SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

(MARK ONE)

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

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

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

For the transition period from to
----------- -------------

Commission File #0-14732

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

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

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

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

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

Yes [X] No
---------- ----------

At February 1, 2000, 6,752,027 shares of registrant's common stock (par value,
$.01) were outstanding.

Page 1 of 17

ADVANCED MAGNETICS, INC.

FORM 10-Q

QUARTER ENDED DECEMBER 31, 1999

PART I. FINANCIAL INFORMATION

Item 1 -- Financial Statements

Page 2 of 17

ADVANCED MAGNETICS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 1999
(UNAUDITED)

ASSETS DECEMBER 31, SEPTEMBER 30,
1999 1999
---- ----

Current assets:
Cash and cash equivalents........................................... $ 14,567,868 $ 17,052,636
Marketable securities (Note B)...................................... 7,383,011 4,804,785
Accounts receivable................................................. 141,684 648,201
Inventories......................................................... 80,480 80,480
Prepaid expenses.................................................... 149,884 195,655
---------------- -------------------
Total current assets.............................................. 22,322,927 22,781,757

Property, plant and equipment:
Land................................................................ 360,000 360,000
Building............................................................ 4,612,172 4,610,827
Laboratory equipment................................................ 7,994,846 8,007,095
Furniture and fixtures.............................................. 774,066 760,538
---------------- -------------------
13,741,084 13,738,460
Less-accumulated depreciation and amortization...................... (9,204,080) (9,065,660)
---------------- -------------------
Net property, plant and equipment................................... 4,537,004 4,672,800

Other assets........................................................ 361,802 361,802
---------------- -------------------
Total assets...................................................... $ 27,221,733 $ 27,816,359
================ ===================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.................................................... $ 157,345 $ 118,465
Accrued expenses.................................................... 545,517 581,534
Income taxes payable................................................ 61,651 61,651
---------------- -------------------
Total current liabilities......................................... 764,513 761,650

Commitments and contingencies (Notes E and H).......................

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 6,752,027 shares at December 31, 1999
and 6,752,027 shares at September 30, 1999....................... 67,521 67,521
Additional paid-in capital.......................................... 44,205,370 44,205,370
Retained earnings (deficit)......................................... (18,278,701) (16,847,061)
Accumulated other comprehensive income.............................. 463,030 (371,121)
------------------ -------------------
Total stockholders' equity........................................ 26,457,220 27,054,709
------------------ -------------------
Total liabilities and stockholders' equity.......................... $ 27,221,733 $ 27,816,359
================== ===================

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

Page 3 of 17

ADVANCED MAGNETICS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE QUARTERS ENDED
DECEMBER 31, 1999 AND 1998
(UNAUDITED)

FIRST QUARTER ENDED DECEMBER 31,
----------------------------------
1999 1998
---- ----

STATEMENT OF OPERATIONS

Revenues:
Royalties......................................... $ 163,246 $ 157,892
Product sales..................................... --- 318,949
Contract research and development................. 10,995 244,902
Interest, dividends and net gains
and losses on sales of securities............... 235,845 192,776
----------------- -----------------
Total revenues............................... 410,086 914,519

Cost and expenses:
Cost of product sales............................. --- 112,181
Cost of contract research and development......... 3,195 ---
Research and development expenses................. 1,367,062 2,490,751
Selling, general and administrative
Expenses........................................ 471,469 921,757
----------------- -----------------
Total costs and expenses..................... 1,841,726 3,524,689
----------------- -----------------
Net income (loss).................................... $ (1,431,640) $ (2,610,170)
================= =================

Basic and diluted net income (loss) per share........ $ (0.21) $ (0.39)
----------------- -----------------
Weighted average shares outstanding:
Basic........................................... 6,752,027 6,767,509
----------------- -----------------
Diluted......................................... 6,752,027 6,767,509
----------------- -----------------

COMPREHENSIVE INCOME (LOSS)

Net income (loss).................................... $ (1,431,640) $ (2,610,170)
Unrealized gains (losses) on market value of
Securities...................................... 834,151 2,146,226
----------------- -----------------
Comprehensive income (loss).......................... $ (597,489) $ (463,944)
================= =================

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

Page 4 of 17

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

THREE-MONTH PERIODS ENDED
DECEMBER 31,
-----------------------------------
1999 1998
---- ----

Cash flows from (for) operating activities:
Cash received from customers........................................... $ 534,399 $ 1,106,712
Cash paid to suppliers and employees................................... (1,680,788) (3,307,916)
Dividends and interest received........................................ 235,845 87,508
Royalties received..................................................... 172,475 116,927
------------------ ----------------
Net cash provided by (used in) operating activities.................... (738,069) (1,996,769)

Cash flows from investing activities:
Purchase of securities................................................. (1,744,075) (1,082,782)
Capital expenditures................................................... (2,624) (176,515)
------------------ ----------------
Net cash provided by (used in) investing activities.................... (1,746,699) (1,259,297)
Cash flows from financing activities:
Proceