOR THE YEARS ENDED SEPTEMBER 30,
                                                      -------------------------------------------
                                                         1997            1996            1995
                                                      -----------     -----------     -----------
<S>                                                   <C>             <C>             <C>
Net income (loss).................................    $   583,174     $(9,714,993)    $ 2,313,002
                                                       ----------     ------------    ------------
Adjustments to reconcile net income (loss) to net
  cash used in operating activities:
Depreciation and amortization.....................      1,112,539       1,076,482       1,007,005
Cumulative effect of accounting change............             --              --        (117,540)
Accretion of U.S. Treasury Notes discount.........       (227,721)        (32,217)        (53,943)
(Increase) decrease in accounts receivable........       (397,572)      1,637,558      (2,231,625)
(Increase) decrease in inventories................         68,988        (126,599)        (55,567)
(Increase) decrease in prepaid expenses...........        (93,634)        (31,892)         13,504
(Increase) decrease in recoverable income taxes...             --          90,117              --
Increase (decrease) in accounts payable and
  accrued expenses................................        619,295        (222,701)        900,925
Increase (decrease) in income taxes payable.......             --         (99,872)        150,000
Net realized (gains) on sales of marketable
  securities......................................     (1,867,350)         (6,353)        (54,966)
Gain on sale of in vitro product line.............             --              --      (3,404,527)
(Credit) for the purchase of in-process research
  and development.................................             --              --        (380,000)
                                                       ----------     ------------    ------------
     Total adjustments............................       (785,455)      2,284,523      (4,226,734)
                                                       ----------     ------------    ------------
Net cash (used in) operating activities...........    $  (202,281)    $(7,430,470)    $(1,913,732)
                                                       ==========     ============    ============
</TABLE>

 
    The accompanying notes are an integral part of the financial statements.
 
                                       31

<PAGE>   32
 
                         NOTES TO FINANCIAL STATEMENTS
 
A.  SUMMARY OF ACCOUNTING POLICIES:
 
     Business
 
     Founded in November 1981, Advanced Magnetics, Inc., a Delaware Corporation
(the "Company") is a biopharmaceutical company engaged in the development and
manufacture of compounds utilizing the Company's core proprietary colloidal
superparamagnetic particle technology and core polysaccharide technology for
magnetic resonance imaging ("MRI") and for polysaccharide directed,
receptor-medicated drug delivery systems. The initial products developed by the
Company are diagnostic imaging agents for use in conjunction with MRI to aid in
the diagnosis of cancer and other diseases. In therapeutics, the Company is
developing targeted drug delivery platforms for the treatment of organ specific
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
commmercialization, lack of marketing and sales history, dependence on key
personnel, market acceptance of products, product liability, protection of
proprietary technology, and compliance with FDA government regulations.
 
     Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
 
     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,
1997 and 1996 were held in a money market account.
 
     Marketable Securities
 
     The Company's current portfolio 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 are recorded as a separate component of
stockholders' equity. 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.
 
     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 income.
 
                                       32

<PAGE>   33
 
     Depreciation and Amortization
 
     Depreciation and amortization are recorded on 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
 
     Revenue is recognized when products are shipped, when contract objectives
are achieved or when research activities are performed. License and royalty
revenues are accrued as earned.
 
     Other Income
 
     Other income of $264,800 was recognized during the fiscal year ended
September 30, 1997 as the result of an insurance settlement for flood damages in
the research and development laboratory in October 1996.
 
     Income Taxes
 
     The provision (benefit) for income taxes includes federal and state income
taxes currently payable 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
 
     Income per share is computed on the basis of the weighted average number of
common and common share equivalents outstanding during each period. Loss per
share is computed on the weighted average number of shares outstanding during
the period.
 
     Reclassifications
 
     Certain amounts from the prior year have been reclassified to conform to
the current year's presentation.
 
B.  SALE OF IN VITRO PRODUCT LINE:
 
     On October 15, 1993, the Company sold its in vitro product line to
PerSeptive Biosystems, Inc. ("PerSeptive") for 151,759 shares of PerSeptive
common stock worth $4,156,674 as of that date, plus an additional earn-out
amount based on PerSeptive's fiscal 1995 revenues. The amount of the earn-out at
September 30, 1995 was $3,404,527, which PerSeptive satisfied by issuing 373,080
shares of PerSeptive common stock The Company recognized pre-tax gains on this
sale of $3,404,527 in fiscal 1995. All shares owned of PerSeptive common stock
were sold by the end of fiscal 1996.
 
C.  MARKETABLE SECURITIES:
 
     The cost and fair value of the marketable securities portfolio at September
30 are as follows:
 

<TABLE>
<CAPTION>
                                           1997            1997            1996            1996
                                        -----------     -----------     -----------     -----------
                                           COST         FAIR VALUE         COST         FAIR VALUE
                                        -----------     -----------     -----------     -----------
    <S>                                 <C>             <C>             <C>             <C>
    U.S. government securities
      Due in one year or less.......    $ 5,000,000     $ 4,998,900     $ 7,510,203     $ 7,481,250
      Due after one through five
         years......................      7,438,569       7,429,650       7,392,785       7,312,500
    Preferred stock.................      2,604,711       3,092,335       3,062,404       3,145,029
    Common stock....................      7,116,089      11,844,880       3,488,874       5,332,390
                                        -----------     -----------     -----------     -----------
                                        $22,159,369     $27,365,765     $21,454,266     $23,271,169
                                        ===========     ===========     ===========     ===========
</TABLE>

 
                                       33

<PAGE>   34
 
     At September 30, 1997, gross unrealized holding gains and gross unrealized
holding losses were $5,344,117 and $137,721 respectively, resulting in a net
unrealized holding gain of $5,206,396. At September 30, 1996, gross unrealized
holding gains and gross unrealized holding losses were $2,020,876 and $203,973
respectively, resulting in a net unrealized holding gain of $1,816,903. For the
fiscal years ended September 30, 1997 and 1996, the net unrealized holding gains
have been recorded as a separate component of stockholders' equity.
 
     At September 30, 1994, the Company recorded a $117,540 unrealized net loss
on the fair value of securities. In the first fiscal quarter ended December 31,
1994, the Company recorded a cumulative effect of the accounting change of
$117,540 including the reversal of a reserve for the carrying value of the
marketable securities.
 
     During the year ended September 30, 1997, gross realized gains and gross
realized losses on the sale of marketable securities were $1,932,504 and
$65,154, respectively, resulting in a net realized gain of $1,867,350. During
the year ended September 30, 1996, gross realized gains and gross realized
losses on the sale of marketable securities were $660,126 and $653,773,
respectively, resulting in a net realized gain of $6,353. During the year ended
September 30, 1995, gross realized gains and gross realized losses on the sale
of marketable securities were $57,394 and $2,428, respectively, resulting in a
net realized gain of $54,966. Proceeds from U.S. treasury notes maturing were
$12,500,000 and $9,499,911 and $3,000,000 in 1997, 1996 and 1995 respectively.
 
     Interest, dividends and net gains (losses) on sales of securities consist
of the following:
 

<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED SEPTEMBER 30
                                                         ----------------------------------------
                                                            1997           1996           1995
                                                         ----------     ----------     ----------
    <S>                                                  <C>            <C>            <C>
    Interest income..................................    $1,385,670     $1,400,597     $1,644,329
    Dividend income..................................       242,029        354,500        588,016
    Net gains on sales of securities.................     1,867,350          6,353         54,966
                                                          ---------      ---------      ---------
    Totals...........................................    $3,495,049     $1,761,450     $2,287,311
                                                          =========      =========      =========
</TABLE>

 
D.  INVENTORIES:
 
     As of September 30, 1997, the Company's inventory balance consisted of
$113,178 in raw materials. As of September 30, 1996, the Company's inventory
balance consisted of $125,144 in raw materials and $57,022 in finished goods.
 
E.  COMMITMENTS:
 
     The Company leases laboratory, office and warehouse space under various
agreements. Rental expense for the years ended September 30, 1997, 1996 and 1995
amounted to $339,311, $340,848, and $320,920, respectively. Future minimum lease
payments for fiscal 1998, 1999, 2000, 2001 and 2002 amount to $469,751,
$417,661, $417,661, $148,800 and $153,600, respectively.
 
F.  ACCRUED EXPENSES:
 
     Accrued expenses consist of the following at September 30:
 

<TABLE>
<CAPTION>
                                                                         1997           1996
                                                                      ----------     ----------
    <S>                                                               <C>            <C>
    Salaries and other compensation...............................    $  183,000     $  195,889
    License and royalty fees......................................       497,307             --
    Clinical trials...............................................       188,288             --
    Professional fees.............................................        56,500         75,638
    Other.........................................................       133,975        228,838
                                                                       ---------      ---------
    Totals........................................................    $1,059,070     $  500,365
                                                                       =========      =========
</TABLE>

 
                                       34

<PAGE>   35
 
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.
 
     The income tax (benefit) provision consisted of the following:
 

<TABLE>
<CAPTION>
                                                            FOR THE YEARS ENDED SEPTEMBER 30,
                                                           ------------------------------------
                                                             1997          1996         1995
                                                           ---------     --------     ---------
<S>                                                        <C>           <C>          <C>
Currently payable:
  Federal..............................................    $(379,022)    $     --     $ 385,000
  State................................................           --           --        15,000
                                                           ----------    ----------   ----------
                                                            (379,022)          --       400,000
                                                           ==========    ==========   ==========
Deferred:
  Federal..............................................           --           --            --
                                                           ----------    ----------   ----------
  State................................................    $(379,022)    $     --     $ 400,000
                                                           ==========    ==========   ==========
</TABLE>

 
     The provisions for income taxes were at different rates than the U.S.
statutory rates for the following reasons:
 

<TABLE>
<CAPTION>
                                                                        FOR THE YEARS ENDED
                                                                           SEPTEMBER 30,
                                                                     --------------------------
                                                                      1997      1996      1995
                                                                     ------     -----     -----
<S>                                                                  <C>        <C>       <C>
U.S. federal statutory tax (benefit) rate........................      34.0%    (34.0%)    34.0%
Dividends received deductions....................................     (31.0)     (0.9)     (5.2)
Prior years income tax refund....................................    (186.1)       --        --
Other, including a prior year tax adjustment.....................      (2.6)      0.1       1.0
Losses without tax benefit.......................................        --      38.2        --
Tax benefit of temporary differences.............................       (--)     (3.4)    (14.4)
                                                                     -------    ------    ------
                                                                        ---      ----      ----
                                                                     (185.7%)      --      15.4%
                                                                     -------    ------    ------
                                                                        ---      ----      ----
</TABLE>

 
     The $379,022 tax benefit recorded in fiscal 1997 is due to refunds of
alternative minimum taxes paid in prior years.
 
     The components of the deferred tax assets and liabilities at September 30,
were as follows:
 

<TABLE>
<CAPTION>
                                                                       1997            1996
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
Assets
  Net operating loss carryforwards..............................    $ 5,133,259     $ 4,834,262
  Research and experimentation tax credit carryforward..........      2,146,627       1,779,972
  Deductible intangibles........................................        121,571         481,360
  Other.........................................................        226,013         539,140
Liabilities
  Property, plant and equipment depreciation....................       (329,162)       (380,212)
  Other.........................................................        (55,206)        (34,283)
                                                                     ----------      ----------
                                                                      7,243,102       7,220,239
  Valuation allowance...........................................     (7,243,102)     (7,220,239)
                                                                     ----------      ----------
Net deferred taxes..............................................    $        --     $        --
                                                                     ==========      ==========
</TABLE>

 
                                       35

<PAGE>   36
 
     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, 1997, the Company had unused net operating loss (NOL)
carryforwards for federal income tax purposes of approximately $12,560,000 which
expire in fiscal 2012. The Company also has federal research and experimentation
credits of approximately $1,880,000 which expire in fiscal 2012.
 
H. STOCK PLANS:
 
     The Company's 1993 Stock Option Plan (the "1993 Stock Plan") provides for
the grant of options to the Company's directors, officers, employees and
consultants to purchase up to an aggregate of 500,000 shares of common stock at
a price equal to the fair market value of the stock at the date of the grant.
The maximum term of the options under the 1993 Stock Plan is ten years. The
number of shares available for future grants at September 30, 1997 was 76,925.
 
     The Company's 1983 Stock Option Plan (the "Plan") does not allow for option
grants after June 1993. The Plan provided for the grant of options to purchase
up to 900,000 shares of common stock at a price equal to the fair market value
of the stock at the date of grant to the Company's employees and mandatory
grants to outside directors upon initial election to the Board of Directors. The
maximum terms of incentive stock options and non-statutory options under the
Plan are ten years and ten years plus thirty days, respectively.
 
     The Company has also granted to certain scientific advisors non-statutory
options to purchase a total of 32,625 shares of common stock at a price equal to
fair market value at the date of grant. As of September 30,1997, 29,625 options
have been exercised.
 
     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
approved. This plan provides for the grant to each non-employee director on
November 5, 1991, and each fifth anniversary thereafter, 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 over a five year period. Under this plan, options to purchase 30,000
shares of common stock at a price of $21.00 per share and an additional 30,000
shares of common stock at a price of $15.25 per share were granted on November
5, 1991 and 1996, respectively. The 1992 Plan also provided for the grant of
options for 5,000 shares to new members of the Board of Directors. A total of
10,000 stock options were granted to new directors during fiscal year 1997 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
approved. This plan provides for the grant to each non-employee director on
November 10, 1992, and each sixth anniversary thereafter 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
over a five year period. Under this plan, options to purchase 30,000 shares of
common stock at a price of $14.50 per share were granted on November 10, 1992.
The 1993 Plan also provided for the grant of options for 5,000 shares to new
members of the Board of Directors. A total of 10,000 stock options were granted
to new directors during fiscal year 1997 under the 1993 Plan. No grants may be
made under this plan after November 10, 2002.
 
     During the fiscal year ended September 30, 1997, the Company's Board of
Directors approved the exchange of stock options by the Company's employees and
directors at the fair market value of the stock at the effective date of the
exchange. This provided for the cancellation of any unexercised stock options
and the reissuance of an equal number of stock options at the new price, with
50% of any previously vested options vesting immediately. The stock options
cancelled were originally issued under the 1983 and 1993 Stock Option Plans and
the 1992 and 1993 Non-Employee Director Stock Option Plans and were reissued
under the 1993 Stock Option Plan. 236,825 options under the 1983 and 1993 Stock
Option Plans were exchanged effective on July 3, 1997 at an exercise price of
$11.50. 110,000 options under the 1992 and 1993 Non-Employee Director Stock
Option Plans were exchanged effective on August 5, 1997 at an exercise price of
$11.125.
 
                                       36

<PAGE>   37
 
     Stock option activity for the years ended September 30, 1997, 1996 and 1995
is as follows:
 

<TABLE>
<CAPTION>
                                               1997                   1996                  1995
                                        -------------------    ------------------    ------------------
                                                   WEIGHTED              WEIGHTED              WEIGHTED
                                                   AVERAGE               AVERAGE               AVERAGE
                                                   EXERCISE              EXERCISE              EXERCISE
                                         SHARES     PRICE      SHARES     PRICE      SHARES     PRICE
                                        --------   --------    -------   --------    -------   --------
    <S>                                 <C>        <C>         <C>       <C>         <C>       <C>
    Outstanding at beginning of
      year............................   407,645    $13.86     426,315    $13.29     374,384    $11.46
    Granted...........................   475,825    $12.17      14,500    $21.37      86,200    $19.12
    Exercised.........................   (42,450)   $ 6.40     (26,445)   $ 7.03     (29,494)   $ 7.03
    Canceled..........................  (380,825)   $16.45      (6,725)   $20.56      (4,775)   $13.28
                                        --------    ------     -------    ------     -------    ------
    Outstanding at end of year........   460,195    $10.66     407,645    $13.86     426,315    $13.29
                                        --------    ------     -------    ------     -------    ------
    Options exercisable at year-end...    98,070    $ 8.01     252,626    $11.82     201,434    $ 9.40
                                        ========    ======     =======    ======     =======    ======
    Weighted average fair value of
      options granted during the
      year............................  $   5.63               $  9.84
                                        ========               =======
</TABLE>

 
     The fair value of each option granted during 1997 and 1996 was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: (1) expected life of 6.0 years (2)
expected volatility of 36% (3) risk-free interest rate of 6.2% and (4) no
dividend yield.
 
     The following table summarizes information about stock options outstanding
and exercisable at September 30, 1997:
 

<TABLE>
<CAPTION>
                                                 OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                                      -----------------------------------------   ------------------------------
                                                        WEIGHTED       WEIGHTED                     WEIGHTED
                                                        AVERAGE        AVERAGE                      AVERAGE
                                        NUMBER         REMAINING       EXERCISE     NUMBER         REMAINING
        RANGE OF EXERCISE PRICES      OUTSTANDING   CONTRACTUAL LIFE    PRICE     EXERCISABLE   CONTRACTUAL LIFE
    --------------------------------  -----------   ----------------   --------   -----------   ----------------
    <S>                               <C>           <C>                <C>        <C>           <C>
    $ 3.33 -- $ 5.00................     34,675            0.4          $ 3.56       34,675          $ 3.56
    $ 5.01 -- $ 7.49................      3,906            3.1          $ 6.50        3,906          $ 6.50
    $ 7.50 -- $11.24................    198,414            8.8          $10.81       28,414          $ 8.93
    $11.25 -- $16.86................    221,650            9.1          $11.63       30,300          $12.06
    $16.87 -- $22.00................      1,550            9.2          $22.00          775          $22.00
                                        -------            ---          ------       ------          ------
    $ 3.33 -- $22.00................    460,195            8.3          $10.66       98,070          $ 8.01
                                        =======            ===          ======       ======          ======
</TABLE>

 
     Employee Stock Purchase Plan:
 
     The Company's 1992 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 ending in 1997, 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 fifth offering under the Purchase Plan ended on May 31, 1997 and
11,621 shares of common stock were purchased by eligible employees at a price of
approximately $10.10 per share. As of September 30, 1997, 56,972 shares have
been issued under this plan.
 
     Had the Company adopted SFAS 123, the weighted average for each purchase
right granted during fiscal 1997 and 1996 would have been $3.68 and $5.72,
respectively.
 
     On December 13, 1996 the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (the "Plan"). The Plan is essentially the same as the Company's
1992 Employee Stock Purchase Plan, and provides for the issuance of 150,000
shares. The Plan was approved by the shareholders of the Company at the annual
meeting of February 4, 1997.
 
                                       37

<PAGE>   38
 
     Pro Forma Disclosures
 
     Had compensation cost for the Company's 1997 and 1996 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income (loss) and net income (loss) per share for 1997 and 1996
would approximate the pro forma amounts below:
 

<TABLE>
<CAPTION>
                                                                        1997            1996
                                                                      --------       -----------
    <S>                                             <C>               <C>            <C>
    Net income (loss).......................        As reported       $583,174       $(9,714,993)
                                                    Pro forma         $276,163       $(9,748,848)
    Net income (loss) per share.............        As reported        $0.09           $(1.44)
                                                    Pro forma          $0.04           $(1.44)
</TABLE>

 
     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'S SAVING 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 $104,943, $110,542, and
$99,751 for 1997, 1996, and 1995, respectively.
 
J.   COMMON STOCK TRANSACTIONS:
 
     On February 11, 1991, Squibb Diagnostics, a division of Bristol-Myers
Squibb Co. purchased a warrant for $950,000 to purchase 600,000 shares of common
stock at $10.92 per share. On August 30, 1994, the Company signed an agreement
to reacquire the development and marketing rights to the MRI contrast agent,
(the Bristol-Myers Agreement) Combidex (AMI-227). As part of the transaction,
Bristol-Myers Squibb, Inc. returned the warrant which was valued at $240,000 to
the Company. In the first quarter of fiscal 1995, the Company and Bristol-Myers
Squibb Co. agreed to modify the agreement. As a result, payments to be made
under the agreement were modified (See Note O). Accordingly, the Company
adjusted the value of the warrant to purchase 600,000 shares of the Company's
common stock by $120,000 in the first quarter of fiscal 1995.
 
     In May 1996, the Board of Directors authorized the purchase of 250,000
shares of the Company's common stock on the open market. Through September 30,
1997, the Company purchased 87,500 shares for $1,337,944 and the shares have
been retired. The Board had previously authorized the purchase of 350,000 shares
of which 24,700 shares were retired through fiscal 1995.
 
K.  PREFERRED STOCK:
 
     The 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 SEGMENTS AND CUSTOMERS:
 
     The Company's operations are located solely within the United States. The
Company is focused principally on developing and manufacturing MRI contrast
agents and drug delivery systems. Accordingly, its revenues are attributable to
one principal business segment. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral. One customer
accounted for 54% of the
 
                                       38

<PAGE>   39
 
Company's revenues in fiscal 1997, while no customer accounted for more than 10%
of the Company's revenues in fiscal 1996. Two customers accounted for 52% and
23% respectively, of the Company's revenues in fiscal 1995.
 
     Revenues from customers and licensees outside the United States were not
significant in fiscal 1997 and 1996. Revenues in fiscal 1995, from customers and
licensees outside of the United States, principally in Europe and Japan,
amounted to 23% of the Company's total revenues.
 
M. LEGAL PROCEEDINGS:
 
     The Company and certain of its officers were sued in an action 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 six of the Company's
patents and on pending applications, and seeks injunctive relief and unspecified
monetary damages. In October 1995, the plaintiff appealed an interlocutory order
of the United States District Court to the United States Court of Appeals for
the Federal Circuit. The plaintiff's appeal is pending and the United States
District Court has administratively closed the case. The plaintiff filed a
related case in the Superior Court of the Commonwealth of Massachusetts. The
Superior Court has dismissed most of the related tort claims on summary
judgment. While the final outcome of these actions cannot be determined, the
Company believes that the plaintiff's claims are without merit and intends to
defend the actions vigorously.
 
N.  AGREEMENTS:
 
     To facilitate the marketing and distribution of its contrast agents, the
Company has entered into strategic relationships with certain established
pharmaceutical companies. These relationships, 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") , the leading marketer of MRI
contrast agents, in the United States; and (iv) Mallinckrodt Inc.
("Mallinckrodt") a leading manufacturer of contrast agents, in the United
States, Canada and Mexico.
 
     On February 1, 1995, the Company entered into an 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 agreement, Berlex paid a
$5,000,000 non-refundable license fee in fiscal 1995. An additional $5,000,000
license fee was received in October 1996 as a result of the FDA's marketing
approval and Berlex's market launch of Feridex I.V. in the United States. In
addition, the company receives payments for manufacturing the product and
royalties on sales.
 
     In fiscal 1991, the Company entered into agreements with Squibb
Diagnostics, granting exclusive world-wide rights (except for Japan, Western
Europe and Brazil) to manufacture and sell two MRI products, AMI-HS and
Combidex. In addition, Squibb Diagnostics received the right to use the
Company's core technology in its own development of other MRI contrast agents.
In fiscal 1994, the Company and Squibb Diagnostics terminated their agreement
with respect to the AMI-HS product. The Company signed an agreement to reacquire
the development and marketing rights to Combidex previously licensed to Squibb
Diagnostics. The Company agreed to pay Bristol-Myers Squibb, Co. $1,000,000 in
two cash payments, of which $500,000 was paid on August 30, 1994 and $500,000
was to be paid upon acceptance of the 1,200 vials of the Combidex product
suitable for worldwide preclinical and clinical studies. Furthermore, the
Company is required to pay up to $2,750,000 in future royalties based on the
Company's sale of Combidex. As part of the transaction, Bristol-Myers Squibb,
Co. returned to the Company a warrant to purchase 600,000 shares of the
Company's common stock, valued at $240,000. The Company recorded a $760,000
expense which represented the value of in-process research and development
reacquired in fiscal 1994. In the first quarter of fiscal 1995, the Company and
Bristol-Myers Squibb Co. agreed that the 1,200 vials of Combidex delivered to
the Company were not acceptable. In addition, they agreed that any future
delivery of Combidex under the agreement will not be required and that the
Company will not be required to make the $500,000 payment.
 
                                       39

<PAGE>   40
 
Accordingly, the Company recorded a credit for $380,000 to the purchase of
in-process research and development and adjusted the value of the warrant by
$120,000 in the first quarter of fiscal 1995.
 
     In 1990, the Company entered into a manufactureing and distribution
agreement with Mallinckrodt granting Mallinckrodt a product license and
co-marketing rights to GastroMARK(R) in the United States, Canada and Mexico.
Under the terms of the agreement, Mallinckrodt paid a $500,000 non-refundable
license fee in fiscal 1997 as a result of the FDA's marketing approval of
Feridex I.V. in the United States. In addition, the company received payments
for manufacturing the product and royalties on sales.
 
     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. During fiscal year 1997, 1996 and 1995, the Company made
milestone payments of $800,000, $725,000, and $350,000 in relation to these
agreements. Future milestone payments are not to exceed $400,000.
 
O.   RELATED PARTY TRANSACTIONS:
 
     During the fiscal years ended September 30, 1997, 1996 and 1995, the
Company paid approximately $58,910, $26,573 and $7,050, respectively, to
Fahnestock & Co. Inc. as commissions on transactions involving its investments
in securities. Mr. Leslie Goldstein, a shareholder and member of the Company's
Board of Directors and the brother of Jerome Goldstein, Chairman of the Board
and CEO of the Company, is employed by SRG Associates, a division of Fahnestock
& Co. Inc., as an investment analyst and advisor.
 
P.  QUARTERLY FINANCIAL DATA -- UNAUDITED:
 
     The following table provides quarterly data for the fiscal years ended
September 30, 1997, and 1996.
 

<TABLE>
<CAPTION>
                                                             FISCAL 1997 QUARTERS ENDED
                                              --------------------------------------------------------
                                              SEPTEMBER 30     JUNE 30      MARCH 31     DEC. 31, 1996
                                              ------------   -----------   -----------   -------------
    <S>                                       <C>            <C>           <C>           <C>
    License fees............................  $         --   $        --   $        --    $  5,500,000
    Royalties...............................        57,541        85,000        95,904         125,000
    Product sales...........................       372,366       394,656       209,793         603,542
    Research and development services.......            --            --            --          62,920
    Interest, dividends and net gains and
      losses on sales of securities.........       984,385       705,323     1,058,895         746,446
                                               -----------   -----------   -----------     -----------
      Total revenues........................     1,414,292     1,184,979     1,364,592       7,037,908
    Cost of product sales...................        60,722        83,436        33,139         143,196
    Operating expenses......................     3,386,242     2,312,148     2,425,778       2,617,758
    Other (income)..........................            --      (264,749)          (51)             --
    Income tax benefit......................            --      (379,022)           --              --
                                               -----------   -----------   -----------     -----------
    Net income (loss).......................  $ (2,032,672)  $  (566,834)  $(1,094,274)   $  4,276,954
                                               ===========   ===========   ===========     ===========
    Net income (loss) per share.............  $      (0.30)  $     (0.08)  $     (0.16)   $       0.63
                                               ===========   ===========   ===========     ===========
</TABLE>

 
                                       40

<PAGE>   41
 

<TABLE>
<CAPTION>
                                                             FISCAL 1996 QUARTERS ENDED
                                              --------------------------------------------------------
                                              SEPTEMBER 30     JUNE 30      MARCH 31     DEC. 31, 1995
                                              ------------   -----------   -----------   -------------
    <S>                                       <C>            <C>           <C>           <C>
    License fees............................  $         --   $        --   $        --    $         --
    Royalties...............................       (75,000)      (25,000)       75,000          75,000
    Product sales...........................            --            --        12,762              --
    Research and development services.......         6,810            --            --              --
    Interest, dividends and net gains and
      losses on sales of securities.........       450,911       470,373       388,307         451,859
                                               -----------   -----------   -----------     -----------
      Total revenues........................       382,721       445,373       476,069         526,859
    Cost of product sales...................            --            --         2,550              --
    Operating expenses......................     2,871,713     3,308,476     2,911,732       2,451,544
                                               -----------   -----------   -----------     -----------
    Net income (loss).......................  $ (2,488,992)  $(2,863,103)  $(2,438,213)   $ (1,924,685)
                                               ===========   ===========   ===========     ===========
    Net income (loss) per share.............  $      (0.37)  $     (0.42)  $     (0.36)   $      (0.28)
                                               ===========   ===========   ===========     ===========
</TABLE>

 
Q.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
 
     The FASB issued Statement No. 128 ("SFAS 128"), "Earnings per Share", which
modifies the way in which earnings per share ("EPS") is calculated and
disclosed. Currently, the Company discloses primary EPS. Upon adoption of this
standard for the first fiscal period ending December 31, 1997, the Company will
disclose basic and diluted EPS. Basic EPS excludes dilution and common stock
equivalents and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period. The
Company believes the implementation of SFAS 128 will not have a material impact
on the earnings per share calculation.
 
     The FASB recently issued Statement No 130 ("SFAS 130"), "Reporting
Comprehensive Income". This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. While not mandating a specific financial
statement format, the Statement requires that an amount representing total
comprehensive income be reported. The Statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods is required for comparative purposes. The Company believes the
implementation of SFAS 130 may have a material impact on results of operations.
 
     The FASB also issued Statement No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information". This Statement, which
supersedes Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise," changes the way public companies report information about segments.
The Statement, which is based on the management approach to segment reporting,
includes requirements to report segment information quarterly and entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenues. The Statement
is effective for periods beginning after December 15, 1997. Restatement for
earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year,
however, in subsequent years, interim period information must be presented on a
comparative basis. The Company is currently evaluating this Statement and its
effect on financial statement disclosures.
 
R.  SUBSEQUENT EVENT:
 
     On October 24, 1997, the Company acquired an 80.7% interest in Kalisto
Biologicals, Inc. ("Kalisto"), an early-stage company that intends to develop,
manufacture and market veterinary and food testing systems and products. Kalisto
has formed a technology and support relationship with Precise Animal
Diagnostics, Inc. of Madison, Wisconsin ("PAD") to manufacture and market PAD's
veterinary testing systems worldwide.
 
                                       41

<PAGE>   42
 

 
                                   PART III
 

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
 
     The information required by this item, with respect to the directors of the
registrant, is incorporated by reference from the Company's definitive proxy
statement in connection with its Annual Meeting of Stockholders to be held on
February 3, 1998, filed with the Commission on December 19, 1997, in the table
under the caption "Election of Directors."
 
THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
 
     Jerome Goldstein, 58, 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 of the
Company from the Company's organization until May 1997. Mr. Goldstein was a
cofounder of Clinical Assays, Inc., serving from 1972 to 1980 as Vice President
and then as President. Mr. Goldstein is the brother of Leslie Goldstein, a
director of the Company, and husband of Marlene Kaplan Goldstein, Secretary of
the Company.
 
     Leonard M. Baum, 44, joined the Company in October 1994 as Senior Vice
President and has been President and Chief Operating Officer since May 1997.
From 1986 to 1994, Mr. Baum was employed as Senior Director, Worldwide
Regulatory Affairs/Drug Safety by Squibb Diagnostics. Mr. Baum is also a member
of the Board of Directors.
 
     Ernest Groman, 52, is a co-founder of the Company and has been Senior Vice
President -- Research since June 1997. From 1994 to 1997, he was Director of
Exploratory Research and from 1981 to 1994 he was a Senior Scientist of the
Company.
 
     Dennis Lawler, 43, joined the Company in February 1989 as Director of
Quality Control and has been Vice President -- 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, 48, joined the Company in April 1986 as a Senior Scientist
and has been Vice President -- 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, 53, joined the Company in May 1996 as Vice President --
Finance. Prior to May 1996, Mr. Matheson was Controller of Diatech Diagnostics,
Inc.
 
     Paula M. Jacobs, 53, 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.
 
     Mark C. Roessel, 47, joined the Company in January 1982 as Director of
Regulatory Affairs and has been Vice President -- Regulatory Affairs since
January 1995. Prior to January 1982, Mr. Roessel was Compliance Manager of the
Clinical Assay Division of Baxter International, Inc.
 
     Marlene Kaplan Goldstein is a founder of the Company and has been Secretary
of the Company since the Company's organization in November 1981.
 

ITEM 11.  EXECUTIVE COMPENSATION:
 
     The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders to be held on February 3, 1998, filed with the Commission on
December 19, 1997, under the captions "Compensation of Directors" and
"Compensation and Other Information Concerning Directors and Officers."
 
                                       42

<PAGE>   43
 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
 
     The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders to be held on February 3, 1998, filed with the Commission on
December 19, 1997, in the table under the caption "Principal Stockholders".
 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
 
     Not applicable.
 
                                       43

<PAGE>   44
 

                                    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. The following financial statements of the
        Company and Independent Auditors' Report are incorporated in Item 8 of
        this report.
 

<TABLE>
         <S>                                                                           <C>

         Report of Independent Accountants
         Balance Sheets at September 30, 1997 and 1996
         Statements of Operations for the Years Ended September 30, 1997, 1996 and
           1995
         Statements of Stockholders' Equity for the Years Ended September 30, 1997,
           1996 and 1995>
         Statements of Cash Flow for the Years Ended September 30, 1997, 1996 and 1995
         Reconciliation of Net Income (Loss) to Net Cash Used in Operating Activities
           for the Years Ended September 30, 1997, 1996 and 1995

         Notes to Financial Statements
</TABLE>

 
     2.    Financial Statement Schedules. Financial statement schedules have
        been omitted because the required information is not present or not
        present in amounts sufficient to require submission of the schedule, or
        because the information required is included in the financial statements
        or the notes thereto.
 
     3.    The exhibits listed in the Exhibit Index immediately preceding the
        Exhibits are filed as a part of this Annual Report on Form 10-K.
 
(b) Reports on Form 8-K:
 
     No reports on Form 8-K were filed by the Company during the fiscal quarter
     ended September 30, 1997.
 
                                       44

<PAGE>   45
 

 
                                  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/ JERMONE GOLDSTEIN
 
                                            ------------------------------------
                                            Jerome Goldstein, Chief Executive
                                              Officer,
                                            Chairman of the Board of Directors
                                              and Treasurer
December 22, 1997

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

<TABLE>
<CAPTION>
                NAME                                  TITLE
- -------------------------------------  -----------------------------------
<C>                                    <S>                                  <C>
        /s/ JEROME GOLDSTEIN           Chief Executive Officer, Chairman    December 22, 1997
- -------------------------------------  of the Board of Directors and
          Jerome Goldstein             Treasurer (principal executive and
                                       financial officer)
         /s/ JAMES MATHESON            Vice President-Finance (principal    December 22, 1997
- -------------------------------------  accounting officer)
           James Matheson
 
         /s/ LEONARD M. BAUM           Director                             December 22, 1997
- -------------------------------------
           Leonard M. Baum
 
           /s/ THOMAS COOR             Director                             December 22, 1997
- -------------------------------------
             Thomas Coor
 
        /s/ LESLIE GOLDSTEIN           Director                             December 22, 1997
- -------------------------------------
          Leslie Goldstein
 
         /s/ JOSEPH LASSITER           Director                             December 22, 1997
- -------------------------------------
           Joseph Lassiter
 
         /s/ MICHAEL LOBERG            Director                             December 22, 1997
- -------------------------------------
           Michael Loberg
 
       /s/ RICHARD L. MCINTIRE         Director                             December 22, 1997
- -------------------------------------
         Richard L. McIntire
 
        /s/ EDWARD B. ROBERTS          Director                             December 22, 1997
- -------------------------------------
          Edward B. Roberts
 
         /s/ ROGER E. TRAVIS           Director                             December 22, 1997
- -------------------------------------
           Roger E. Travis
 
      /s/ GEORGE M. WHITESIDES         Director                             December 22, 1997
- -------------------------------------
        George M. Whitesides
</TABLE>

 
                                       45

<PAGE>   46
 

                                 EXHIBIT INDEX
 

<TABLE>
<CAPTION>
     EXHIBIT
      NUMBER                                  DESCRIPTION
    ----------   ---------------------------------------------------------------------
    <C>          <S>                                                                      <C>
      3.1(1)     Certificate of Incorporation of the Company, as amended.
      3.2(2)     By-Laws of the Company, as amended.
     10.1(6)     1983 Stock Option Plan of the Company, as amended on November 13,
                 1990.
     10.2(7)     1987 Employee Stock Purchase Plan.
     10.3(7)     1992 Employee Stock Purchase Plan.
     10.4(7)     1992 Non-Employee Director Stock Option Plan.
     10.5(9)     1993 Stock Plan.
     10.6(9)     1993 Non-Employee Director Stock Option Plan.
     10.7(13)    1997 Employee Stock Purchase Plan.
     10.8(3)     Technology Agreement dated January 21, 1983 between the Company and
                 Corning Glass Works (now Ciba Corning Diagnostics Corp.)
                 (confidential treatment previously granted).
     10.9(2)     Agreements between the Company and ML Technology Ventures, L.P. dated
                 as of March 23, 1987 (confidential treatment previously granted).
     10.10(2)    Clinical Testing, Supply and Marketing Agreement between the Company
                 and Guerbet, S.A. dated May 22, 1987 (confidential treatment
                 previously granted).
     10.11(4)    Clinical Testing, Supply and Marketing Agreement between the Company
                 and Eiken Chemical Co., Ltd., dated August 30, 1988 (confidential
                 treatment previously granted).
     10.12(5)    Contrast Agent Agreement dated between the Company and Guerbet, S.A.
                 dated September 29, 1989 (confidential treatment previously granted).
     10.13(6)    Contrast Agent Agreement between the Company and Eiken Chemical Co.,
                 Ltd. dated March 27, 1990 (confidential treatment previously
                 granted).
     10.14(6)    Amendment to Clinical Testing, Supply and Marketing Agreement between
                 the Company and Eiken Chemical Co., Ltd., dated September 29, 1990
                 (confidential treatment previously granted).
     10.15(6)    License, Supply and Marketing Agreement between the Company and
                 Mallinckrodt Medical, Inc., dated June 28, 1990 (confidential
                 treatment previously granted).
     10.16(6)    Agreement of Amendment between the Company and ML Technology
                 Ventures, L.P. dated as of June 28, 1990.
     10.17(7)    Technology License Agreement between the Company and Squibb
                 Diagnostics, dated February 5, 1991 (confidential treatment
                 previously granted).
     10.18(7)    AMI-227 License Agreement between the Company and Squibb Diagnostics,
                 dated February 5, 1991 (confidential treatment previously granted).
     10.19(7)    AMI-HS License Agreement between the Company and Squibb Diagnostics,
                 dated February 5, 1991 (confidential treatment previously granted).
     10.20(7)    Warrant Purchase Agreement between the Company and Squibb
                 Diagnostics, dated February 11, 1991.
     10.21(7)    Purchase Agreement between the Company and ML Technology.
     10.22(7)    Agreement of Amendment to Clinical Testing, Supply and Marketing
                 Agreement between the Company and Guerbet, S.A., dated August 13,
                 1990.
     10.23(8)    Asset Purchase Agreement dated as of October 15, 1993 by and between
                 the Company and PerSeptive Biosystems, Inc.
     10.24(10)   License, Supply and Marketing Agreement dated September 27, 1993
                 between the Company and Sterling (confidential treatment previously
                 granted).
     10.25(10)   Termination Agreement dated November 8, 1993 between the Company and
                 Squibb Diagnostics (confidential treatment previously granted).
     10.26(10)   Amendment to License Agreement dated November 8, 1993 between the
                 Company and Squibb Diagnostics (confidential treatment previously
                 granted).
</TABLE>

 
                                       46

<PAGE>   47
 

<TABLE>
<CAPTION>
     EXHIBIT
      NUMBER                                  DESCRIPTION
    ----------   ---------------------------------------------------------------------
    <C>          <S>                                                                      <C>
     10.27(11)   Termination Agreement dated August 30, 1994 between the Company and
                 Bristol-Myers Squibb Co.
     10.28(12)   License and marketing agreement between the Company and Berlex
                 Laboratories, Inc. dated as of February 1, 1995.
     10.29(12)   Supply Agreement between the Company and Berlex Laboratories, Inc.
                 dated as of February 1, 1995.
     10.30       Lease and Lease Agreement between the Company and Carnegie Center
                 Associates dated September 6, 1994.
     10.31       Lease between Silver Lake Realty Trust and Kalisto Biologicals, Inc.
                 dated October 24, 1997.
     11.1        Computation of earnings per share.
     23.1        Consent of Coopers & Lybrand L.L.P., independent accountants.
     27          Financial Data Schedule.
</TABLE>

 
 (1) Incorporated herein by reference to the exhibits to the Company's
     Registration Statement on Form S-8 (File No. 33-13953).
 
 (2) 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.
 
 (3) Incorporated herein by reference to the exhibits to the Company's
     Registration Statement on Form S-1 (File No. 33-5312).
 
 (4) Incorporated herein by reference to the exhibits to the Company's Annual
     Report on Form 10-K for the fiscal year ended September 30, 1988.
 
 (5) Incorporated herein by reference to the exhibits to the Company's Annual
     Report on Form 10-K for the fiscal year ended September 30, 1989.
 
 (6) Incorporated herein by reference to the exhibits to the Company's Annual
     Report on Form 10-K for the fiscal year ended September 30, 1990.
 
 (7) Incorporated herein by reference to the exhibits to the Company's Annual
     Report on Form 10-K for the fiscal year ended September 30, 1991.
 
 (8) Incorporated herein by reference to the exhibits to the Company's Current
     Report on Form 8-K dated October 15, 1993.
 
 (9) Incorporated herein by reference to the exhibits to the Company's
     definitive proxy statement for the fiscal year ended September 30, 1992.
 
(10) Incorporated herein by reference to the exhibits to the Company's Annual
     Report on Form 10-K, as amended, for the fiscal year ended September 30,
     1993.
 
(11) Incorporated herein by reference to the exhibits to the Company's Annual
     Report on Form 10-K, for the fiscal year ended September 30, 1994.
 
(12) Incorporated herein by reference to the exhibits to the Company's Quarterly
     Report on Form 10-Q, for the fiscal quarter ended December 31, 1994.
 
(13) Incorporated herein by reference to the exhibits to the Company's
     definitive Proxy Statement for the fiscal year ended September 30, 1996.
 
                                       47





<PAGE>   1
                                                                   Exhibit 10.30




                            LEASE AND LEASE AGREEMENT


                                     Between


                           CARNEGIE CENTER ASSOCIATES

                                  The Landlord


                                       And


                            ADVANCED MAGNETICS, INC.

                                   The Tenant


                             For Leased Premises In


                               104 Carnegie Center
                              Princeton, New Jersey

                                September 6, 1994



<PAGE>   2






                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                                                              Page
                                                                                              ----


<S>                                                                                             <C>
1 Definitions....................................................................................1

2 Lease Of The Leased Premises...................................................................1

3 Rent...........................................................................................1

4 Term...........................................................................................2

5 Preparation Of The Leased Premises.............................................................3

6 Options........................................................................................4

7 Use And Occupancy..............................................................................5

8 Utilities, Services, Maintenance And Repairs...................................................7

9 Allocation Of The Expenses Of Utilities, Services, Maintenance, Repairs And Taxes..............8

10 Computation And Payment Of Allocated Expenses Of Utilities And Capital Expenditures...........9

11 Leasehold Improvements, Fixtures And Trade Fixtures..........................................12

12 Alterations, Improvements And Other Modifications By The Tenant..............................13

13 Landlord's Rights Of Entry And Access........................................................14

14 Liabilities And Insurance Obligations........................................................15

15 Casualty Damage To Building Or Leased Premises...............................................18

16 Condemnation.................................................................................19

17 Assignment Or Subletting By Tenant...........................................................19
</TABLE>




<PAGE>   3



<TABLE>
<S>                                                                                             <C>
18 Signs, Displays And Advertising..............................................................23

19 Quiet Enjoyment..............................................................................23

20 Relocation...................................................................................23

21 Surrender....................................................................................24

22 Events Of Default............................................................................24

23 Rights And Remedies..........................................................................25

24 Termination Of The Term......................................................................28

25 Mortgage And Underlying Lease Priority.......................................................29

26 Transfer By Landlord.........................................................................29


27 Indemnification..............................................................................30

28 Parties' Liability...........................................................................31

29 Security Deposit.............................................................................33

30 Representations..............................................................................33

31 Reservation In Favor Of Tenant...............................................................34

32 Tenant's Certificates And Mortgagee Notice Requirements......................................34

33 Waiver Of Jury Trial And Arbitration.........................................................36

34 Severability.................................................................................36

35 Notices......................................................................................36

36 Captions.....................................................................................36

37 Counterparts.................................................................................36
</TABLE>



                                      -ii-



<PAGE>   4

<TABLE>
<S>                                                                                             <C>
38 Applicable Law...............................................................................37

39 Exclusive Benefit............................................................................37

40 Successors...................................................................................37

41 Amendments...................................................................................37

42 Waiver.......................................................................................37

43 Course Of Performance........................................................................37

44 Landlord's Concessions.......................................................................37
</TABLE>



                                TABLE OF EXHIBITS


<TABLE>
<CAPTION>
                                                                               Exhibit
                                                                               -------

<S>                                                                               <C>
Leased Premises Floor Space Diagram........................................       A

Property Description.......................................................       B

Work Letter................................................................       C

Building Rules and Regulations.............................................       D

Definitions and Index of Definitions.......................................       E

Acknowledgment and Amendment...............................................       F
</TABLE>











                                     -iii-

<PAGE>   5






       LEASE AND LEASE AGREEMENT, dated as of September 6, 1994, between
CARNEGIE CENTER ASSOCIATES, a New Jersey general partnership, with offices at
Suite 100, 210 Carnegie Center, Princeton, New Jersey 08540 (the "Landlord"),
and ADVANCED MAGNETICS, INC., a Delaware corporation, with its principal office
at 61 Mooney Street, Cambridge, Massachusetts 02138 (the "Tenant").

       Subject to all the terms and conditions set forth below, the Landlord and
the Tenant hereby agree as follows:

       1      DEFINITIONS. Certain terms and phrases used in this Agreement
(generally those whose first letters are capitalized) are defined in Exhibit E
attached hereto and, as used in this Agreement, they shall have the respective
meanings assigned or referred to in that exhibit.

       2      LEASE OF THE LEASED PREMISES.

              2.1 The Landlord shall, and hereby does, lease to the Tenant, and
the Tenant shall, and hereby does, accept and lease from the Landlord, the
Leased Premises during the Term. The Leased Premises consist of 5,174 square
feet of gross rentable floor space on the second floor of 104 Carnegie Center,
as more fully described in the definition of Leased Premises set forth in
Exhibit E attached hereto.

              2.2 The Landlord shall, and hereby does, grant to the Tenant, and
the Tenant shall, and hereby does, accept from the Landlord, the non-exclusive
right to use the Common Facilities during the Term for itself, its employees,
other agents and Guests in common with the Landlord, any tenants of Other Leased
Premises, any of their respective employees, other agents and guests and such
other persons as the Landlord may, in the Landlord's sole discretion, determine
from time to time.

       3      RENT.

              3.1 The Tenant shall punctually pay the Rent for the Leased
Premises for the Term to the Landlord in the amounts and at the times set forth
below, without bill or other demand and without any offset, deduction or, except
as may be otherwise specifically set forth in this Agreement, abatement
whatsoever.

              3.2 The Basic Rent for the Leased Premises during the Initial Term
shall be at the rate per year set forth below:

                   Period                               Annual Basic Rental Rate
                   ------                               ------------------------

       Commencement Date through the                           $117,449.80
       end of Lease Year 1

                Lease Year 2                                   $120,036.80




<PAGE>   6

The annual rate of Basic Rent for the Leased Premises during any Renewal Term
shall be as set forth in subsection 6.3 of this Agreement for the respective
Renewal Term.

              3.3    The Tenant shall punctually pay the applicable Basic Rent
in equal monthly installments in advance on the first day of each month during
the Term, with the exception of Basic Rent for the first full calendar month of
the Initial Term and for any period of less than a full calendar month at the
beginning of the Term. The Tenant shall pay the Basic Rent for the first full
calendar month of the Initial Term upon execution and delivery of this
Agreement. The Tenant shall punctually pay the Basic Rent for a period of less
than a full calendar month at the beginning of the Term on the Commencement
Date.

              3.4    The Basic Rent and the Additional Rent for any period of
less than a full calendar month shall be prorated on a per diem basis within the
partial month. In the event that any installment of Basic Rent cannot be
calculated by the time payment is due, such portion as is then known or
calculable shall be then due and payable; and the balance shall be due upon the
Landlord's giving notice to the Tenant of the amount of the balance due.

              3.5    The Additional Rent for the Leased Premises during the Term
shall be promptly paid by the Tenant in the respective amounts and at the
respective times set forth in this Agreement.

              3.6    That portion of any amount of Rent or other amount due
under this Agreement which is not paid on the day it is first due shall incur a
late charge equal to the sum of: (i) five percent of that portion of any amount
of Rent or other amount due under this Agreement which is not paid on the day it
is first due and (ii) interest on that portion of any amount of Rent or other
amount due under this Agreement which is not paid on the day it is first due at
the Base Rate(s) in effect from time to time plus two additional percentage
points from the day such portion is first due through the day of receipt thereof
by the Landlord. Any such late charge due from the Tenant shall be due
immediately.

       4      TERM.

              4.1    The Initial Term shall commence on the Commencement Date
and shall continue for two years from the beginning of the Initial Year, unless
sooner terminated in accordance with section 24 of this Agreement. The Term
shall commence on the Commencement Date and shall continue until the later of
the conclusion of the Initial Term or the conclusion of any Renewal Term, unless
sooner terminated in accordance with section 24 of this Agreement.

              4.2    Unless one or more of the conditions contemplated by
subsection 4.3 of this Agreement occurs, the Commencement Date shall be the
later of:

                     4.2.1  the Target Date; or



                                      -2-


<PAGE>   7

                     4.2.2  the date that the last of each of the following
conditions set forth in this subsection 4.2.2 of the Agreement that is
specifically applicable shall have occurred:

                            4.2.2.1   if the Leased Premises is being prepared
exclusively by contractors selected and retained by the Landlord, the date the
Leased Premises can first be legally occupied for its intended use;

                            4.2.2.2   preparation of the Leased Premises in
accordance with the Tenant Plan as it pertains to repainting and recarpeting is
substantially completed ;

                            4.2.2.3   the Landlord can deliver actual and
exclusive possession of the Leased Premises, free of rubbish and debris, to the
Tenant (except for any contractors not selected and retained by the Landlord and
their rubbish and debris).

              4.3    In the event one or more of the conditions contemplated by
this subsection 4.3 of the Agreement occurs, notwithstanding anything to the
contrary set forth in subsection 4.2 of this Agreement, the Commencement Date
shall be the earliest applicable date specified below:

                     4.3.1  the earliest date the Tenant takes any of the
following actions shall be the Commencement Date in the event the Tenant takes
possession of, occupies or moves any furniture, furnishings equipment (with the
exception of equipment required for telecommunications hook-ups), supplies or
other possessions into, the Leased Premises or any portion thereof earlier than
the date otherwise determined in accordance with subsection 4.2 of this
Agreement;

                     4.3.2  the date that the last of the conditions set forth
in subsection 4.2.2 of this Agreement that is specifically applicable shall have
occurred if (i) the Tenant shall have requested the Landlord or any contractors
selected and retained by the Landlord to complete their work as it pertains to
repainting and recarpeting before the Target Date and (ii) they shall have done
so.

              4.4    Once it is ascertained in accordance with subsections 4.2
and 4.3 of this Agreement, the Landlord shall give prompt notice of the
Commencement Date to the Tenant; and if the Tenant does not object thereto by
notice given to the Landlord within 10 days of the Landlord's notice, the date
set forth in the Landlord's notice shall thereafter be conclusively presumed to
be the Commencement Date.

       5      PREPARATION OF THE LEASED PREMISES.

              5.1    [This subsection intentionally left blank.]

              5.2    [This subsection intentionally left blank.]

              5.3    If, at or prior to the execution and delivery of this
Agreement, the Tenant shall not have requested the Landlord in writing to
provide the Tenant Plan, the Tenant shall deliver the complete Tenant Plan as it
pertains to repainting and recarpeting to the Landlord not 



                                      -3-



<PAGE>   8

later than the Tenant Plan Due Date and the complete Tenant Plan as it pertains
to other work to the Landlord at the Tenant's convenience. The Tenant Plan shall
be the Tenant's expense.

              5.4 Within three days after receipt of each of the Tenant Plans
contemplated by subsection 5.3 of this Agreement, the Landlord shall give
notice* to the Tenant of the Landlord's price to the Tenant to supply or
perform, or both, the work contemplated by the respective Tenant Plan being
provided by the Landlord or the Landlord's contractors. Such price shall include
15% of the Landlord's contractors' aggregate price as the Landlord's general
contracting fee and shall be net of any credit for work being provided by the
Landlord without charge to the Tenant in accordance with subsection 44.1 of this
Agreement. If acceptable to the Tenant, the Tenant shall sign a copy of the
notice and return it to the Landlord, together with payment of 33-1/3% of such
net price, within three days after it was given authorizing the Landlord and the
Landlord's contractors to supply or perform the work contemplated by both the
respective Tenant Plan and the notice at the net price set forth in the
respective notice. The Tenant shall pay the balance of such net price to the
Landlord in proportion to the progress of such work, as and when billed by the
Landlord at convenient intervals, with payment of any remaining final balance
due from the Tenant upon completion of such respective work which, to the extent
the Tenant Plan pertains to repainting and recarpeting, the Landlord shall use
its best efforts to complete by the Target Date and which, in the case of other
work, shall be completed as soon as reasonably practicable after receipt of the
related Tenant Plan and notice contemplated above.

       6      OPTIONS.

              6.1 If, prior to the respective date of exercise thereof, (a)(i)
no Event of Default shall have occurred or (ii) if an Event of Default shall
have occurred, the Tenant shall have previously cured it in full or the Landlord
shall have waived it and (b) there shall not have been a History of Recurring
Events of Default, the Tenant shall have two options, exercisable exclusively at
the times and in the manner set forth below in subsection 6.2 of this Agreement,
to extend the Term for one additional period of one year's duration per option.
The respective options and the respective periods to which each option relates
shall be consecutive and, if the respective option is properly exercised, the
respective period to which it relates shall commence upon the end of the
Expiring Term. Each such option is an "Option to Renew."

              6.2 In the event the Tenant desires to exercise the next available
Option to Renew, the Tenant shall do so exclusively by giving timely notice
thereof to the Landlord no earlier than nine, and no later than six, months
prior to the end of the Expiring Term. In the event the Tenant fails timely to
exercise any Option to Renew, that option to Renew and any subsequent Options to
Renew shall thereupon expire.

              6.3 The Basic Rent for the Leased Premises during any Renewal Term
shall be at the rate per year set forth below:





- ------------------------
* in the form attached hereto as Exhibit F, entitled "Acknowledgment & 
  Amendment."







                                      -4-


<PAGE>   9

                     Period                          Annual Basic Rental Rate
                     ------                          ------------------------

       Lease Year 3 (Renewal Term                           $123,917.30
       Appurtenant to first Option to Renew)

       Lease Year 4 (Renewal Term                           $127,797.80
       Appurtenant to second option to Renew)


              6.4    In the event the Tenant assigns this Agreement or sublets,
or licenses the use or occupancy of, the Leased Premises or any portions thereof
other than in accordance with subsection 17.6 of this Agreement, or attempts to
do so:

                     6.4.1  any Option to Renew which the Tenant has theretofore
properly exercised with respect to a Renewal Term that has not yet actually
commenced shall be rescinded, if the Landlord so elects by notice to the Tenant,
to the same extent as if it had not been exercised at all; and

                     6.4.2  any Option to Renew or any other type of option or
optional right exercisable by the Tenant not theretofore timely and otherwise
properly exercised by the Tenant shall thereupon expire.

       7      USE AND OCCUPANCY.

              7.1    The Tenant shall continuously occupy and use the Leased
Premises during the Term exclusively as a general business, sales and
administrative office for its business of manufacturing pharmaceutical products.

              7.2    In connection with the Tenant's use and occupancy of the
Leased Premises and use of the Common Facilities, the Tenant shall observe, and
the Tenant shall cause the Tenant's employees, other agents and Guests to
observe, each of the following:

                     7.2.1  the Tenant shall not do, or permit or suffer the
doing of, anything which might have the effect of creating not insignificantly
increased risk of, or damage from, fire, explosion or other casualty;

                     7.2.2  the Tenant shall not do, or permit or suffer the
doing of, anything which would have the effect of (a) increasing any premium for
any liability, property, casualty or excess coverage insurance policy otherwise
payable by the Landlord or any tenant of Other Leased Premises or (b) making any
such types or amounts of insurance coverage unavailable or less available to the
Landlord or any tenant of Other Leased Premises;

                     7.2.3  to the extent they are not inconsistent with this
Agreement, the Tenant and the Tenant's employees, other agents and Guests shall
comply with the Building Rules and Regulations attached hereto as Exhibit D, and
with any changes made therein by the Landlord if, with respect to any such
changes, the Landlord shall have given notice of the 



                                      -5-


<PAGE>   10

particular changes to the Tenant and such changes shall not materially adversely
affect the conduct of the Tenant's business in the Leased Premises and shall
apply to all tenants of Other Leased Premises generally;

                     7.2.4  the Tenant and the Tenant's employees, other agents
and Guests shall not create, permit or continue any Nuisance in or around the
Carnegie Center Complex, the Leased Premises, the Other Leased Premises, the
Building, the common Facilities and the Property;

                     7.2.5  The Tenant and the Tenant's employees, other agents
and Guests shall not permit the Leased Premises to be regularly occupied by more
than one individual per 200 square feet of usable floor space of the Leased
Premises;

                     7.2.6  the Tenant and the Tenant's employees, other agents
and Guests shall comply with all Federal, state and local statutes, ordinances,
rules, regulations and orders as they pertain to the Tenant's use and occupancy
of the Leased Premises, to the conduct of the Tenant's business and to the use
of the common Facilities, except that this subsection shall not require the
Tenant to make any structural changes that may be required thereby that are
generally applicable to the Building as a whole;

                     7.2.7  the Tenant and the Tenant's employees, other agents
and Guests shall comply with the requirements of the Board of Fire underwriters
(or successor organization) and of any insurance carriers providing liability,
property, casualty or excess insurance coverage regarding the Property, the
Building, the Common Facilities or any portions thereof, any other improvements
on the Property and the Carnegie Center Complex, except that this subsection
shall not require the Tenant to make any structural changes that may be required
thereby that are generally applicable to the Building as a whole;

                     7.2.8  the Tenant and the Tenant's employees, other agents
and Guests shall not bring or discharge any substance (solid liquid or gaseous),
or conduct any activity, in or on the Carnegie Center Complex, the Property, the
Building, the Common Facilities or the Leased Premises that shall have been
identified by any Federal, state or local statute (including, without limiting
the generality of the foregoing, the Spill Compensation and Control Act (58
N.J.S.A. ss.23.11 ET SEQ.) and the Environmental Cleanup Responsibility Act (13
N.J.S.A. ss.1 K-6 ET SEQ.), as they may be amended), ordinance, rule, regulation
or order as toxic or hazardous to health or to the environment;

                     7.2.9  the Tenant and the Tenant's employees, other agents
and Guests shall not draw electricity in the Leased Premises in excess of the
rated capacity of the electrical conductors and safety devices including,
without limiting the generality of the foregoing, circuit breakers and fuses, by
which electricity is distributed to and throughout the Leased Premises and,
without the prior written consent of the Landlord in each instance, shall not
connect any fixtures, appliances or equipment to the electrical distribution
system serving the Building and the Leased Premises other than typical
professional office equipment such as minicomputers, microcomputers,
typewriters, copiers, telephone systems, coffee machines and table top 


                                      -6-



<PAGE>   11

microwave ovens, none of which, considered individually and in the aggregate,
overall and per fused or circuit breaker protected circuit, shall exceed the
above limits;

                     7.2.10 on a timely basis the Tenant shall pay directly and
promptly to the respective taxing authorities any taxes (other than Taxes)
charged, assessed or levied exclusively on the Leased Premises or arising
exclusively from the Tenant's use and occupancy of the Leased Premises; and

                     7.2.11 the Tenant shall not initiate any appeal or contest
of any assessment or collection of Taxes for any period without, in each
instance, the prior written consent of the Landlord which, without being deemed
unreasonable, the Landlord may withhold if the Building was not 90% occupied by
paying tenants throughout that period or if the Tenant is not joined by tenants
of Other Leased Premises that leased throughout that period, and that are then
leasing, at least 80% of all Other Leased Premises, determined by their gross
rentable floor space.

       8      UTILITIES, SERVICES, MAINTENANCE AND REPAIRS.

       8.1    The Landlord shall provide or arrange for the provision of:

                     8.1.1  such maintenance and repair of the Building (except
the Leased Premises and Other Leased Premises); the common Facilities; and the
heating, ventilation and air conditioning systems, any plumbing systems and the
electrical systems in the Building, the common Facilities, the Leased Premises
and other Leased Premises as is necessary to keep the same in good order and
operational condition;

                     8.1.2  such garbage removal from the Building and the
Common Facilities; and such janitorial services for the Building, the Leased
Premises and Other Leased Premises as is customarily provided for first class
office buildings in the immediate area;

                     8.1.3  water to the Building and, if the appropriate
plumbing has been installed therein, the Leased Premises and Other Leased
Premises;

                     8.1.4  sewage disposal for the Building;

                     8.1.5  passenger elevator service for the Building;

                     8.1.6  snow clearance from, and sweeping of, Parking
Facilities, sidewalks and private access roads which are part of the Property or
the Common Facilities; and

                     8.1.7  the maintenance of landscaping which is part of the
Property or the Common Facilities.

              8.2    The Landlord shall provide or arrange for the provision of:

                     8.2.1  such maintenance and repair of the Leased Premises,
except for refinishing walls and wall treatments, base, ceilings, floor
treatments and doors in general from 



                                      -7-



<PAGE>   12

time to time or for gouges, spots, marks, damage or defacement caused by anyone
other than the Landlord, its employees and other agents, and except for the
Tenant's furniture, furnishings, equipment and other property;

                     8.2.2  such maintenance and repair of the Other Leased
Premises, except for refinishing walls and wall treatments, base, ceilings,
floor treatments and doors in general from time to time or for gouges, spots,
marks, damage or defacement caused by anyone other than the Landlord, its
employees and other agents, and except for the respective tenants' furniture,
furnishings, equipment and other property;

                     8.2.3  the electricity required for the operation of the
Building, the Property and the Common Facilities during Regular Business Hours
and, on a reduced service basis, during other than Regular Business Hours; and,
at all times, the electricity required for the Leased Premises and Other Leased
Premises;

                     8.2.4  such heat, ventilation and air conditioning for the
Building, the Leased Premises and Other Leased Premises as is customarily
provided for first class office buildings in the immediate area for the
comfortable use of the Building during Regular Business Hours; and

                     8.2.5  heated water to the Building (except the Leased
Premises and other Leased Premises, unless the appropriate plumbing, fixtures
and hot water heating units have been installed therein).

              8.3    Except as specifically set forth in subsections 8.1 and 
8.2.1 of this Agreement, the Tenant shall maintain and repair the Leased
Premises and keep the Leased Premises in as good condition and repair,
reasonable wear and use excepted, as the Leased Premises are upon the completion
of any improvements contemplated by section 5 of this Agreement.

       9      ALLOCATION OF THE EXPENSES OF UTILITIES, SERVICES, MAINTENANCE, 
REPAIRS AND TAXES.

              9.1    Tenant Electric Charges for periods other than Regular
Business Hours shall be borne by the Tenant.

              9.2    The Tenant shall not bear any portion of the operational
Expenses and Taxes incurred during the Term.

       10     COMPUTATION AND PAYMENT OF ALLOCATED EXPENSES OF UTILITIES AND
CAPITAL EXPENDITURES.

              10.1   The Tenant shall promptly pay the following additional
amounts to the Landlord at the respective times set forth below:

                     10.1.1 commencing with the first day of the first month
after the Landlord gives any notice contemplated by subsection 10.9 of this
Agreement to the Tenant and 




                                      -8-


<PAGE>   13

continuing on the first day of each month thereafter until the earlier of (a)
the end of the Term or (b) the last month of the useful life set forth in the
respective notice, one-twelfth of the Tenant's Share of any Annual Amortized
Capital Expenditure, computed in accordance with subsection 10.9 of this
Agreement;

                     10.1.2 promptly as and when billed therefor by the
Landlord, Tenant Electric Charges for periods other than Regular Business Hours;
and

                     10.1.3 promptly as and when billed therefor by the
Landlord, the amount of any expense which would otherwise fall within the
definition of Operational Expenses, but which is specifically paid or incurred
by the Landlord for operation and maintenance of the Building, the Common
Facilities or the Property outside Regular Business Hours at the specific
request and for the sole benefit of the Tenant or the amount of any expenditure
incurred for maintenance or repair of damage to the Building, the Common
Facilities, the Property, the Leased Premises or the Other Leased Premises
caused directly or indirectly, in whole or in part, by the active or passive
negligence or intentional act of the Tenant or any of its employees, other
agents or Guests.

              10.2   "Operational Expenses" means all expenses paid or incurred
by the Landlord in connection with the operation and maintenance of the
Property, the Building, the Common Facilities and any other improvements on the
Property (other than Taxes, Capital Expenditures (which are separately allocated
to the Tenant in accordance with subsection 10.1.1 of this Agreement) and those
expenses contemplated by subsections 10.1.2 and 10.1.3 of this Agreement)
including, without limiting the generality of the foregoing:

                     10.2.1 Utilities Expenses;

                     10.2.2 the expense of providing the services, maintenance
and repairs contemplated by subsections 8.1, 8.2.1 and 8.2.2 of this Agreement,
whether furnished by the Landlord's employees or by independent contractors or
other agents;

                     10.2.3 wages, salaries, fees and other compensation and
payments and payroll taxes and contributions to any social security,
unemployment insurance, welfare, pension or similar fund and payments for other
fringe benefits required by law or union agreement (or, if the employees or any
of them are not represented by a union, then payments for benefits comparable to
those generally required by union agreement in first class office buildings in
the immediate area which are unionized) made to or on behalf of any employees of
Landlord performing services rendered in connection with the operation and
maintenance of the Building, the Common Facilities and the Property, including,
without limiting the generality of the foregoing, elevator operators, elevator
starters, window cleaners, porters, janitors, maids, miscellaneous handymen,
watchmen, persons engaged in patrolling and protecting the Building, the Common
Facilities and the Property, carpenters, engineers, firemen, mechanics,
electricians, plumbers, other tradesmen, other persons engaged in the operation
and maintenance of the Building, Common Facilities and Property, Building
superintendent and assistants; building manager, and clerical and administrative
personnel;




                                      -9-


<PAGE>   14

                    10.2.4  the uniforms of all employees and the cleaning, 
pressing and repair thereof;

                    10.2.5  premiums and other charges incurred by Landlord with
respect to all insurance relating to the Building, the Common Facilities and the
Property and the operation and maintenance thereof, including, without
limitation: property and casualty, fire and extended coverage insurance,
including windstorm, flood, hail, explosion, other casualty, riot, rioting
attending a strike, civil commotion, aircraft, vehicle and smoke insurance;
public liability insurance; elevator, boiler and machinery insurance; excess
liability coverage insurance; use and occupancy insurance; worker's compensation
and health, accident, disability and group life insurance for all employees; and
casualty rent insurance;

                    10.2.6  sales and excise taxes and the like upon any
Operational Expenses and Capital Expenditures;

                    10.2.7  management fees of any independent managing agent
for the Property, the Building or the Common Facilities; and if there shall be
no independent managing agent, or if the managing agent shall be a person
affiliated with the Landlord, the management fees that would customarily be
charged for the management of the Property, the Building and the Common
Facilities by an independent, first class managing agent in the immediate area;

                    10.2.8  the cost of replacements for tools, supplies and
equipment used in the operation, service, maintenance, improvement, inspection,
repair and alteration of the Building, the Common Facilities and the Property;

                    10.2.9  the cost of repainting or otherwise redecorating any
part of the Building or the Common Facilities;

                    10.2.10 decorations for the lobbies and other Common
Facilities in the Building;

                    10.2.11 the cost of licenses, permits and similar fees and
charges related to operation, repair and maintenance of the Building, the
Property and the Common Facilities;

                    10.2.12 an allocable share of service, replacement, repair,
maintenance and other charges assessed from time to time by the Carnegie Center
Owner's Association to the Building; and

                    10.2.13 any and all other expenditures of the Landlord in
connection with the operation, alteration, repair or maintenance of the
Property, the Common Facilities or the Building as a first-class office building
and facilities in the immediate area which are properly treated as an expense
fully deductible as incurred in accordance with generally applied real estate
accounting practice.



                                      -10-



<PAGE>   15

              10.3   "Capital Expenditures" means the following expenditures
incurred or paid by the Landlord in connection with the Property, the Building,
the Common Facilities and any other improvements on the Property:

                     10.3.1 all costs and expenses incurred by the Landlord in
connection with retrofitting the entire Building or the common Facilities, or
any portion thereof, to comply with any change in Federal, state or local
statute, rule, regulation, order or requirement which change takes effect after
the original completion of the Building;

                     10.3.2 all costs and expenses incurred by the Landlord to
replace and improve the Property, the Building or the Common Facilities or
portions thereof for the purpose of continued operation of the Property, the
Building and the Common Facilities as a first class office complex in the
immediate area; and

                     10.3.3 all costs and expenses incurred by the Landlord in
connection with the installation of any energy, labor or other cost saving
device or system on the Property or in the Building or the Common Facilities.

              10.4   "Capital Expenditures" shall not include any of the 
following:

                     10.4.1 principal or interest on any mortgage indebtedness
on the Property, the Building or any portion thereof;

                     10.4.2 any capital expenditure, or amortized portion
thereof, other than those included in the definition of Capital Expenditures set
forth in subsection 10.3 above;

                     10.4.3 expenditures for any leasehold improvement which is
made in connection with the preparation of any portion of the Building for
occupancy by a new tenant or which is not made generally to or for the benefit
of the Leased Premises and all Other Leased Premises or generally to the
Building or the Common Facilities;

                     10.4.4 to the extent the Landlord actually receives
proceeds of property and casualty insurance policies on the Building, other
improvements on the Property or the Common Facilities, expenditures for repairs
or replacements occasioned by fire or other casualty to the Building or the
Common Facilities;

                     10.4.5 expenditures for repairs, replacements or rebuilding
occasioned by any of the events contemplated by section 16 of this Agreement;

                     10.4.6 expenditures for costs, including advertising and
leasing commissions, incurred in connection with efforts to lease portions of
the Building and to procure new tenants for the Building;

                     10.4.7 expenditures for the salaries and benefits of the
executive officers, if any, of the Landlord;

                     10.4.8 Operational Expenses and Taxes; and



                                      -11-



<PAGE>   16

                     10.4.9 depreciation (as that term is used in the accounting
sense in the context of generally applied real estate accounting practice) of
the Building, the Common Facilities and any other improvement on the Property.

              10.5   As soon as practicable after incurring any Capital
Expenditure, the Landlord shall furnish the Tenant with a notice setting forth:

                     10.5.1 a description of the Capital Expenditure and the
subject thereof;

                     10.5.2 the date the subject of the respective Capital
Expenditure was first placed into service and the period of useful life selected
by the Landlord in connection with the determination of the Annual Amortized
Capital Expenditure;

                     10.5.3 the amount of the Annual Amortized Capital
Expenditure; and

                     10.5.4 the Tenant's Share of item 10.5.3 above.

              10.6   Within 30 days after the Landlord gives any notice
enumerated in subsection 10.5 of this Agreement, the Tenant or the Tenant's
authorized agent, upon one week's prior notice to the Landlord, may inspect the
Landlord's books and records, as they pertain to the particular expense in
question, at the Landlord's office regarding the subject of any such notice to
verify the amount(s) and calculation(s) thereof.

              10.7   The mere enumeration of an item within the definitions of
Operational Expenses and Capital Expenditures in subsections 10.2 and 10.3 of
this Agreement, respectively, shall not be deemed to create an obligation on the
part of the Landlord to provide such item unless the Landlord is affirmatively
required to provide such item elsewhere in this Agreement.

       11     LEASEHOLD IMPROVEMENTS, FIXTURES AND TRADE FIXTURES. All leasehold
improvements to the Leased Premises, fixtures installed in the Leased Premises
and the blinds and floor treatments or coverings shall be the property of the
Landlord, regardless of when, by which party or at which party's cost the item
is installed. Movable furniture, furnishings, trade fixtures and equipment of
the Tenant which are in the Leased Premises shall be the property of the Tenant,
except as may otherwise be set forth in section 23 of this Agreement.

       12     ALTERATIONS, IMPROVEMENTS AND OTHER MODIFICATIONS BY THE TENANT.

              12.1   Except as may be otherwise contemplated by section 5 of
this Agreement, the Tenant shall not make any alterations, improvements or other
modifications to the Leased Premises which effect structural changes in the
Building or any portion thereof, change the functional utility or rental value
of the Leased Premises or affect the mechanical, electrical, plumbing or other
systems installed in the Building or the Leased Premises.

              12.2   The Tenant shall not make any other alterations,
improvements or modifications to the Leased Premises, the Building or the
Property or make any boring in the ceiling, walls or floor of the Leased
Premises or the Building unless the Tenant shall have first:



                                      -12-




<PAGE>   17

                     12.2.1 furnished to the Landlord detailed, New Jersey
architect-certified construction drawings, construction specifications and, if
they pertain in any way to the heating, ventilation and air conditioning or
other systems of the Building, related engineering design work and
specifications regarding, the proposed alterations, improvements or other
modifications;

                     12.2.2 not received a notice from the Landlord objecting
thereto in any respect within 30 days of the furnishing thereof (which objection
shall not be unreasonably made by the Landlord or which lack of timely notice of
objection shall not be deemed the Landlord's affirmative consent for any
purpose);

                     12.2.3 obtained any necessary or appropriate building
permits or other approvals from the Municipality and, if such permits or other
approvals are conditional, satisfied all conditions to the satisfaction of the
Municipality; and

                     12.2.4 met, and continued to meet, all the following
conditions with regard to any contractors selected by the Tenant and any
subcontractors, including materialmen, in turn selected by any of them:

                            12.2.4.1   the Tenant shall have sole responsibility
for payment of, and shall pay, such contractors;

                            12.2.4.2   the Tenant shall have sole responsibility
for coordinating, and shall coordinate, the work to be supplied or performed by
such contractors, both among themselves and with any contractors selected by the
Landlord;

                            12.2.4.3   the Tenant shall not permit or suffer the
filing of any mechanic's notice of intention or other lien or prospective lien
by any such contractor or subcontractor with respect to the Property, the Common
Facilities, the Building or any other improvements on the Property; and if any
of the foregoing should be filed by any such contractor or subcontractor, the
Tenant shall forthwith obtain and file the complete discharge and release
thereof or provide such payment bond(s) from a reputable, financially sound
institutional surety as will, in the opinions of the Landlord, the holders of
any mortgage indebtedness on, or other interest in, the Property, the Building,
the Common Facilities or any other improvements on the Property, or any portions
thereof, and their respective title insurers, be adequate to assure the complete
discharge and release thereof;

                            12.2.4.4   prior to any such contractor's entering
upon the Property, the Building or the Leased Premises or commencing work the
Tenant shall have delivered to the Landlord (a) all the Tenant's certificates of
insurance set forth in section 14 of this Agreement, conforming in all respects
to the requirements of section 14 of this Agreement, except that the effective
dates of all such insurance policies shall be prior to any such contractor's
entering upon the Property, the Building or the Leased Premises or commencing
work (if any work is scheduled to begin before the Commencement Date) and (b)
similar certificates of insurance from each of the Tenant's contractors
providing for coverage in equivalent amounts, together with their respective
certificates of workers' compensation insurance, employer's liability insurance
and 



                                      -13-



<PAGE>   18

products completed operations insurance, the latter providing coverage in at
least the amount required for the Tenant's comprehensive general public
liability and excess insurance;

                            12.2.4.5   each such contractor shall be a party to
collective bargaining agreements with those unions that are certified as the
collective bargaining agents of all bargaining units of such contractor, of
which all such contractor's workpersons shall be members in good standing;

                            12.2.4.6   each such contractor shall perform its
work in a good and workpersonlike manner and shall not interfere with or hinder
the Landlord or any other contractor in any manner;

                            12.2.4.7   there shall be no labor dispute of any
nature whatsoever involving any such contractor or any workpersons of such
contractor or the unions of which they are members with anyone; and if such a
labor dispute exists or comes into existence the Tenant shall forthwith, at the
Tenant's sole cost and expense, remove all such contractors and their
workpersons from the Building, the Common Facilities and the Property; and

                            12.2.4.8   the Tenant shall have the sole
responsibility for the security of the Leased Premises and all contractors'
materials, equipment and work, regardless of whether their work is in progress
or completed.

              12.3   After the Commencement Date, the Tenant may apply any wall
covering or other treatment to the walls of the Leased Premises (so long as such
wall covering or treatment is not unconventional in first class office buildings
and hang any decorative wall hangings), all without the prior written consent of
the Landlord.

       13     LANDLORD'S RIGHTS OF ENTRY AND ACCESS. The Landlord and its
authorized agents shall have the following rights of entry and access to the
Leased Premises:

              13.1   In case of any emergency or threatened emergency, at any
time for any purpose which the Landlord reasonably believes under such
circumstances will serve to prevent, eliminate or reduce the emergency, or the
threat thereof, or damage or threatened damage to persons and property.

              13.2   Upon at least two days' prior verbal advice to the Tenant,
at any time for the purpose of erecting or constructing improvements,
modifications, alterations and other changes to the Building or any portion
thereof, including, without limiting the generality of the foregoing, the Leased
Premises, the Common Facilities or the Property or for the purpose of repairing,
maintaining or cleaning them, whether for the benefit of the Landlord, the
Building, all tenants of Other Leased Premises in the Building, or one or more
tenants of Other Leased Premises, the Carnegie Center Complex or others. In
connection with any such improvements, modifications, alterations, other
changes, repairs, maintenance or cleaning, the Landlord may close off such
portions of the Property, the Building and the Common Facilities and interrupt
such services as may be necessary to accomplish such work, without liability to
the Tenant therefor and without such closing or interruption being deemed an
eviction or constructive 



                                      -14-



<PAGE>   19

eviction or requiring an abatement of Rent. However, in accomplishing any such
work, the Landlord shall endeavor not to materially interfere with the Tenant's
use and enjoyment of the Leased Premises or the conduct of the Tenant's business
and to minimize interference, inconvenience and annoyance to the Tenant.

              13.3   At all reasonable hours for the purpose of performing
janitorial services in the Leased Premises and, during Regular Business Hours
or, by prior arrangement with the Tenant, at all reasonable hours for the
purpose of operating, inspecting or examining the Building, including the Leased
Premises, or the Property.

              13.4   At any time after the Tenant has vacated the Leased
Premises, for the purpose of preparing the Leased Premises for another tenant or
prospective tenant.

              13.5   If practicable by appointment with the Tenant, at all
reasonable hours for the purpose of showing the Building to prospective
purchasers, mortgagees and prospective mortgagees and prospective ground lessees
and lessors.

              13.6   If practicable by appointment with the Tenant, at all
reasonable hours during the last six months of the Term for the purpose of
showing the Leased Premises to prospective tenants thereof.

              13.7   The mere enumeration of any right of the Landlord within
this section 13 of the Agreement shall not be deemed to create an obligation on
the part of the Landlord to exercise any such right unless the Landlord is
affirmatively required to exercise such right elsewhere in this Agreement.

       14     LIABILITIES AND INSURANCE OBLIGATIONS.

              14.1   The Tenant shall, at the Tenant's own expense, purchase
before the Commencement Date, and maintain in full force and effect throughout
the Term and any other period during which the Tenant may have possession of the
Leased Premises, the following types of insurance coverage from financially
sound and reputable insurers, licensed by the State of New Jersey to provide
such insurance and acceptable to the Landlord, in the minimum amounts set forth
below, each of which insurance policies shall be for the benefit of, and shall
name the Landlord, the Landlord's managing agent and mortgagees and ground
lessors known to the Tenant, if any, of the Building, the Common Facilities, the
Property or any interest therein, their successors and assigns as additional
persons insured, and none of which insurance policies shall contain a
"co-insurance" clause:

                     14.1.1 comprehensive general public liability insurance 
(including a "broad form" coverage endorsement) and excess ("umbrella")
insurance which, without limiting the generality of the foregoing, considered
together shall insure against such risks as bodily injury, death and property
damage, with a combined single limit of not less than $3,000,000.00 for each
occurrence with respect to each type of risk;



                                      -15-



<PAGE>   20

                     14.1.2 contractual liability insurance which shall insure
the risk of the Tenant's failure to perform all the Tenant's obligations under
this Agreement by which the Tenant indemnifies the Landlord, in an amount not
less than $3,000,000.00; and

                     14.1.3 property, casualty and "all risks" insurance which,
without limiting the generality of the foregoing, shall insure against the risk
of damage and loss by reason of fire, explosion and all other casualties, of the
Leased Premises and leasehold improvements thereto.

              14.2   With respect to risks:

                     14.2.1 as to which this Agreement requires either party to
maintain insurance, or

                     14.2.2 as to which either party is effectively insured and
for which risks the other party may be liable, the party required to maintain
such insurance and the party effectively insured shall use its best efforts to
obtain a clause, if available from the respective insurer, in each such
insurance policy expressly waiving any right of recovery, by reason of
subrogation to such party's rights or otherwise, the respective insurer might
otherwise have or obtain against the other party, so long as such a clause can
be obtained in the respective insurance policy without additional premium cost.
If such a clause can be obtained in the respective insurance policy, but only at
additional premium cost, such party shall, by notice to the other party,
promptly advise the other party of such fact and the amount of the additional
premium cost. If the other party desires the inclusion of such a clause in the
notifying party's respective insurance policy, the other party shall, within 10
days of receipt of the notifying party's notice, by notice advise the notifying
party of its desire and enclose therewith its check in the full amount of the
additional premium cost; otherwise the notifying party need not obtain such a
clause in the respective insurance.

              14.3   Each party hereby waives any right of recovery against the
other party for any and all damages for property losses and property damages
which are actually insured by either party, but only to the extent:

                     14.3.1 that the waiver set forth in this subsection 14.3
does not cause or result in any cancellation of, or diminution in, the insurance
coverage otherwise available under any applicable insurance policy;

                     14.3.2 of the proceeds of any applicable insurance policy 
(without adjustment for any deductible amount set forth therein) actually
received by such party for such respective loss or damages; and

                     14.3.3 the substance of the clause contemplated by
subsection 14.2 of this Agreement is actually and effectively set forth in the
respective insurance policy.

The waiver set forth in this subsection 14.3 of the Agreement shall not apply
with respect to liability insurance policies (as opposed to property and
casualty insurance policies).



                                      -16-



<PAGE>   21

              14.4   The Tenant hereby waives any right of recovery it might
otherwise have against the Landlord for losses and damages caused actively or
passively, in whole or in part, by any of the risks the Tenant is required to
insure against in accordance with subsections 14.1.1 or 14.1.3 of this
Agreement, unless such waiver would cause or result in a cancellation of, or
diminution in, the coverage of the Tenant's policies of insurance against such
risks.

              14.5   The Landlord shall have no liability whatsoever to the
Tenant or the Tenant's employees, other agents or Guests or anyone else for any
death, bodily injury, property loss or other damages suffered by any of them or
any of their property which is not proximately caused by the negligence or
intentional misconduct of the Landlord, its agents or employees.

              14.6   Each policy of insurance required under subsection 14.1 of
this Agreement shall include provisions to the effect that:

                     14.6.1 no act or omission of the Tenant, its employees,
other agents or Guests shall result in a loss of insurance coverage otherwise
available under such policy to any person required to be named as an additional
insured in accordance with subsection 14.1 of this Agreement; and

                     14.6.2 the insurance coverage afforded by such policy shall
not be diminished, cancelled, permitted to expire or otherwise terminated for
any reason except upon 30 days' prior written notice from the insurer to every
person required to be named as an additional insured in accordance with
subsection 14.1 of this Agreement.

              14.7   With respect to each type of insurance coverage referred to
in subsection 14.1 of this Agreement, prior to the Commencement Date the Tenant
shall cause its insurer(s) to deliver to the Landlord the certificate(s) of the
insurer(s) setting forth the name and address of the insurer, the name and
address of each additional insured, the type of coverage provided, the limits of
the coverage, any deductible amounts, the effective dates of coverage and that
each policy under which coverage is provided affirmatively includes provisions
to the effect set forth in subsection 14.6 of this Agreement. In the event any
of such certificates indicates a coverage termination date earlier than the end
of the Term or the end of any other period during which the Tenant may have
possession of the Leased Premises, no later than 10 days before any such
coverage termination date, the Tenant shall deliver to the Landlord respective,
equivalent, new certificate(s) of the insurer(s).

              14.8   The Landlord represents that it maintains property
insurance coverage for the Building and other improvements on the Property and
liability insurance coverage in the form of a blanket insurance policy for
several projects of the Landlord and its Affiliates. The basic property
insurance blanket policy limit is well in excess of $100,000,000 with a $10,000
deductible.

              14.9   The Landlord hereby waives any right of recovery it might
otherwise have against the Tenant for losses and damages caused actively or
passively, in whole or in part, by any of the risks the Landlord is required to
insure against in accordance with subsection 14.8 of 



                                      -17-



<PAGE>   22

this Agreement, unless such waiver would cause or result in a cancellation of,
or diminution in, the coverage of the Landlord's policies of insurance against
such risks.

       15     CASUALTY DAMAGE TO BUILDING OR LEASED PREMISES.

              15.1   In the event of any damage to the Building or any portion
thereof by fire or other casualty:

                     15.1.1 with the result that the Leased Premises are
rendered untenantable in whole or in part due either (i) to casualty damage to
the Leased Premises itself or (ii) to casualty damage to necessary Common
Facilities such that the Tenant is unable to access and use any portion of the
Leased Premises for the purpose contemplated by subsection 7.1 of this
Agreement;

                     15.1.2 regarding which, within 60 days after the occurrence
of the casualty, the Landlord gives notice to the Tenant that the Landlord can
restore the Leased Premises within 180 days after the occurrence of the casualty
to the same condition they were in immediately prior to the occurrence of the
casualty and can restore the Common Facilities within the same period so that
there is no material interference in the Tenant's ability to access and use and
enjoy the Leased Premises, and

                     15.1.3 regarding which the Landlord does restore the Leased
Premises within such period of 180 days, then this Agreement shall remain in
full force and effect, but Rent shall abate from the date of the casualty until
such time as such restoration has been completed and be reduced during such
period by the amount which bears the same proportion to the Rent otherwise
payable during such period as the gross rentable floor space of the Leased
Premises which are rendered untenantable bears to the gross rentable floor space
of the Leased Premises.

              15.2   In the event of casualty damages in the circumstances set
forth in subsection 15.1 of this Agreement which do not result in a termination
of the Term, the Landlord shall cause restoration to proceed diligently and
expediently to the extent the Landlord has received proceeds of any property,
casualty or liability insurance on the damaged portions.

              15.3   The Tenant shall promptly advise the Landlord by the
quickest means of communication of the occurrence or threatened occurrence of
any casualty damage to the Building or the Leased Premises of which the Tenant
becomes aware.

       16     CONDEMNATION. If the Leased Premises, or any portion thereof, or
the Building or the Common Facilities, or any substantial portion of any of the
foregoing, shall be acquired for any public or quasi-public use or purpose by
statute, right of eminent domain or private sale in lieu thereof, with the
result the Tenant can not use and occupy the Leased Premises for the purpose set
forth in subsection 7.1 of this Agreement, the Tenant hereby waives any claim
against the Landlord, the condemning authority or other person acquiring same
for any thing of value, tangible or intangible, including, without limiting the
generality of the foregoing, the putative value of any leasehold interest or
loss of the use of same, except for any right the Tenant 


                                      -18-



<PAGE>   23

might have to make a claim, independent of, and without reference to or having
any effect on, any award or claim of the Landlord, against the condemning
authority or other acquiring party regarding the value of the Tenant's installed
trade fixtures and other installed equipment which are not removable from the
Leased Premises or for ordinary and necessary moving and relocation expenses
occasioned thereby.

       17     ASSIGNMENT OR SUBLETTING BY TENANT.

              17.1   Except as may be specifically set forth in this section 17
of the Agreement, the Tenant shall not:

                     17.1.1 assign, or purport to assign, this Agreement or any
of the Tenant's rights hereunder;

                     17.1.2 sublet, or purport to sublet, the Leased Premises or
any portion thereof;

                     17.1.3 license, or purport to license, the use or occupancy
of the Leased Premises or any portion thereof;

                     17.1.4 otherwise transfer, or attempt to transfer any
interest including, without limiting the generality of the foregoing, a
mortgage, pledge or security interest, in this Agreement, the Leased Premises or
the right to the use and occupancy of the Leased Premises; or

                     17.1.5 indirectly accomplish, or permit or suffer the
accomplishment of, any of the foregoing by merger or consolidation with another
entity, by acquisition or disposition of assets or liabilities outside the
ordinary course of the Tenant's business or by acquisition or disposition, by
the Tenant's equity owners or subordinated creditors, of any of their respective
interests in the Tenant.

              17.2 The Tenant shall not assign this Agreement or any of the
Tenant's rights hereunder or sublet the Leased Premises or any portion thereof
without first giving 30 days' prior notice to the Landlord of its desire to
assign or sublet and requesting the Landlord's consent and without first
receiving the Landlord's prior written consent. The Tenant's notice to the
Landlord shall include:

                     17.2.1 the full name, address and telephone number of the
proposed assignee or sublessee;

                     17.2.2 a description of the type(s) of business in which 
the proposed assignee or sublessee is engaged and proposes to engage;

                     17.2.3 a description of the precise use to which the 
proposed assignee or sublessee intends to put the Leased Premises or portion
thereof;

                     17.2.4 the proposed assignee's or subtenant's most recent
quarterly and annual financial statements prepared in accordance with generally
accepted accounting principles 



                                      -19-



<PAGE>   24

and any other evidence of financial position and responsibility that the Tenant
or proposed assignee or sublessee may desire to submit;

                     17.2.5 by diagram and measurement of the actual square feet
of floor space, the precise portion of the Leased Premises proposed to be
subject to the assignment of this Agreement or to be sublet;

                     17.2.6 a complete, accurate and detailed description of the
terms of the proposed assignment or sublease including, without limiting the
generality of the foregoing, all consideration paid or given, or proposed to be
paid or to be given, by the proposed assignee, sublessee or other person to the
Tenant and the respective times of payment or delivery; and

                     17.2.7 any other information reasonably requested by the 
Landlord.

              17.3   By the expiration of the notice period contemplated by
subsection 17.2 of this Agreement, the Landlord, in its sole discretion, shall
take one of the following actions by notice to the Tenant:

                     17.3.1 grant consent on the terms and conditions set forth
in subsection 17.4 of this Agreement and such other reasonable terms and
conditions set forth in the Landlord's notice;

                     17.3.2 refuse to grant consent for any of the reasons set
forth in subsection 17.5 of this Agreement; or

                     17.3.3 elect to terminate the Term as of (a) the end of the
third full month after the Tenant has given notice of the Tenant's desire to
assign or sublet or (b) the proposed effective date of the proposed assignment
or sublease.

              17.4   The Landlord's consent to the Tenant's proposed assignment
or sublease, if granted under subsection 17.3.1 of this Agreement, shall be
subject to all the following terms and conditions (and to any other terms and
conditions permitted by that subsection):

                     17.4.1 any proposed assignee or sublesee shall, by document
executed and delivered forthwith to the Landlord, agree to be bound by all the
obligations of the Tenant set forth in this Agreement;

                     17.4.2 the Tenant shall remain liable under this Agreement,
jointly and severally with any proposed assignee or sublessee, for the timely
performance of all obligations of the Tenant set forth in this Agreement;

                     17.4.3 the Tenant shall forthwith deliver to the Landlord
manually executed copies of all documents regarding the proposed assignment or
sublease and a written, accurate and complete description, manually executed
both by the Tenant and the proposed assignee or sublessee, of any other
agreement, arrangement or understanding between them regarding the same;



                                      -20-




<PAGE>   25

                     17.4.4 with respect to any consideration or other thing of
value received or to be received by the Tenant in connection with any such
assignment or sublease (other than those payable in equal monthly installments
each month during the proposed term of any such assignment or sublease), the
Tenant shall pay to the Landlord one-half of any such amount and one-half of the
fair market value of any other thing of value within 10 days of receipt of same;
and

                     17.4.5 with respect to any amount payable to the Tenant in
equal monthly installments each month during the proposed term of any such
assignment or sublease in connection with such assignment or sublease, which
amount is in excess of the amount which bears the same ratio to the monthly
installment of Rent due from the Tenant as the usable floor space of the Leased
Premises subject to the assignment or sublease bears to the usable floor space
of the entire Leased Premises, the Tenant shall pay one-half of such excess to
the Landlord together with the Tenant's monthly installment of Rent.

              17.5   The Landlord's refusal to grant consent under subsection
17.3.2 of this Agreement shall not be deemed an unreasonable withholding of
consent if based upon any of the following reasons (or any other reason
permitted by that subsection):

                     17.5.1 the Landlord desires to take the action enumerated
in subsection 17.3.3 of this Agreement:

                     17.5.2 there is already another assignee, sublessee or
licensee of all or a portion of the Leased Premises;

                     17.5.3 the proposed sublease is for a term of less than one
 year;

                     17.5.4 the proposed sublease is for a term which would
expire after the Term;

                     17.5.5 less than one year remains in the Term as of the
proposed effective date of the proposed assignment or sublease;

                     17.5.6 the general reputation, financial position or
ability or type of business of, or the anticipated use of the Leased Premises by
the proposed assignee or proposed sublessee is reasonably unsatisfactory to the
Landlord or is inconsistent with those of tenants of Other Leased Premises or of
the Carnegie Center Complex or inconsistent with any commitment made by the
Landlord to any such other tenant;

                     17.5.7 the proposed consideration to be paid to the Tenant
during any period of 12 months is less than the amount of the Market Rental Rate
divided by the gross rentable floor space of the Leased Premises and multiplied
by that portion of the gross rentable floor space of the Leased Premise proposed
to be subject to the proposed assignment or sublease and the Tenant or any of
its agents shall have publicized such lower rate in any media or broad based
mailing;



                                      -21-



<PAGE>   26

                     17.5.8 the gross rentable floor space of the portion of the
Leased Premises proposed to be sublet is less than one-third of the gross
rentable floor space of the Leased Premises; or

                     17.5.9 the proposed assignee or sublessee is a tenant of
other Leased Premises or other premises in the Carnegie Center Complex.

              17.6   Notwithstanding anything to the contrary set forth in
section 17 of this Agreement, the Landlord hereby consents to the Tenant's
subletting the Leased Premises or portion thereof specified below if:

                     17.6.1 at or prior to the respective dates of exercise and
effectiveness thereof (a) (i) no Event of Default shall have occurred or (ii) if
an Event of Default shall have occurred, the Tenant shall have previously cured
it in full and the Landlord shall have waived it and (b) there shall not have
been a History of Recurring Events of Default; and

                     17.6.2 the Tenant and the proposed sublessee comply with
all the conditions set forth in subsections 17.4.1 through 17.4.3 of this
Agreement; and

                     17.6.3 at the date of effectiveness of the proposed sublet
there is not already more than one other assignee, sublessee or licensee of the
Leased Premises or any portions thereof; and

                     17.6.4 one of the following is applicable:

                            17.6.4.1   the proposed sublessee is, and continues
to be, an Affiliate of the Tenant, and if the proposed sublessee is also a
person controlling the Tenant the proposed sublessee shall also have and shall
continue to have a net worth at least as great as the greatest of the net worth
of the Tenant (i) on the Commencement Date, (ii) before the transaction or event
giving rise to such controlling relationship and (iii) immediately after the
transaction or event giving rise to such controlling relationship; or

                            17.6.4.2   the proposed sublessee is a person (a)
resulting from the merger or consolidation of the Tenant with or into such
person or (b) purchasing substantially all the assets (subject to substantially
all the liabilities) of the Tenant, provided either the Tenant or the proposed
sublessee shall have and shall continue to have a net worth at least as great as
the greatest of the net worth of the Tenant (i) on the Commencement Date, (ii)
before the transaction or event giving rise to such controlling relationship and
(iii) immediately after the transaction or event giving rise to such controlling
relationship.

       18     SIGNS, DISPLAYS AND ADVERTISING.

              18.1   The Tenant shall have one sign identifying the Landlord's
assigned number for the Leased Premises at the principal entrance to the Leased
Premises. The Tenant may identify itself in or on each of: the sign at the
principal entrance to the Leased Premises, the Building directory and the
directory, if any, on the floor of the Building on which the Leased 


                                      -22-



<PAGE>   27

Premises is located. All such signs, and the method and materials used in
mounting and dismounting them, shall be in accordance with the Landlord's
specifications. All such signs shall be provided and mounted by the Landlord at
the Landlord's expense, except that the Tenant shall bear any expense of
identifying itself on the sign at the principal entrance to the Leased Premises.

              18.2 No other sign, advertisement, fixture or display shall be
used by the Tenant on the Property or in the Building or the Common Facilities.
Any signs other than those specifically permitted under subsection 18.1 of this
Agreement shall be removed promptly by the Tenant or by the Landlord at the
Tenant's expense.

       19     QUIET ENJOYMENT. The Landlord is the owner of the Building, the
Property and those Common Facilities located on the Property. The Landlord has
the right and authority to enter into and execute and deliver this Agreement
with the Tenant. So long as an Event of Default shall not have occurred, the
Tenant shall and may peaceably and quietly have, hold and enjoy the Leased
Premises during the Term in accordance with this Agreement.

       20     RELOCATION. At any time and from time to time during the Term, on
at least 60 days' prior notice to the Tenant, the Landlord shall have the right
to move the Tenant out of the Leased Premises and into premises having at least
equal floor space located in the Building or in any other comparable building
located in the Carnegie Center Complex for the duration of the Term. In the
event the Landlord exercises this right of relocation, the Landlord shall
decorate the new premises similarly to the Leased Premises and remove, relocate
and reinstall the Tenant's furniture, trade fixtures, furnishings and equipment,
all at the sole cost and expense of the Landlord. When the substitute new
premises are ready, the Tenant shall surrender the Leased Premises. Following
any such relocation, this Agreement shall continue in full force and effect
except for the description of the Leased Premises, the Building and the Property
which, upon completion of such relocation, shall be deemed amended to describe
the substitute new premises, building and property, respectively, to which the
Tenant shall have been relocated in accordance with this section 20 of the
Agreement.

       21     SURRENDER. Upon termination of the Term, or at any other time at
which the Landlord, by virtue of any provision of this Agreement or otherwise
has the right to re-enter and re-take possession of the Leased Premises, the
Tenant shall surrender possession of the Leased Premises; remove from the Leased
Premises all property owned by the Tenant or anyone else other than the
Landlord; remove from the Leased Premises any alterations, improvements or other
modifications to the Leased Premises that the Landlord may request by notice;
make any repairs required by such removal; clean the Leased Premises; except in
the event of casualty damage to the Leased Premises which shall not have been
restored, leave the Leased Premises in as good order and condition as it was
upon the completion of any improvements contemplated by section 5 of this
Agreement, ordinary wear and use excepted; return all copies of all keys and
passes to the Leased Premises, the Common Facilities and the Building to the
Landlord; and, if termination of the term shall have occurred other than
exclusively in connection with expiration of the Term, receive the Landlord's
written acceptance of the Tenant's surrender. In those instances where written
acceptance of surrender is required, the Landlord shall not be deemed to 



                                      -23-

<PAGE>   28

have accepted the Tenant's surrender of the Leased Premises unless and until the
Landlord shall have executed and delivered the Landlord's written acceptance of
surrender to the Tenant, which shall not be unreasonably withheld or delayed.

       22     EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an Event of Default under this Agreement:

              22.1   the Tenant's failure to pay any installment of Basic Rent
or any amount of Additional Rent when it is first due, except in the case of the
first two instances thereof in any period of 12 consecutive months, in which
instances, the Tenant's failure to pay any installment of Basic Rent or any
amount of Additional Rent within five days after the Landlord's verbal advice to
the Tenant that any such amount was not received by the time it was first due;

              22.2   the Tenant's failure to complete performance of any of the
Tenant's obligations under this Agreement (other than those contemplated by
subsection 22.1 of this Agreement) within 20 days after the Landlord shall have
given notice to the Tenant specifying which of the Tenant's obligations has not
been performed and in what respects, unless completion of performance within
such period of 20 days is not possible using diligence and expedience, then
within a reasonable time of the Landlord's notice so long as the Tenant shall
have commenced substantial performance within the first five days of such period
of 20 days and shall have continued to provide substantial performance,
diligently and expediently, through to completion of performance;

              22.3   the discovery that any representation made by the Tenant in
this Agreement shall have been inaccurate or incomplete in any material respect
either on the date it was made or the date as of which it was made;

              22.4   the sale, transfer or other disposition of any interest of
the Tenant in the Leased Premises by way of execution or other legal process;

              22.5   with the exception of those of the following events to
which section 365 of the Bankruptcy Code shall apply in the context of an office
lease (in which case subsection 22.7 of this Agreement shall apply):

                     22.5.1 the Tenant's voluntarily becoming a "debtor," as
that term is defined in section 101 of the Bankruptcy Code;

                     22.5.2 in connection with the Tenant's involuntarily
becoming a "debtor," as that term is defined in section 101 of the Bankruptcy
Code, the earlier of: (i) the expiration of 60 days from the date of the filing
of the involuntary petition in bankruptcy without the Tenant's obtaining a
dismissal of the involuntary petition or (ii) the Bankruptcy Court's granting an
order for relief;

                     22.5.3 in connection with the appointment of a receiver or
trustee of the Tenant's property or affairs, the expiration of 60 days from that
time without the Tenant's obtaining a dismissal of such appointment; or




                                      -24-



<PAGE>   29

                     22.5.4 the Tenant's making an assignment for the benefit
of, or an arrangement with or among, creditors or filing a petition in
insolvency or for reorganization or for the appointment of a receiver;

              22.6   in the event of the occurrence of any of the events
enumerated in subsection 22.6 of this Agreement to which section 365 of the
Bankruptcy Code shall apply in the context of an office lease, the earlier of
the bankruptcy trustee's rejection or deemed rejection (as those terms are used
in section 365 of the Bankruptcy Code) of this Agreement; or

              22.7   the Tenant's abandoning the Leased Premises before
expiration of the Term without the prior written consent of the Landlord.

       23     RIGHTS AND REMEDIES.

              23.1   Upon the occurrence of an Event of Default the Landlord
shall have all the following rights and remedies:

                     23.1.1 to elect to terminate the Term by giving notice of
such election, and the effective date thereof, to the Tenant and to receive
Termination Damages;

                     23.1.2 to elect to re-enter and re-take possession of the
Leased Premises, without thereby terminating the Term, by giving notice of such
election, and the effective date thereof, to the Tenant and to receive
Re-Leasing Damages;

                     23.1.3 if the Tenant remains in possession of the Leased
Premises after the Tenant's obligation to surrender the Leased Premises shall
have arisen, to remove the Tenant and the Tenant's and any others' possessions
from the Leased Premises by any of the following means without any liability to
the Tenant therefor, any such liability to the Tenant therefor which might
otherwise arise being hereby waived by the Tenant: legal proceedings (summary or
otherwise), writ of dispossession and any other means and to receive Holdover
Damages and, except in the circumstances contemplated by section 20 of this
Agreement, to receive all expenses incurred in removing the Tenant and the
Tenant's and any others' possessions from the Leased Premises, and of storing
such possessions if the Landlord so elects;

                     23.1.4 to be awarded specific performance, temporary
restraints and preliminary and permanent injunctive relief regarding Events of
Default where the Landlord's rights and remedies at law may be inadequate and,
in connection with any Event of Default involving the Tenant's failure to
perform its obligations under sections or subsections 7.2, 12, 13, 17.1, 17.2,
18, 20, 21, 26.3, 26.4 and 32, without the necessity of proving actual damages
or the inadequacy of the rights and remedies at law;

                     23.1.5 to receive all expenses incurred in securing,
preserving, maintaining and operating the Leased Premises during any period of
vacancy, in making repairs to the Leased Premises,, in preparing the Leased
Premises for re-leasing and in re-leasing the Leased Premises including, without
limiting the generality of the foregoing, any brokerage commissions;



                                      -25-



<PAGE>   30

                     23.1.6 to receive all legal expenses, including without
limiting the generality of the foregoing, attorneys' fees incurred in connection
with pursuing any of the Landlord's rights and remedies, including
indemnification rights and remedies;

                     23.1.7 if the Landlord, in its sole discretion, elects to
perform any obligation of the Tenant under this Agreement (other than the
obligation to pay Rent) which the Tenant has not timely performed, to receive
all expenses incurred in so doing;

                     23.1.8 to elect to pursue any legal or equitable right and
remedy available to the Landlord under this Agreement or otherwise; and

                     23.1.9 to elect any combination, or any sequential
combination of any of the rights and remedies set forth in subsection 23.1 of
this Agreement.

              23.2   In the event the Landlord elects the right and remedy set
forth in subsection 23.1.1 of this Agreement, Termination Damages shall be equal
to the amount which, at the time of actual payment thereof to the Landlord, is
the sum of:

                     23.2.1 all accrued but unpaid Rent;

                     23.2.2 the present value (calculated using the most
recently available (at the time of calculation) published weekly average yield
on United States Treasury securities having maturities comparable to the balance
of the then remaining Term) of the sum of all payments of Rent remaining due (at
the time of calculation) until the date the Term would have expired (had there
been no election to terminate it earlier) less the present value (similarly
calculated) of all payments of rent to be received through the end of the Term
(had there been no election to terminate it earlier) from a lessee, if any, of
the Leased Premises at the time of calculation; and

                     23.2.3 the Landlord's reasonably estimated cost of
demolishing any leasehold improvements to the Leased Premises.

              23.3   In the event the Landlord elects the right and remedy set
forth in subsection 23.1.2 of this Agreement, Re-Leasing Damages shall be equal
to the Rent less any rent actually and timely received by the Landlord from any
lessee of the Leased Premises or any portion thereof, payable at the respective
times that Rent is payable under the Agreement.

              23.4   In the event the Landlord elects the right and remedy set
forth in subsection 23.1.3 of this Agreement, Holdover Damages shall mean
damages at the rate per month or part thereof equal to the greater of: (a) one
and one-half times one-twelfth of the then Market Rental Rate plus all
Additional Rent as set forth in this Agreement or (b) double the average amount
of all payments of Rent due under this Agreement during each of the last 12 full
calendar months prior to the Landlord's so electing or, in the event the Term
shall have terminated by expiration under subsection 24.1.1 of this Agreement,
the last full 12 calendar months of the Term, in either case payable in full on
the first day of each holdover month or part thereof.



                                      -26-



<PAGE>   31

              23.5   In connection with any summary proceeding to dispossess and
remove the Tenant from the Leased Premises under subsection 23.1.3 of this
Agreement, the Tenant hereby waives:

                     23.5.1 any notices for delivery of possession thereof, of
termination, of demand for removal therefrom, of the cause therefor, to cease,
to quit and all other notices that might otherwise be required pursuant to 2 A
N.J.S.A. 18-53 ET SEQ.;

                     23.5.2 any right the Tenant might otherwise have to
transfer or remove such proceeding from the court (or the particular division or
part of the court) or other forum in which it shall have been instituted by the
Landlord to another court, division or part; and

                     23.5.3 any right the Tenant might otherwise have to appeal
any judgment awarding possession of the Leased Premises to the Landlord (but
this subsection shall not be deemed a waiver of any right the Tenant might
otherwise have to appeal any judgment other than a judgment awarding possession
of the Leased Premises to the Landlord).

              23.6   The enumeration of rights and remedies in this section 23
of the Agreement is not intended to be exhaustive or exclusive of any rights and
remedies which might otherwise be available to the Landlord, or to force an
election of one or more rights and remedies to the exclusion of others,
concurrently, consecutively or sequentially. On the contrary, each right and
remedy enumerated in this section 23 of the Agreement is intended to be
cumulative with each other right and remedy enumerated in this section 23 of the
Agreement and with each other right and remedy that might otherwise be available
to the Landlord; and the selection of one or more of such rights and remedies at
any time shall not be deemed to prevent resort to one or more others of such
rights and remedies at the same time or a subsequent time, even with regard to
the same occurrence sought to be remedied. Nothing in this section 23 of the
Agreement shall be deemed to sanction recovery by the Landlord of damages for
unpaid Rent in arrears with respect to any given period under more than one of
the following subsections: 23.2, 23.3 and 23.4.

       24     TERMINATION OF THE TERM.

              24.1   The Term shall terminate upon the earliest of the following
events to occur:

                     24.1.1 expiration of the Term;

                     24.1.2 in connection with a transaction contemplated by
section 16 of this Agreement, the later of (a) the vesting of the acquiring
party's right to possession or (b) the Tenant's vacating the Leased Premises;

                     24.1.3 under the circumstances contemplated by 
subsection 15.1 of this Agreement, upon the Tenant's giving notice of the
failure of the Landlord to give, on a timely basis, the notice contemplated by
subsection 15.1.2 of this Agreement (within 30 days of the last date that the
Landlord might timely have given timely notice under subsection 15.1.2 of this



                                      -27-



<PAGE>   32

Agreement) and that the Tenant desires termination of the Term (which
termination shall be effective as of the date of the subject casualty with
respect to those portions of the Leased Premises rendered untenantable and as of
the date of the Tenant's giving notice with respect to those portions of the
Leased Premises which were not rendered untenantable);

                     24.1.4 under the circumstances contemplated by 
subsection 15.1 of this Agreement, upon the expiration of 30 additional days
(without the Landlord's completion of restoration in the interim) after the
Tenant's notice that the Landlord has not restored the Leased Premises on a
timely basis and that the Tenant desires termination of the Term (which
termination shall be effective as of the date of the subject casualty with
respect to those portions of the Leased Premises rendered untenantable and as of
the date of the Tenant's giving notice with respect to those portions of the
Leased Premises which were not rendered untenantable);

                     24.1.5 the effective date of any election by the Landlord
under subsection 17.3.3 of this Agreement in response to the Tenant's notice of
the Tenant's desire to assign this Agreement or to sublet all or a portion of
the Leased Premises; or

                     24.1.6 the effective date of any election by the Landlord
to terminate the Term under subsection 23.1.1 of this Agreement.

              24.2   No termination of the Term shall have the effect of
releasing the Tenant from any obligation or liability theretofore or thereby
incurred and, until the Tenant shall have surrendered the Leased Premises in
accordance with section 21 of this Agreement, from any obligation or liability
thereafter incurred.

       25     MORTGAGE AND UNDERLYING LEASE PRIORITY. This Agreement and the
estate, interest and rights hereby created for the benefit of the Tenant are,
and shall always be, subordinate to any mortgage (other than a mortgage created
by the Tenant or a sale, transfer or other disposition by the Tenant in the
nature of a security interest in violation of subsections 17.1.4 and 22.5,
respectively, of this Agreement) already or afterwards placed on the Carnegie
Center Complex, the Property, the Common Facilities, the Building or any estate
or interest therein including, without limiting the generality of the foregoing,
any new mortgage or any mortgage extension, renewal, modification,
consolidation, replacement, supplement or substitution. This Agreement and the
estate, interest and rights hereby created for the benefit of the Tenant are,
and shall always be, subordinate to any ground lease already or afterwards made
with regard to the Carnegie Center Complex, the Property, the Common Facilities,
the Building or any estate or interest therein including, without limiting the
generality of the foregoing, any new ground lease or any ground lease extension,
renewal, modification, consolidation, replacement, supplement or substitution.
The provisions of this section 25 of the Agreement shall be self-effecting; and
no further instrument shall be necessary to effect any such subordination.
Nevertheless, the Tenant hereby consents that any mortgagee or mortgagee's
successor in interest may, at any time and from time to time, by notice to the
Tenant, subordinate its mortgage to the estate and interest created by this
Agreement; and upon the giving of such notice, the subject mortgage shall be
deemed subordinate to the estate and interest created by this Agreement
regardless of the respective times of execution or delivery of either or of
recording the subject mortgage.




                                      -28-



<PAGE>   33

       26     TRANSFER BY LANDLORD.

              26.1   The Landlord shall have the right at any time and from time
to time to sell, transfer, lease or otherwise dispose of the Carnegie Center
Complex, the Property, the common Facilities or the Building or any of the
Landlord's interests therein, or to assign this Agreement or any of the
Landlord's rights thereunder.

              26.2   upon giving notice of the occurrence of any transaction
contemplated by subsection 26.1 of this Agreement, the Landlord shall thereby be
relieved of any obligation that might otherwise exist under this Agreement with
respect to periods subsequent to the effective date of any such transaction. If,
in connection with any transaction contemplated by subsection 26.1 of this
Agreement the Landlord transfers, or makes allowance for, any Security Deposit
of the Tenant and gives notice of that fact to the Tenant, the Landlord shall
thereby be relieved of any further obligation to the Tenant with regard to any
such Security Deposit; and the Tenant shall look solely to the transferee with
respect to any such Security Deposit.

              26.3   In the event of the occurrence of any transaction
contemplated by subsection 26.1 of this Agreement the Tenant, upon written
request therefor from the transferee, shall attorn to and become the tenant of
such transferee upon the terms and conditions set forth in this Agreement.

              26.4   Notwithstanding anything to the contrary that may be set
forth in subsections 26.1, 26.2 and 26.3 of this Agreement, in the event any
mortgage contemplated by section 25 of this Agreement is enforced by the
respective mortgagee pursuant to remedies provided in the mortgage or otherwise
provided by law or equity and any person succeeds to the interest of the
Landlord as a result of, or in connection with, any such enforcement, the Tenant
shall, upon the request of such successor in interest, automatically attorn to
and become the Tenant of such successor in interest without any change in the
terms or provisions of this Agreement, except that such successor in interest
shall not be bound by: (a) any payment of Basic Rent or Additional Rent
(exclusive of prepayments in the nature of a Security Deposit) -for more than
one month in advance or (b) any amendment or other modification of this
Agreement which was made without the consent of such mortgagee or such successor
in interest; and, upon the request of such successor in interest, the Tenant
shall execute, acknowledge and deliver any instruments) confirming such
attornment.

              26.5   If this Agreement and the estate, interest and rights
hereby created for the benefit of the Tenant are ever subject and subordinate to
any ground lease contemplated by section 25 of this Agreement:

                     26.5.1 upon the expiration or earlier termination of the
term of any such ground lease before the termination of the Term under this
Agreement, the Tenant shall attorn to, and become the Tenant of, the lessor
under any such ground lease and recognize such lessor as the Landlord under this
Agreement for the balance of the Term; and

                     26.5.2 such expiration or earlier termination of the term
of any such ground lease shall have no effect on the Term under this Agreement.



                                      -29-



<PAGE>   34

              26.6   Notwithstanding anything to the contrary that may be set
forth in section 25 of this Agreement, with respect to any mortgages or ground
leases contemplated by section 25 of this Agreement, the Landlord shall use its
best efforts to obtain from each such mortgagee and ground lessor its respective
standard form of non-disturbance, attornment and subordination agreement
including a provision to the effect that, in the event of enforcement of any
remedies provided in the respective mortgage or ground lease, respectively, or
otherwise, so long as an Event of Default shall not have occurred, the Tenant
shall not be disturbed in its possession of the Leased Premises in accordance
with this Agreement. Any processing or other fee that the mortgagee or ground
lessor may charge and any reasonable legal expense that the Landlord may incur
in connection with performing its obligations under this subsection shall be
paid by the Tenant and, with respect to any processing or other fee charged by
the mortgagee or ground lessor, in advance.

       27     INDEMNIFICATION.

              27.1   The Tenant shall, and hereby does, indemnify the Landlord
against any and all liabilities, obligations, damages, penalties, claims, costs,
charges and expenses including, without limiting the generality of the
foregoing, expenses of investigation, defense and enforcement thereof or of the
obligation set forth in this section 27 of the Agreement including, without
limiting the generality of the foregoing, attorneys' fees, imposed on or
incurred by the Landlord in connection with any of the following matters which
occurs during the Term:

                     27.1.1 any matter, cause or thing arising out of the use,
occupancy, control or management of the Leased Premises or any portion thereof
which is not proximately caused by the Landlord's negligence or intentional
misconduct;

                     27.1.2 any negligence or intentional act on the part of the
Tenant or any of its employees, other agents or Guests;

                     27.1.3 any accident, injury or damage to any person or
property occurring in the Leased Premises which is not proximately caused by-the
Landlord's negligence intentional misconduct ;

                     27.1.4 any representation made by the Tenant in this
Agreement shall have been inaccurate or incomplete in any material respect
either on the date it was made or the date as of which it was made;

                     27.1.5 the imposition of any mechanic's, materialman's or
other lien on the Property, the Common Facilities, the Building, the
Leased-Premises or any-portion-of any of the foregoing, or the filing of any
notice of intention to obtain any such lien, in connection with any alteration,
improvement or other modification of the Leased Premises made or authorized by
the Tenant (which indemnification obligation shall be deemed to include the
Tenant's obligations set forth in subsection 12.2.4.3 of this Agreement); or

                     27.1.6 any failure on the part of the Tenant to perform or
comply with any obligation of the Tenant set forth in this Agreement.


                                      -30-



<PAGE>   35

              27.2   Payment of indemnification claims by the Tenant to the
Landlord shall be due upon the Landlord's giving notice thereof to the Tenant.

              27.3   The Landlord shall promptly give notice of any claim
asserted, or action or proceeding commenced, against it as to which it intends
to claim indemnification from the Tenant and, upon notice from the Tenant so
requesting, shall forward to the Tenant copies of all claim or litigation
documents received by it. Upon receipt of such notice the Tenant may, by notice
to the Landlord, participate therein and, to the extent it may desire, assume
the defense thereof through independent counsel selected by the Tenant and
reasonably satisfactory to the Landlord. The Landlord shall not be bound by any
compromise or settlement of any such claim, action or proceeding without its
prior written consent.

       28     PARTIES' LIABILITY.

              28.1   None of the following occurrences shall constitute a breach
of this Agreement by the Landlord, a termination of the Term, an active or
constructive eviction or an occurrence requiring an abatement of Rent:

                     28.1.1 the inability of the Landlord to provide any utility
or service to be provided by the Landlord, as described in section 8 of this
Agreement which is due to causes beyond the Landlord's control, or to necessary
or advisable improvements, maintenance, repairs or emergency, so long as the
Landlord uses reasonable efforts and diligence under the circumstances to
restore the interrupted service or utility;

                     28.1.2 any improvement, modification, alteration or other
change made to the Carnegie Center Complex, the Property, the Building or the
common Facilities by the Landlord consistently with the Landlord's obligations
set forth in subsection 13.2 of this Agreement; and

                     28.1.3 any change in any Federal, state or local law or 
ordinance.

              28.2   Except for the commencement, duration or termination of the
Term (other than under the circumstances contemplated by subsection 15.1 of this
Agreement), the Tenant's obligation to make timely payments of Rent, the
Tenant's obligation to maintain certain insurance coverage in effect and the
period within which any option to Renew or any other type of option or optional
right exercisable by the Tenant must be exercised, any period of time during
which the Landlord or the Tenant is prevented from performing any of its
respective obligations under this Agreement because of fire, any other casualty
or catastrophe, strikes, lockouts, civil commotion, acts of God or the public
enemy, governmental prohibitions or preemptions, embargoes or inability to
obtain labor or material due to shortage, governmental regulation or
prohibition, shall be added to the time when such performance is otherwise
required under this Agreement.

              28.3   In the event the Landlord is an individual, partnership,
joint venture, association or a participant in a joint tenancy or tenancy in
common, the Landlord, the partners, venturers, members and joint owners shall
not have any personal liability or obligation under or 


                                      -31-



<PAGE>   36

in connection with this Agreement or the Tenant's use and occupany of the Leased
Premises; but recourse shall be limited exclusively to the Landlord's interest
in the Building.

              28.4 If, at any time during the Term, the payment or collection of
any Rent otherwise due under this Agreement shall be limited, frozen or
otherwise subjected to a moratorium by applicable law, and such limitation,
freeze or other moratorium shall subsequently be lifted, whether before or after
the termination of the Term, such aggregate amount of Rent as shall not have
been paid or collected during the Term on account of any such limitation, freeze
or other moratorium, shall thereupon be due and payable at once. There shall be
added to the maximum period of any otherwise applicable statute of limitation
the entire period during which any such limitation, freeze or other moratorium
shall have been in effect.

              28.5 If this Agreement is executed by more than one person as
Tenant, their liability under this Agreement and in connection with the use and
occupancy of the Leased Premises shall be joint and several.

              28.6 In the event any rate of interest, or other charge in the
nature of interest, calculated as set forth in this Agreement would lead to the
imposition of a rate of interest in excess of the maximum rate permitted by
applicable usury law, only the maximum rate permitted shall be charged and
collected.

       29     SECURITY DEPOSIT. The Tenant shall pay to the Landlord upon
execution and delivery of this Agreement the sum of $14,228.00 as a security
deposit to be held by the Landlord as security for the Tenant's performance of
all the Tenant's obligations under this Agreement. The Landlord may commingle
the Security Deposit with its general funds. Any interest earned on the Security
Deposit shall belong to the Landlord. The Tenant shall not encumber the Security
Deposit. The Landlord, in its sole discretion, may apply the Security Deposit to
cure any Event of Default under this Agreement. If any such application is made,
upon notice by the Landlord to the Tenant, the Tenant shall promptly replace the
amount so applied. If there has been no Event of Default, within 30 days after
termination of the Term the Landlord shall return the entire balance of the
Security Deposit to the Tenant. The Tenant will not look to any foreclosing
mortgagee of the Property, the Building, the Common Facilities or any interest
therein for such return of the balance of the Security Deposit, unless the
mortgagee has expressly assumed the Landlord's obligations under this Agreement
or has actually received the balance of the Security Deposit.

       30     REPRESENTATIONS.  The Tenant hereby represents and warrants that:

              30.1 its Standard Industrial Classification (SIC) code is 2834 and
it will promptly give notice of any change therein during the Term to the
Landlord;

              30.2 no broker or other agent has shown the Leased Premises or the
Building to the Tenant, or brought either to the Tenant's attention, except
Princeton Realty Advisors L. P., whose entire commission therefor is set forth
in a separate document and which commission the Tenant understands will be paid
by the Landlord directly to the person named;



                                      -32-




<PAGE>   37

              30.3 the execution and delivery of, the consummation of the
transactions contemplated by and the performance of all its obligations under,
this Agreement by the Tenant have been duly and validly authorized by its
general partners, to the extent required by their partnership agreement and
applicable law, if the Tenant is a partnership or, if the Tenant is a
corporation, by its board of directors and, if necessary by its stockholders at
meetings duly called and held on proper notice for that purpose at which there
were respective quorums present and voting throughout or, alternatively, by
effective written consent of its board of directors and, if necessary, its
stockholders; and no other approval, partnership, corporate, governmental or
otherwise, is required to authorize any of the foregoing or to give effect to
the Tenant's execution and delivery of this Agreement; and

              30.4 the execution and delivery of, the consummation of the
transactions contemplated by and the performance of all its obligations under,
this Agreement by the Tenant will not result in a breach or violation of, or
constitute a default under, the provisions of any statute, charter, certificate
of incorporation or bylaws or partnership agreement-of the Tenant or any
affiliate of the Tenant, as presently in effect, or any indenture, mortgage,
lease, deed of trust, other agreement, instrument, franchise, permit, license,
decree, order, notice, judgment, rule or order to or of which the Tenant or any
affiliate of the Tenant is a party, a subject or a recipient or by which the
Tenant, any affiliate of the Tenant or any of their respective properties and
other assets is bound.

       31     RESERVATION IN FAVOR OF TENANT. Neither the Landlord's forwarding
a copy of this document to any prospective tenant nor any other act on the part
of the Landlord prior to execution and delivery of this Agreement by the
Landlord shall give rise to any implication that any prospective tenant has a
reservation, an option to lease or an outstanding offer to lease any premises.

       32     TENANT'S CERTIFICATES AND MORTGAGEE NOTICE REQUIREMENTS.

              32.1   Upon request of the Landlord at any time or from time to
time, but in no event more than 13 days after the Landlord's respective request,
the Tenant shall execute, acknowledge and deliver to the Landlord or its
designee an estoppel or other certificate, satisfactory in form and substance to
the Landlord and any of its mortgagees, ground lessors or lessees or transferees
or prospective mortgagees, ground lessors or lessees or transferees, with
respect to any of or all the following matters:

                     32.1.1 whether this Agreement is then in full force and 
effect;

                     32.1.2 whether this Agreement has not been amended,
modified, superseded, canceled, repudiated or revoked;

                     32.1.3 whether the Landlord has satisfactorily completed
all construction work, if any, required of the Landlord or contractors selected
and retained by the Landlord in connection with readying the Leased Premises for
occupancy by the Tenant in accordance with section 5 of this Agreement;



                                      -33-



<PAGE>   38

                    32.1.4  whether the Tenant is then in actual possession of
the Leased Premises;

                    32.1.5  whether, to its knowledge, the Tenant then has no
defenses or counterclaims under this Agreement or otherwise against the Landlord
or with respect to the Leased Premises;

                    32.1.6  whether, to the Tenant's knowledge, Landlord is not
then in breach of this Agreement in any respect;

                    32.1.7  whether the Tenant then has no knowledge of any
assignment of this Agreement, the pledging or granting of any security interest
in this Agreement or in Rent due and to become due under this Agreement;

                    32.1.8  whether Rent is not then accruing under this
Agreement in accordance with its terms;

                    32.1.9  whether any Rent is not then in arrears;

                    32.1.10 whether Rent due or to become due under this
Agreement has not been prepaid by more than one month;

                    32.1.11 if the response to any of the foregoing matters is
in the negative, a specification of all the precise reasons that necessitated
the negative response in each instance; and

                    32.1.12 any other matter reasonably requested by the
Landlord or any of its mortgagees, ground lessors or lessees or transferees or
prospective mortgagees, ground lessors or lessees or transferees, including,
without limiting the generality of the foregoing, such information as the
Landlord may reasonably request for purposes of assuring compliance with the
Environmental Cleanup Responsibility Act (13 N.J.S.A. ss.1K-6 ET SEQ.), as it
may be amended, and any other applicable Federal, state or local statute,
ordinance, rule, regulation or order concerned with environmental matters.

              32.2  If, in connection with the Landlord's or a prospective
transferee's obtaining financing or refinancing of the Carnegie Center Complex,
the Property, the Building, the Common Facilities, any portion thereof or any
interest therein, the Landlord or a prospective lender shall so request, the
Tenant shall furnish to the requesting party within 15 days of the request:

                    32.2.1  its written consent to any requested modifications
of this Agreement provided that, in each such instance, the requested
modification does not increase the Rent otherwise due or, in the reasonable
judgment of the Tenant, otherwise materially increase the obligations of the
Tenant under this Agreement or materially adversely affect the Tenant's
leasehold interest created hereby or the Tenant's use and enjoyment of the
Leased Premises (except in the circumstances contemplated by section 16 of this
Agreement).


                                      -34-




<PAGE>   39

              32.3 If the Landlord or any of its mortgagees gives notice to the
Tenant of any of their respective names and addresses from time to time, the
Tenant shall give notice to each such mortgagee of any notice of breach or
default previously or afterwards given by the Tenant to the Landlord under this
Agreement and provide in such notice that if the Landlord has not cured such
breach or default within any permissible cure period then such mortgagee shall
have the greater of (a) an additional period of 30 days or (b) if such default
cannot practically be cured within such period, such additional period as is
reasonable under the circumstances, within which to cure such default. Upon
request of the Landlord at any time or from time to time, the Tenant shall
execute, acknowledge and deliver to the Landlord or its designee an
acknowledgment of receipt of any such notice, an acknowledgment of receipt of
any notice of assignment of this Agreement or rights hereunder by the Landlord
to any of its mortgagees and the Tenant's agreement to the foregoing effect on
the respective forms,-if any, furnished by the Landlord or the respective
mortgagees.

              32.4 Approximately (i) 90 days prior to the termination of the
Term and (ii) 30 days prior to any relocation of the Tenant from the Leased
Premises (as constituted on the Commencement Date), the Tenant shall obtain from
the New Jersey Department of -Environmental Protection, and deliver to the
Landlord, the Department's-unconditional certificate of non-applicability or
approval of the Tenant's negative declaration or clean-up plan, together with
copies of all documents furnished to the Department in connection with obtaining
such certificate or approval.

       33     WAIVER OF JURY TRIAL AND ARBITRATION. The parties hereby waive any
right they might otherwise have to a trial by jury in connection with any
dispute arising out of or in connection with this Agreement or the use and
occupancy of the Leased Premises; and they hereby consent to arbitration of any
such dispute in Princeton, New Jersey, in accordance with the rules for
commercial arbitration of the American Arbitration Association or successor
organization, except that the Landlord, in its sole discretion, may, with
respect to any dispute involving either (i) the Landlord's right to re-enter and
re-take possession of the Leased Premises or (ii) the determination of money
damages following the occurrence of an Event of Default under this Agreement,
elect to pursue any of or all its rights in any court of competent jurisdiction.
Judgment upon any arbitration award may be entered in any court of competent
jurisdiction.

       34     SEVERABILITY. In the event that any provision of this Agreement,
or the application of any provision in any instance, shall be conclusively
determined by a court of competent jurisdiction to be illegal, invalid or
otherwise unenforceable, such determination shall not affect the validity or
enforceability of the balance of this Agreement.

       35     NOTICES. All notices contemplated, permitted or required by this
Agreement shall be in writing. All notices required by this Agreement shall be
delivered by messenger, by overnight courier service (such as Fedex and the
like) or by facsimile or forwarded by certified mail--return receipt requested,
addressed to the intended party at its address first set forth above (adding, in
the case of notices to the Landlord after the Commencement Date, "Attention:
Lease Administration") or, in the case of notices to the Tenant during the Term
or any other period 



                                      -35-





<PAGE>   40

during which the Tenant shall be in possession of the Leased Premises, at the
Leased Premises. Either party may from time to time change the address
prescribed in this Agreement for notices to it by notice to the other. All
mailed notices required under this Agreement shall be deemed given upon their
deposit, properly addressed and postage prepaid, in a postal depository or upon
delivery by any of the other modes contemplated above, to the intended party,
regardless of whether delivery shall be refused.

       36     CAPTIONS. Captions have been inserted at the beginning of each
section of this Agreement for convenience of reference only and such captions
shall not affect the construction or interpretation of any such section of this
Agreement.

       37     COUNTERPARTS. This Agreement may be executed in more than one
counterpart, each of which shall constitute an original of this Agreement but
all of which, taken together, shall constitute one and the same Agreement.

       38     APPLICABLE LAW. This Agreement and the obligations of the parties
hereunder shall be governed by and construed in accordance with the laws of the
State of New Jersey.

       39     EXCLUSIVE BENEFIT. Except as may be otherwise specifically set
forth in this Agreement, this Agreement is made exclusively for the benefit of
the parties hereto and their permitted assignees and no one else shall be
entitled to any right, remedy or claim by reason of any provision of this
Agreement.

       40     SUCCESSORS. This Agreement shall be binding upon the parties
hereto and their respective successors and assigns.

       41     AMENDMENTS. This Agreement contains the entire agreement of the
parties hereto, subsumes all prior discussions and negotiations and, except as
may otherwise be specifically set forth in this Agreement, this Agreement may
not be amended or otherwise modified except by a writing signed by all the
parties to this Agreement.

       42     WAIVER. Except as may otherwise be specifically set forth in this
Agreement, the failure of any party at any time or times to require performance
of any provision of this Agreement shall in no manner affect the right at a
later time to enforce the same. No waiver by any party of any condition, or of
the breach of any term, covenant, representation or warranty set forth in this
Agreement, whether by conduct or otherwise, in any one or more instances shall
be deemed to be or construed as a further or continuing waiver of any such
condition or breach, or as a waiver of any other condition or of the breach of
any other term, covenant, representation or warranty set forth in this
Agreement. The Landlord's acceptance of, or endorsement on, any partial payment
of Rent or any late payment of Rent from the Tenant shall. not operate as a
waiver of the Landlord's right to the balance of the Rent due on a timely basis
regardless of any writing to the contrary on, or accompanying, the Tenant's
partial payment or the Landlord's putative acquiescence therein.



                                      -36-





<PAGE>   41

       43     COURSE OF PERFORMANCE. No course of dealing or performance by the
parties, or any of them, shall be admissible for the purpose of obtaining an
interpretation or construction of this Agreement at variance with the express
language of the Agreement itself.

       44     LANDLORD'S CONCESSIONS.

              44.1 Notwithstanding anything to the contrary that may be set
forth in subsection 5.4 of this Agreement, (a)(i) if no Event of Default shall
have occurred or (ii) if an Event of Default shall have occurred, the Tenant
shall have previously cured it in full and the Landlord shall have waived it and
(b) if the preparation of the Leased Premises contemplated by section 5 of this
Agreement is being accomplished exclusively through contractors selected by the
Landlord and (c) if the scope of the work contemplated by the Tenant Plan is
limited to (i) repainting those portions of the interior walls of the Leased
Premises in the Tenant's choice of building standard color where the Tenant does
not wish to retain existing wall treatments, (ii) recarpeting floors of the
Leased Premises with building standard carpet in the Tenant's choice of building
standard color (from the Landlord's existing inventory of building standard
carpet on hand) and (iii) constructing two offices in the Leased Premises with
building standard materials and finishes, the Landlord shall credit against any
amount otherwise due from the Tenant in accordance with subsection 5.4 of this
Agreement an amount equal to 100% thereof.

       IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.



                                         LANDLORD:

                                         CARNEGIE CENTER ASSOCIATES

                                         By:  Princeton Carnegie Associates

                                         By /s/ Alan B. Landes
                                            ------------------------------------
                                            Alan B. Landis, General Partner

                                         TENANT:

                                         ADVANCED MAGNETICS, INC.


                                         By /s/ Jerome M. Lewis
                                            ------------------------------------
                                            Jerome M. Lewis, Vice President
                                            Scientific Operations



                                      -37-

<PAGE>   42






                                                                       EXHIBIT A


                           LEASED PREMISES FLOOR SPACE DIAGRAM











<PAGE>   43







                                                                       EXHIBIT B


                                  PROPERTY DESCRIPTION

                           DESCRIPTION OF 104 CARNEGIE CENTER
                                  WEST WINDSOR TOWNSHIP
                                MERCER COUNTY, NEW JERSEY

       All that certain lot, parcel or tract of land situate and lying in the
Township of West Windsor, County of Mercer and State of New Jersey and being
more particularly described as lot 70 in block 9, as shown on a map entitled
"Final Plat, Carnegie Center, Tax Lot 2, Block 9, situate in West Windsor
Township, Mercer County, New Jersey," dated February 11, 1980, and filed in the
Mercer County Clerk's Office as Map No. 2426 on May 29, 1980, as the same may be
amended.




<PAGE>   44








                                                                      EXHIBIT C-

                                       WORK LETTER



       The following is the Work Letter referred to in the Agreement of which
this exhibit is a part.

       The Building's structure is a three-story office building of Construction
Type 2C with a steel frame, a metal deck floor system, a brick exterior facade
and insulated glass. The floors will sustain a live load of 100 pounds per
square foot of usable floor space plus an allowance of 20 pounds per square foot
for partitions and will have a typical bay size of 30 feet by 30 feet.

       Among other Common Facilities, the Building will contain two men's and
two women's bathrooms on each floor, two drinking fountains on each floor and
two hydraulic elevators with a capacity of 2,500 pounds each and will have
Parking Facilities with approximately 500 lined parking spaces. For purposes of
telecommunications hookups, a Building telephone switching room and space
between the finished ceilings and the underside of the floor above (or roof) are
provided as common Facilities.

       "Building standard" shall mean the type and grade of material, equipment
or device designated by the Landlord as standard for leased premises in the
Building.

       The Tenant will include the following information as part of its Tenant
Plan:

              1. The location and extent of floor loading, if any, in excess of
the building standard specified above.

              2. Special air conditioning requirements, if any, in excess of the
building standard.

              3. Plumbing requirements, if any.

              4. Estimated total electrical load, including lighting
requirements, lighting switch requirements and electrical outlet requirements,
if any, in excess of the building standard, setting forth the amount of the
load, locations and types.




<PAGE>   45









                                                                      EXHIBIT D-
                             BUILDING RULES AND REGULATIONS


       The following are the Building Rules and Regulations adopted in
accordance with subsection 7.2.3 of the Agreement of which this exhibit is a
part; and the Tenant and the Tenant's employees, other agents and Guests shall
comply with these Building Rules and Regulations:

              1. The sidewalks, driveways, entrances, passages, courts, lobby,
esplanade areas, plazas, elevators, vestibules, stairways, corridors, halls and
other Common Facilities shall not be obstructed or encumbered or used for any
purpose other than ingress and egress to and from the Leased Premises. The
Tenant shall not permit or suffer any of its employees, other agents or Guests
to congregate in any of the said areas. No door mat of any kind whatsoever shall
be placed or left in any public hall or outside any entry door of the Leased
Premises.

              2. No awnings or other projections shall be attached to the
outside walls of the Building. No curtains, drapes, blinds, shades or screens
shall be attached to, hung in or used in connection with any window or door of
the Leased Premises without the prior written consent of Landlord. If such
consent is given, such curtains, drapes, blinds, shades or screens shall be of a
quality, type, design and color, and attached in the manner, approved by
Landlord.

              3. Except as otherwise specifically provided in subsection 18.1 of
the Agreement, no sign, insignia, advertisement, object, notice or other
lettering shall be exhibited, inscribed, painted or affixed so as to be visible
from outside the Leased Premises or the Building. In the event of the violation
of the foregoing by the Tenant, the Landlord may remove same without any
liability and may charge the expense incurred in such removal to the Tenant.

              4. The sashes, doors, skylights, windows, and doors that reflect
or admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed and no bottles, parcels or other
articles shall-be placed on the window sills.

              5.     No showcase or other articles shall be placed in front of
or affixed to any part of the Building or the Common Facilities.

              6. The lavatories, water and wash closets and other plumbing
fixtures shall not be used for any purposes other than those for which they were
designed and constructed, and no sweepings, rubbish, rags, acids or other
substances shall be thrown or deposited therein. All damages resulting from any
misuse thereof shall be repaired at the expense of the Tenant that permitted or
suffered the violation hereof by the Tenant, the Tenant's employees, other
agents or Guests.

              7. The Tenant shall not mark, paint, drill into or in any way
deface any part of the Leased Premises, the Building, the Common Facilities or
the Property. No boring, cutting or stringing of wires shall be permitted,
except with the prior written consent of the Landlord, 







<PAGE>   46

and as the Landlord may direct. Linoleum and other resilient floor coverings
shall be laid so that the same shall not come in direct contact with the floor
of the Leased Premises; and if linoleum or other resilient floor coverings are
desired, an interlining of builder's deadening felt shall be first affixed to
the floor by a paste or other material that is, and will remain, soluble in
water. The use of cement or other adhesive material that either is not, or will
not remain, soluble in water is prohibited.

              8.  No bicycles, vehicles, animals, reptiles, fish or birds of any
kind shall be brought into or kept in or about the Leased Premises.

              9.  No noise including, without limiting the generality of the
foregoing, music or the playing of musical instruments, recordings, radio or
television which, in the reasonable judgment of Landlord, might disturb tenants
of Other Leased Premises shall be made or permitted by the Tenant. Nothing shall
be done or permitted in the Leased Premises by the Tenant which would impair or
interfere with the use or enjoyment of Other Leased Premises by any tenant
thereof. Nothing shall be thrown out of the doors, windows or skylights or down
the passageways of the Building.

              10. The Tenant shall not manufacture any commodity, or prepare or
dispense any foods or beverages, tobacco, flowers or other commodities or
articles without the prior written consent of the Landlord.

              11. Duplicates of keys and passes distributed to the Tenant by the
Landlord shall not be made. The Tenant shall provide appropriate security for
keys. Nothing shall be done to render any lock inoperable by the Building Grand
Master Key. No lock shall be installed without the Landlord's prior written
consent; and any lock so installed shall be operable by the Building Grand
Master Key. Upon termination of the Term, all keys, passes and duplicates
provided by the Landlord to the Tenant, or otherwise procured by the Tenant,
shall be returned to the Landlord. Any failure to comply with the foregoing
which requires changes in locks, new or additional keys, passes or duplicates or
other services of a locksmith shall be paid by the Tenant.

              12. All deliveries and removals, and the carrying in or out of any
safes, freight, furniture, packages, boxes, crates or any other object or matter
of any description shall take place during such hours, in such manner and in
such elevators and passageways as the Landlord may determine from time to time.
The Landlord reserves the right to inspect all objects and matter being brought
into the Building or the Common Facilities and to exclude from the Building and
the Common Facilities all objects and matter that violates any of these Building
Rules and Regulations or that are contraband. The Landlord may (but shall not be
obligated to) require any person leaving the Building or the common Facilities
with any package or object or matter from the Leased Premises to establish his
authority from the Tenant to do so. The establishment and enforcement of such a
requirement shall not impose any responsibility on the Landlord for the
- -protection of the Tenant against the removal of property from the Leased
Premises. The Landlord shall not be liable to the Tenant for damages or loss
arising from the admission, exclusion or ejection of any person to or from the
Leased-Premises or the Building or the Common Facilities under this rule.




                                      D-2




<PAGE>   47

              13. The Tenant shall not place any object in any advertising or
display of such identifying sign.

              14. The Landlord shall have the right to prohibit any advertising
or display of any identifying sign by the Tenant which in the Landlord's
judgment tends to impair the reputation of the Building or its desirability;
and, on written notice from the Landlord, the Tenant shall refrain from or
discontinue such advertising or display of such identifying sign.

              15. The Landlord reserves the right to exclude from the Building
and the Common Facilities during hours other than Regular Business Hours all
persons who do not present a pass thereto signed by both the Landlord and the
Tenant. All persons entering or leaving the Building or the Common Facilities
during hours other than Regular Business may be required to sign a register. The
Landlord will furnish passes to persons for whom the Tenant requests same in
writing. The establishment and enforcement of such a requirement shall not
impose any responsibility on the Landlord for the protection of the Tenant
against unauthorized entry of persons.

              16. The Tenant, before closing and leaving the Leased Premises at
any time shall see that all lights and appliances generating heat (other than
the heating system) are turned off. All entrance doors to the Leased Premises
shall be left locked by the Tenant when the Leased Premises are not in use. At
any time when the Building or the Common Facilities are locked during hours
other than Regular Business Hours, the Building and the Common Facilities locks
shall not be defeated by any means, such as by leaving a door ajar.

              17. No person shall go upon the roof of the Building without the
prior written consent of the Landlord.

              18. Any requirements of the Tenant may be attended to only upon
application at the office of the Building. The Landlord and its agents shall not
perform any work or do any work or do anything outside of the Landlord's
obligations under the Agreement except upon special instructions from the
Landlord on terms acceptable to the Landlord and the Tenant.

              19. Canvassing, soliciting and peddling in the Building and the
Common Facilities are prohibited and the Tenant shall cooperate to prevent same.

              20. There shall not be used in any space, or in the public halls
or other Common Facilities of the Building, in connection with the moving or
delivery or receipt of safes, freight, furniture, packages, boxes, crates,
paper, office material, or any other matter or thing, any hand trucks or dollies
except those equipped with rubber tires, side guards and such other safeguards
as the Landlord shall require. No hand trucks shall be used in passenger
elevators, and no passenger elevators shall be used for the moving, delivery or
receipt of the aforementioned articles. In connection with moving in or out any
Furniture, furnishings, equipment, heavy articles and heavy packages, the Tenant
shall take such precautions as may be 



                                      D-3





<PAGE>   48

necessary to prevent excessive wear and tear in the Building's common Facilities
and the Leased Premises including, without limiting the generality of the
foregoing, floor and wall treatments.

              21. The Tenant shall not cause or permit any odors of cooking or
other processes or any unusual or objectionable odors to emanate from the Leased
Premises which might constitute a Nuisance. No cooking shall be done in the
Leased Premises other than as specifically permitted in the Agreement.

              22. The Landlord reserves the right not to enforce any Building
Rule or Regulation against any tenants of Other Leased Premises. The Landlord
reserves the right to rescind, amend or waive any Building Rule and Regulation
when, in the Landlord's reasonable judgment, it appears necessary or desirable
for the reputation, safety, care or appearance of the Building or the
preservation of good order therein or the operation of the Building or the
comfort of tenants or others in the Building. No rescission, amendment or waiver
of any Building Rule and Regulation in favor of one tenant shall operate as a
rescission, amendment or waiver in favor of any other tenant.





                                      D-4

<PAGE>   49









                                                                       EXHIBIT E


                          DEFINITIONS AND INDEX OF DEFINITIONS

       In accordance with section 1 of the Agreement of which this exhibit is a
part, throughout the Agreement the following terms and phrases shall have the
meanings set forth or referred to below:

1      "Additional Rent" means all amounts, other than Basic Rent and any
Security Deposit, required to be paid by the Tenant to the Landlord in
accordance with this Agreement.

2      "Affiliate" of any person means a person controlling, controlled by, or
under common control with, that person.

3      "Agreement" means this Lease and Lease Agreement (including exhibits), as
it may have been amended.

4      "Annual Amortized Capital Expenditure" means the payment amount
determined as an annuity payable in arrears using the cost incurred by the
Landlord for any Capital Expenditure as the present value, the number of years
of its useful life (not exceeding 10 years) selected by the Landlord in
accordance with generally applied real estate accounting practice as the number
of periods and the Base Rate in effect when the respective improvement is first
placed into service plus two additional percentage points as the annual rate of
interest.

5      "Base Rate" means the prime commercial lending rate per year as announced
from time to time by The Chase Manhattan Bank (National Association) at its
principal office in New York City.

6      "Basic Rent" is defined in subsection 3.2 of this Agreement.

7      "Building" means the office building erected on the Property which is
commonly known as 104 Carnegie Center, Princeton, New Jersey 08540, as it may,
in the Landlord's sole discretion, be increased, decreased, modified;-altered or
otherwise changed from time to time before, during or after the Term. As the
Building is presently constructed it consists of 100,338 gross rentable square
feet of floor space.

8      "Capital Expenditure" is defined in subsection 10.3 of this Agreement.

9      "Commencement Date" is defined in section 4 of this Agreement.

10     "Common Facilities" means the areas, facilities and improvements provided
by the Landlord in the Building.(except the Leased Premises and the Other Leased
Premises) and on or about the Property, including, without limiting the
generality of the foregoing, the Parking Facilities and access roads thereto,
sidewalks providing access to the Building, hallways, 









<PAGE>   50

stairways, elevators, lobbies and other public areas for non-exclusive use by
the Tenant in accordance with subsection 2.2 of this Agreement, as they may, in
the Landlord's sole discretion, be increased, decreased, modified, altered or
otherwise changed from time to time before, during or after the Term.

11     "Common Walls" means those walls which separate the Leased Premises from
Other Leased Premises.

12     "Electric Charges" means all the supplying utility's charges for, or in
connection with, furnishing electricity including charges determined by actual
usage, any seasonal adjustments, demand charges, energy charges, energy
adjustment charges and any other charges, howsoever denominated, of the
supplying utility, including sales and excise taxes and the like.

13     "Event of Default" is defined in section 22 of this Agreement.

14     "Expiring Term" means, when used in the context of any option to Renew,
the Term as it is then scheduled to expire (immediately prior to exercise of the
next available Option to Renew).

15     The Tenant's "Guests" shall mean the Tenant's licensees, invitees and all
others in, on or about the Leased Premises, the Building, the Common Facilities
or the Property, either at the Tenant's express or implied request or invitation
or for the purpose of soliciting or visiting the Tenant.

16     A "History of Recurring Events of Default" means the occurrence of three
or more Events of Default (whether or not cured by the Tenant) in any period of
12 months.

17     "Holdover Damages" is defined in subsection 23.4 of this Agreement.

18     The "Index" means the "all items" index figure for the New York
Northeastern New Jersey average of the Consumer Price Index for all urban wage
earners and clerical workers which uses a base period of 1982-84=100, published
by the United States Department of Labor, so long as it continues to be
published. If the Index is not published for a period of three consecutive
months, or if its base period is changed, the term "Index" shall mean that
index, as nearly equivalent in purpose, function and coverage as practicable to
the original Index, which the Landlord shall have designated by notice to the
Tenant.

19     "Initial Term" means the period so designated in subsection 4.1 of this
Agreement.

20     "Initial Year" means the first 12 full calendar months of the Initial 
Term.

21     "Landlord" means the person so designated at the beginning of this
Agreement and those successors to the Landlord's interest in the Property and/or
the Landlord's rights and obligations under this Agreement contemplated by
section 26 of this Agreement.



                                      E-2






<PAGE>   51

22     "Leased Premises" means that portion of the interior of the Building (as
viewed from the interior of the Leased Premises) bounded by the interior sides
of the unfinished floor and the finished ceiling on the second floor (as the
floors have been designated by the Landlord) of the Building, the centers of all
Common Walls and the exterior sides of all walls other than Common Walls, the
outline of which floor space is designated on the diagram set forth in Exhibit A
attached hereto, which portion contains 4,445 square feet of usable floor space
and 5,174 square feet of gross rentable floor space; and references within this
Agreement to the gross rentable floor space and the usable floor space,
respectively, of the Leased Premises shall mean the respective quantities herein
specified.

23     "Legal Holidays" means New Year's Day, Presidents' Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

24     "Market Rental Rate" means, at the time of reference, the gross rentable
floor space of the Leased Premises multiplied by the greater of: (a) that annual
rate of Basic Rent per square foot of gross rentable floor space which is then
being quoted by the Landlord for comparable Other Leased Premises (or would then
be quoted if comparable Other Leased Premises were then available) or (b) that
annual rate of Basic Rent per square foot of gross rentable floor space in
effect during the Expiring Term.

25     "Municipality" means the Township of West Windsor in Mercer County, New
Jersey, or any successor municipality with jurisdiction over the Property.

26     "Nuisance" means any condition or occurrence which unreasonably or
materially interferes with the authorized use and enjoyment of the Other Leased
Premises and the Common Facilities by any tenant of Other Leased Premises or by
any person authorized to use any other Leased Premises or Common Facilities or
with the authorized use of any other areas, buildings or other improvements in
the Carnegie Center Complex.

27     "Operational Expenses" is defined in subsection 10.2 of this Agreement.

28     "Option to Renew" is defined in subsection 6.1 of this Agreement.

29     "Other Leased Premises" means all premises within the Building, with the
exception of the Leased Premises, that are, or are available to be, leased to
tenants or prospective tenants, respectively.

30     "Parking Facilities" means the parking area adjacent to the Building,
containing the approximate number of lined parking spaces set forth in the Work
Letter, which parking area is provided as Common Facilities and which parking
area shall not be reduced in such a manner as to materially interfere with the
Tenant's requirements for parking for its employees, other agents and Guests.

31     "Person" includes an individual, a corporation, a partnership, a trust,
an estate, an unincorporated group of persons and any group of persons.



                                      E-3





<PAGE>   52

32     "Property" means the parcel of land, as it may, in the Landlord's sole
discretion, be increased, decreased, modified, altered or otherwise changed from
time to time before, during or after the Term, on which the Building is erected.
As the Property is presently constituted it is more particularly described in
Exhibit B attached hereto.

33     "Regular Business Hours" means 8:00 A.M. to 6:00 P.M., Monday through
Friday, except on Legal Holidays.

34     "Re-Leasing Damages" is defined in subsection 23.3.

35     "Renewal Term" means, at the time of reference, any portion of the Term,
other than the Initial Term, as to which the Tenant has properly exercised an
Option to Renew which Option to Renew `has not, been rescinded in accordance
with subsection 6.4.1 of this Agreement.

36     "Rent" means Basic Rent and Additional Rent.

37     "Security Deposit" is designated in section 29 of this Agreement.

38     "Target Date" means September 19, 1994.

39.    "Taxes" means, in any calendar year, the aggregate amount of real
property taxes, assessments and sewer rents, rates and charges, state and local
taxes, transit taxes and every other governmental charge, whether general or
special, ordinary or extraordinary (except corporate franchise taxes and taxes
imposed on, or computed as a function of, net income or net profits from all
sources and except taxes charged, assessed or levied exclusively on the Leased
Premises or arising exclusively from the Tenant's occupancy of the Leased
Premises) charged, assessed or levied by any taxing authority with respect to
the Property, the Building, the Common Facilities and any other improvements on
the Property and an allocable portion of Taxes with respect to other portions of
the Carnegie center Complex, less any refunds or rebates (net of expenses
incurred in obtaining any such refunds or rebates) of Taxes actually received by
the Landlord during such calendar year with respect to any period during the
Term for the benefit of the Tenant, tenants of Other Leased Premises and the
Landlord. If during the Term there shall be a change in the means or methods of
taxing real property generally in effect at the beginning of the Term and
another type of tax or method of taxation should be substituted in whole or in
part for, or in lieu of, Taxes, the amounts calculated under such other types of
tax or by such other methods of taxation shall also be deemed to be Taxes. Until
such time as the actual amount of Taxes for any calendar year becomes known, the
amount thereof shall be the Landlord's estimate of Taxes for that calendar year.

40     "Tenant" means the person so designated at the beginning of this 
Agreement.

41     "Tenant Electric Charges" means (a) during Regular Business Hours, none
and (b) during other than Regular Business Hours, a charge at the rate of $75.00
per hour or partial hour of use.




                                      E-4





<PAGE>   53

42     "Tenant Plan" means informal construction drawings and related
construction specifications regarding the build-out of the Leased Premises
including, without limiting the generality of the foregoing, the information
called for by the Work Letter, complying in all respects with applicable
building and fire codes and insurance underwriting standards in effect and in
sufficient detail to permit skilled contractors to supply and perform the work
called for therein.

43     "Tenant Plan Due Date" means September 7, 1994.

44     "Tenant's Share" of any amount means 5.16%.

45     "Term" means the Initial Term plus, at the time of reference, any Renewal
Term.

46     "Termination Damages" is defined in subsection 23.2 of this Agreement.

47     "Utilities Expenses" means Electric Charges (other than Tenant Electric
Charges) and all charges for any other fuel that may be used in providing
electricity and services powered by electricity that the Landlord provides in
accordance with section 8 of this Agreement to the Building, the Leased
Premises, Other Leased Premises, the Common Facilities and the Property,
including sales and excise taxes and the like.

48     "Work Letter" means Exhibit C attached hereto which generally describes
the type of construction of the Building.






                                      E-5

<PAGE>   54









                                    EXHIBIT F

                          ACKNOWLEDGMENT AND AMENDMENT


CARNEGIE CENTER ASSOCIATES, as Landlord, and ADVANCED MAGNETICS, INC., as
Tenant, acknowledge and agree as follows:

       1. The Tenant Plan, as it pertains to work other than repainting and
recarpeting ("TP2"), referred to in the Lease and Lease Agreement dated
September 6, 1994 (the "Agreement") between the Landlord and the Tenant for the
Leased Premises, was received on 1994 by the Landlord and consists of the
following:


                          [DESCRIPTION TO BE INSERTED]



       2. Through contractors selected by it, the Landlord shall perform certain
work shown on the TP2 as itemized below, in a good and workmanlike manner, and
use its best efforts to achieve completion of that work in a timely manner after
receipt of the TP2 at a net price to the Tenant of $___________.___ (which is
net of all credits to the Tenant in accordance with the Lease and which includes
the Landlord's general contractor's fee).



                          [ITEMIZATION TO BE INSERTED]



       3. The Tenant hereby authorizes the Landlord to proceed with preparation
of the Leased Premises in accordance with this Acknowledgment and Amendment and
the work shown on the TP2 as itemized above. Any subsequent changes in the work
shown on the TP2, together with related price and schedule adjustments, shall be
authorized only by a written change order signed by the Landlord and the Tenant.
The price reflecting the change order, if any, shall be paid for within 30 days
after completion of the work required by the change order.

       4. Defined terms used herein shall have the respective meanings assigned
in the Agreement.

       5. Except as specifically set forth above, the Agreement will be in full
force and effect in accordance with its original terms.






<PAGE>   55

Date:                  , 1994          Landlord:
     ------------------------
                                       By: Metric Construction &
                                           Development, its Affiliate

                                       By:
                                           -------------------------------------
                                           George Waugh
                                           Director of Construction


                                       Tenant: ADVANCED MAGNETICS, INC.


Date:                  , 1994          By:
                                           -------------------------------------
                                           Jerome M. Lewis
                                           Vice President
                                           Scientific Operations




                                      F-2




<PAGE>   1
                                                                   EXHIBIT 10.31

                         STANDARD FORM COMMERCIAL LEASE
                         ------------------------------

1. PARTIES                    Silver Lake Realty Trust, P.O. Box 269, Newton, MA
   (fill in)                  02160,                                            
                              
                              LESSOR, which expression shall include its heirs,
                              successors, and assigns where the context so
                              admits, does hereby lease to Kalisto Biologicals,
2. PREMISES                   Inc., a Delaware corporation, 46 Jodie Road,
   (fill in and include,      Framingham, MA 01702,
   if applicable, suite       LESSEE, which expression shall include its        
   number, floor              successors, executors, administrators, and assigns
   number, and                where the context so admits, and the LESSEE hereby
   square feet)               leases the following described premises:          
                              
                                         Approx. 12,000 gross sq.ft. of space, 
                              including Lessee's proportionate share of building
                              common area, on the second floor of the building
                              located at 1480 Soldier's Field Road, Brighton,
                              Mass., as shown on the attached PLAN,

                              together with the right to use in common, with
                              others entitled thereto, the hallways, stairways,
                              xxx xxxxxx necessary for access to said leased
                              premises, xxxxxxxx Except as otherwise provided
                              herein, premises to be delivered "as-is".

3. TERM                       The term of this lease shall be for five (5) years
   (fill in)                  commencing on November 1, 1997 and ending on 
                              October 31, 2002. See 22.A. for Extension
                              Privilege.                    
                           

4. RENT                       The LESSEE
 shall pay to the LESSOR rent at the   
  (fill in)                   rate xx as specified in 22.A., 22.B. and          
                              xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 
                              22.C. herein.                                     
                                                            

5. SECURITY                   Upon the execution of this lease, the LESSEE shall
   DEPOSIT                    pay to the LESSOR the amount of $10,500.00        
  (fill in)                   dollars, which shall be held as a security for 
                              the LESSEE's performance as herein provided and
                              refunded to the LESSEE at the end of this lease   
                              subject to the LESSEE's satisfactory compliance   
                              with the conditions hereof.                       
                              

6. RENT                       xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx      xxxxxxxxxxxxx
   ADJUSTMENT                 xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 
   (fill in)            
                              See 22.C. for Additional Rent.
                              
                              


                              xxx        xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
                              xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
                              xxxxxxx           xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
                              xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
                              xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx


7. UTILITIES                  xxxxxxxxxxxxxxxx LESSEE shall pay for all LESSEE's
   (fill in or delete)        utilities, water and sewer use charges, xxxxxx    
   and services               including heating fuel xxxxx and electricity for  
                              lights, power and air conditioning, and any other 
                              utility it may consume.                           
                              
                                     xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
                              xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
                              xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
                              xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
                              xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
                              xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
                              xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

8. USE OF LEASED              The LESSEE shall use the leased premises only for 
   PREMISES                   the purpose of office and laboratory and light 
   (fill in)                  manufacturing space, and related uses.


9. COMPLIANCE                 The LESSEE acknowledges that no trade or  
   WITH LAWS                  occupation shall be conducted in the leased 
                              premises or use made thereof which will be 
                              unlawful, improper, noisy or offensive, or  
                              contrary to any municipal by-law or ordinance in
                              force in the city or town in which the premises
                              are situated. 
    




<PAGE>   2
10. FIRE            The LESSEE shall not permit any use of the leased premises
    INSURANCE       which will make voidable any insurance on the property of
                    which the leased premises are a part, or on the contents of
                    said property or which shall be contrary to any law or
                    regulation from time to time established by the New England
                    Fire Insurance Rating Association, or any similar body
                    succeeding to its powers. The LESSEE shall on demand
                    reimburse the LESSOR, and all other tenants, all extra
                    insurance premiums caused by the LESSEE's use of the
                    premises.

11. MAINTENANCE     The LESSEE agrees to maintain the leased premises in the
    OF PREMISES     same condition as they are at the commencement of the term
                    or as they may be put in during the term of this lease,
                    reasonable wear and tear, damage by fire and other casualty
                    only excepted, and whenever necessary, to replace plate
                    glass and other glass therein, acknowledging that the leased
                    premises are now in good order and the glass whole. The
                    LESSEE shall not permit the leased premises to be
                    overloaded, damaged, stripped, or defaced, nor suffer any
                    waste. LESSEE shall obtain written consent of LESSOR before
                    erecting any sign on the premises. such consent of Lessor
                    not to be unreasonably withheld. Continued in 22.D.

12. ALTERATIONS-    The LESSEE shall not make structural alterations or
    ADDITIONS       additions to the leased premises, but may make
                    non-structural alterations provided the LESSOR consents
                    thereto in writing, which consent shall not be unreasonably
                    withheld or delayed. All such allowed alterations shall be
                    at LESSEE's expense and shall be in quality at least equal
                    to the present construction. LESSEE shall not permit any
                    mechanics' liens, or similar liens, to remain upon the
                    leased premises for labor and material furnished to LESSEE
                    or claimed to have been furnished to LESSEE in connection
                    with work of any character performed or claimed to have been
                    performed at the direction of LESSEE and shall cause any
                    such lien to be released of record forthwith without cost to
                    LESSOR. Any alterations or improvements made by the LESSEE
                    shall become the property of the LESSOR at the termination
                    of occupancy as provided herein. No cutting or patching
                    walls, roof, or floors without Lessor's prior approval.

13. ASSIGNMENT-     The LESSEE shall not assign or sublet the whole or any part
    SUBLEASING      of the leased premises without LESSOR's prior written
                    consent, which consent shall not be unreasonably withheld or
                    delayed. Notwithstanding such consent, LESSEE shall remain
                    liable to LESSOR for the payment of all rent and for the
                    full performance of the covenants and conditions of this
                    lease.

14. SUBORDINATION   This lease shall be subject and subordinate to any and all
                    mortgages, deeds of trust and other instruments in the
                    nature of a mortgage, now or at any time hereafter, a lien
                    or liens on the property of which the leased premises are a
                    part and the LESSEE shall, when requested, promptly execute
                    and deliver such written instruments as shall be necessary
                    to show the subordination of this lease to said mortgages,
                    deeds of trust or other such instruments in the nature of a
                    mortgage.

15. LESSOR'S        The LESSOR or agents of the LESSOR may, at reasonable times,
    ACCESS          enter to view the leased premises and may remove placards
                    and signs not approved and affixed as herein provided, and
                    make repairs and alterations as LESSOR should elect to do
                    and may show the leased premises to others, and at any time
                    within three (3) months before the expiration of the term,
                    may affix to any suitable part of the leased premises a
                    notice for letting or selling the leased premises or
                    property of which the leased premises are a part and keep
                    the same so affixed without hindrance or molestation.

16. INDEMNIFI-      The LESSEE shall save the LESSOR harmless from all loss and
    CATION AND      damage to Lessee's property occasioned by the use or escape
    LIABILITY       of water or by the bursting of pipes, as well as from any
    (fill in)       claim or damage resulting from neglect in not removing snow
                    and ice from the roof of the building or from the sidewalks
                    bordering upon the premises so leased, or by any nuisance
                    made or suffered on the leased premises, unless such loss is
                    caused by the neglect of the LESSOR. The removal of snow
                    and ice from the sidewalks bordering upon the leased
                    premises shall be Lessee's responsibility. The Lessor shall
                    machine snow-plow the paved parking area.

17. LESSEE'S        The LESSEE shall maintain with respect to the leased
    LIABILITY       premises and the property, of which the leased premises are
    INSURANCE       a part, comprehensive public liability insurance in the
    (fill in)       amount of $1,000,000. 
                           with property damage insurance in limits of $300,000.
                                           in responsible companies qualified to
                    do business in Massachusetts and in good standing therein
                    insuring the LESSOR as well as LESSEE against injury to
                    persons or damage to property as provided. The LESSEE shall
                    deposit with the LESSOR certificates for such insurance at
                    or prior to the commencement of the term, and thereafter
                    within thirty (30) days prior to the expiration of any such
                    policies. All such insurance certificates shall provide that
                    such policies shall not be cancelled without at least ten
                    (10) days prior written notice to each assured named
                    therein.

18. FIRE,           Should a substantial portion of the leased premises, or of
    CASUALTY-       the property of which they are a part, be substantially
    EMINENT         damaged by fire or other casualty, or be taken by eminent
    DOMAIN          domain, the LESSOR may elect to terminate this lease. When
                    such fire, casualty, or taking renders the leased premises
                    substantially unsuitable for their intended use, a just and
                    proportionate abatement of rent shall be made, and the
                    LESSEE may elect to terminate this lease if:

                         (a)  The LESSOR fails to give written notice within
                              thirty (30) days of intention to restore leased
                              premises, or

                         (b)  The LESSOR fails to restore the leased premises to
                              a condition substantially suitable for their
                              intended use within ninety (90) days of said fire,
                              casualty, or taking.

                    The LESSOR reserves, and the LESSEE grants to the LESSOR,
                    all rights which the LESSEE may have for damages or injury
                    to the leased premises for any taking by eminent domain,
                    except for damage to the LESSEE's fixtures, property, or
                    equipment.








<PAGE>   3
19. DEFAULT         In the event that:
    AND                  (a)  The LESSEE shall default in the payment of any
    BANKRUPTCY                installment of rent or other sum herein specified
                              and such default shall continue for ten (10) days
                              after written notice thereof; or 
                         (b)  The LESSEE shall default in the observance or
                              performance of any other of the LESSEE's
                              covenants, agreements, or obligations hereunder
                              and such default shall not be corrected within
                              thirty (30) days after written notice thereof; or
                         (c)  The LESSEE shall be declared bankruptcy or
                              insolvent according to law, or, if any assignment
                              shall be made of LESSEE's property for the benefit
                              of creditors,

                    then the LESSOR shall have the right thereafter, while such
                    default continues, to re-enter and take complete possession
                    of the leased premises, to declare the term of this lease
                    ended, and remove the LESSEE's effects, without prejudice to
                    any remedies which might be otherwise used for arrears of
                    rent or other default. The LESSEE shall indemnify the LESSOR
                    against all loss of rent and other payments which the LESSOR
                    may incur by reason of such termination during the residue
                    of the term. If the LESSEE shall default, after reasonable
                    notice thereof, in the observance or performance of any
                    conditions or covenants on LESSEE's part to be observed or
                    performed under or by virtue of any of the provisions in any
                    article of this lease, the LESSOR, without being under any
                    obligation to do so and without thereby waiting such
                    default, may remedy such default for the account and at the
                    expense of the LESSEE. If the LESSOR makes any expenditures
                    or incurs any obligations for the payment of money in
                    connection therewith, including but not limited to,
                    reasonable attorney's fees in instituting, prosecuting or
                    defending any action or proceeding, such sums paid or
                    obligations insured, with interest at the rate of six (6)
                    per cent per annum and costs, shall be paid to the LESSOR by
                    the LESSEE as additional rent.
 
   
20. NOTICE          Any notice from the LESSOR to the LESSEE relating to the
    (fill in)       leased premises or to the occupancy thereof, shall be deemed
                    duly served, if mailed to the leased premises, registered or
                    certified mail, return receipt requested, postage
                    prepaid, addressed to the LESSEE. Any notice from the LESSEE
                    to the LESSOR relating to the leased premises or to the
                    occupancy thereof, shall be deemed duly served, if mailed to
                    the LESSOR by registered or certified mail, return receipt
                    requested, postage prepaid, addressed to the LESSOR at such
                    address as the LESSOR may from time to time advise in
                    writing. All rent and notices shall be paid and sent to the
                    LESSOR at P.O. Box 269, Newton, MA 02160.


21. SURRENDER       The LESSEE shall at the expiration or other termination of
                    this lease remove all LESSEE's goods and effects from the
                    leased premises, (including, without hereby limiting the
                    generality of the foregoing, all signs and lettering affixed
                    or painted by the LESSEE, either inside or outside the
                    leased premises). LESSEE shall deliver to the LESSOR the
                    leased premises and all keys, locks thereto, and other
                    fixtures connected therewith and all alterations and
                    additions made to or upon the leased premises, in the same
                    condition as they were at the commencement of the term, or
                    as they were put in during the term hereof, reasonable wear
                    and tear and damage by fire or other casualty only excepted.
                    In the event of the LESSEE's failure to remove any of
                    LESSEE's property from the premises, LESSOR is hereby
                    authorized, without liability to LESSEE for loss or damage
                    thereto, and at the sole risk of LESSEE, to remove and store
                    any of the property at LESSEE's expense, or to retain same
                    under LESSOR's control or to sell at public or private sale,
                    without notice any or all of the property not so removed and
                    to apply the net proceeds of such sale to the payment of any
                    sum hereunder, or to destroy such property.


22.  OTHER          It is also understood and agreed that the attached RIDER,
     PROVISION      PLAN, and GUARANTY are parts of this lease.

     
                   
                    
                    IN WITNESS WHEREOF, the LESSOR and LESSEE have hereunto set
                    their hands and common seals this 24th day of October 1997


                                          /s/ John Sain     
                                          -----------------------------------
                                          LESSOR Silver Lake Realty Trust


                                          /s/ Francis E. Capitanio, President
                                          -----------------------------------
                                          LESSEE  Kalisto Biologicals, Inc.

<PAGE>   4

RIDER TO LEASE, DATED OCTOBER 24, 1997, BETWEEN SILVER LAKE REALTY TRUST AND
KALISTO BIOLOGICALS, INC., FOR PREMISES AT 1480 SOLDIERS FIELD ROAD, BRIGHTON,
MASS.:

22.A. EXTENSION PRIVILEGE
       AND RENT:       The Lessee shall have the right to extend the lease for
                       one additional term of five years commencing November 1,
                       2002, exercisable by notice to the Lessor, as provided in
                       Section 20. herein, on or before May 1, 2002.

                       During the extension term, if exercised, the base rent
                       shall be $153,600. per year, adjusted annually to reflect
                       the change in the cost of living according to the change
                       in the Consumer Price Index (CPI-U*) over that for 2001,
                       according to the following formula:

                        Rent for year commencing = $153,600.00 x CPI-U July 200x
                           November 1,200x                       ---------------
                                                                 CPI-U July 2001

                                * where the CPI-U is the Consumer Price Index,
                                All Urban Consumers, All Items, (1982-84 = 100),
                                Boston, Mass. Should this index be unavailable
                                or inapplicable, comparable data shall be used.

                       Notwithstanding the above, the base rent for the
                       extension term shall not be less than $153,600. per year,
                       nor be reduced from one year to the next.

22.B. BASE RENT:       The Lessee shall pay to the Lessor Base Rent as per the 
                       following schedule:


<TABLE>
                       <S>                               <C>
                       Nov. 1, 1997- April 30, 1998:      $10,500. per month;
                       May 1, 1998 - Oct. 31, 1998:       $11,000. per month;
                       Nov. 1, 1998 - Oct. 31, 1999:     $138,000. per year,   $11,500. per mo.;
                       Nov. 1, 1999 - Oct. 31, 2000:     $144,000. per year,   $12,000. per mo.;
                       Nov. 1, 2000 - Oct. 31, 2001:     $148,800. per year,   $12,400. per mo.;
                       Nov. 1, 2001 - Oct. 31, 2002:     $153,600. per year,   $12,800. per mo.
</TABLE>


                       Base rent shall be payable in advance on the first day of
                       each month. Base Rent for November 1997 shall be paid
                       upon execution of the lease.

                       Rents or other sums due hereunder not received by the
                       10th day of the month shall be subject to interest at the
                       rate of 18% per annum from the first day of the month.

22.C. ADDITIONAL RENT: Lessee shall pay to the Lessor as Additional Rent:

                     - Reimbursement for 50% of real estate taxes levied against
                       the land and building of which the premises are a part.

                     - Reimbursement for 50% of premiums for "all-risk"
                       insurance, including loss of rent, on the building and
                       improvements thereto.

                     - Reimbursement for 100% of common area costs including but
                       not limited to landscaping, snowplowing, and exterior
                       lighting. (If and when other tenant(s) occupy the
                       building, an equitable adjustment will be made.) The
                       Lessor represents that such common area costs shall be
                       typical of similar buildings in the area.

                       Lessee shall pay this Additional Rent as estimated by
                       Lessor, in 1/12th installments payable in advance on the
                       first day of each month. At reasonable intervals, Lessor
                       shall provide Lessee with updated estimates of these
                       expenses, and over- or under-payments shall be credited
                       or debited to the Lessee. Lessor's initial estimate of
                       the Additional Rent is $3,000.00 per month.

                       Lessee shall pay the Additional Rent for November 1997
                       upon execution of this lease.










<PAGE>   5

22.D. MAINTENANCE
       (Continued):      Any sign to be erected by Lessee shall be installed in
                         accordance with applicable building codes, and in
                         accordance with section 11. herein.

                         The Lessor shall be responsible for the structural
                         integrity of the building, the roof, and repairs and
                         maintenance of the building common areas and exterior.

                         The Lessee shall be responsible for interior cleaning,
                         disposal of debris, maintenance, and repairs, including
                         maintenance and repairs to the freight elevator, HVAC,
                         electrical and plumbing systems servicing its premises.

22.E. LEASEHOLD
      IMPROVEMENTS:      Upon execution of the lease, the Lessor shall put all
                         building systems, including the freight elevator, in
                         good working order; and segregate the utilities to
                         provide separate metering. Lessor shall also be
                         responsible for putting the associated parking lot and
                         landscaping in good condition. Lessor shall complete
                         such work in a timely manner.

                         The Lessee shall be responsible for the installation of
                         vinyl tile throughout the lab areas (including removal
                         of existing carpet) as well as any other changes or
                         improvements associated with Lessee's intended use. The
                         Lessee shall also be responsible for the removal of any
                         resulting debris. Lessee will obtain Lessor's
                         permission pursuant to section 12. herein prior to
                         making any alterations to the leased premises. All work
                         to be done according to applicable building codes and
                         in a good and workmanlike manner.

                         Upon full execution of this lease, including payment of
                         security deposit and first month's rent, Lessee may
                         have early occupancy of the premises to commence its
                         improvements.

22.F. PARKING:           The Lessee shall have the use of 35 parking spaces in
                         the associated common parking lot. Lessor reserves the
                         right to establish reasonable rules and regulations
                         governing parking for the property.

22.G. LABORATORY USE:    The Lessee shall comply with all applicable
                         governmental codes and regulations in its use of the
                         laboratory within the premises, and shall effect, at
                         its sole expense, any modifications to the premises
                         required for such compliance.

22.H. ENVIRONMENT:       The Lessee shall not permit any hazardous materials or
                         substances to be used, stored, or disposed of
                         improperly or in conflict with any law, ordinance or
                         code, and Lessee shall be solely responsible for any
                         and all contamination or other damage associated with
                         use, control or disposal of same by Lessee.

22.I. ELEVATOR:          Lessor shall modify the area on the first floor of the
                         building as shown on the attached PLAN in order to
                         provide Lessee access to the freight elevator.










<PAGE>   6


                                      PLAN
                                      ----




                 PREMISES LEASE TO KALISTO  BIOLOGICALS, INC.
                                  (2nd Floor)




                              [SECOND FLOOR PLAN]




                               [FIRST FLOOR PLAN]
                                 (not included)




               1480 SOLDIERS FIELD ROAD, BRIGHTON, MASSACHUSETTS

<PAGE>   7

                                    GUARANTY

         FOR VALUE RECEIVED, and in consideration for and as an inducement to
the Lessor to make the forgoing lease with Kalisto Biologicals, Inc., as Lessee,
the undersigned Advanced Magnetics, Inc. 725 Concord Ave., Cambridge, MA 02138,
unconditionally guarantees the full performance and observance of the provisions
of the lease to be performed and observed by Lessee, Lessee's successors' and
assigns, and expressly agrees that the validity of this agreement and the
obligations of the guarantor hereunder shall in no ways be terminated, affected
or impaired by reason of the granting by the Lessor of any indulgences to Lessee
or by reason of the assertion by Lessor against Lessee of any of the rights or
remedies reserved to Lessor pursuant to the lease.

         The undersigned guarantor has duly executed this instrument this 24th
day of October, 1997.





                             ---------------------------------------------------
                             Advanced Magnetics, Inc.

                             By Jerome Goldstein its CEO & CHAIRMAN OF THE BOARD
                                ----------------     ---------------------------





                          COMMONWEALTH OF MASSACHUSETTS

               ss. Middlesex                          Date 10/24/97

         Then personally appeared the above named JEROME GOLDSTEIN, and
acknowledged the foregoing to be his free act and deed, before me,


                                        /s/ Marlene Kaplan Goldstein    
                                        ----------------------------------------
                                        Notary Public
                                        My Commission Expires: 4/7/00












<PAGE>   1
 
                                                                    EXHIBIT 11.1
 
                            ADVANCED MAGNETICS, INC.
 
                STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
                 YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
 

<TABLE>
<CAPTION>
                                                              1997          1996          1995
                                                            ---------     ---------     ---------
<S>                                                         <C>           <C>           <C>
Weighted average number of shares issued and
  outstanding...........................................    6,744,946     6,762,748     6,730,315
Assumed exercise of options reduced by the number of
  shares which could have been purchased with the
  proceeds of those options.............................       60,286            --       140,524
Assumed exercise of warrants reduced by the number of
  shares which could have been purchased with the
  proceeds of those warrants............................           --            --            --
Weighted average number of common and equivalent
  shares................................................    6,805,232     6,762,748*    6,870,839
</TABLE>

 
*Due to the net loss for fiscal 1996, computation of per share earnings includes
 only the weighted average number of shares issued and outstanding.





<PAGE>   1
 
                                                                    EXHIBIT 23.1
 
                       CONSENT OF INDEPENDENT ACCOUNTANTS
 
     We consent to the incorporation by reference in the Registration Statements
of Advanced Magnetics, Inc. on Form S-8 (File Nos. 33-8697, 33-13953, 33-40744,
33-46963, and 333-28417) of our report, dated November 6, 1997, on our audits of
the financial statements of Advanced Magnetics, Inc. as of September 30, 1997
and 1996, and for the years ended September 30, 1997, 1996, and 1995, which
report is incorporated by reference in this Annual Report on Form 10-K.
 
COOPERS & LYBRAND LLP
 
Boston, Massachusetts
December 19, 1997





<TABLE> <S> <C>

<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          SEP-30-1997
<PERIOD-START>                             OCT-01-1996
<PERIOD-END>                               SEP-30-1997
<CASH>                                      10,724,740
<SECURITIES>                                27,365,765
<RECEIVABLES>                                  546,807
<ALLOWANCES>                                         0
<INVENTORY>                                    113,178
<CURRENT-ASSETS>                            38,975,358
<PP&E>                                      13,084,039
<DEPRECIATION>                               7,332,118
<TOTAL-ASSETS>                              44,976,181
<CURRENT-LIABILITIES>                        1,553,128
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                        67,406
<OTHER-SE>                                           0
<TOTAL-LIABILITY-AND-EQUITY>                44,976,181
<SALES>                                      1,580,357
<TOTAL-REVENUES>                            11,001,771
<CGS>                                          311,678
<TOTAL-COSTS>                               11,062,419
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                204,152
<INCOME-TAX>                                 (379,022)
<INCOME-CONTINUING>                                  0
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   583,174
<EPS-PRIMARY>                                     0.09
<EPS-DILUTED>                                     0.09
        

</TABLE>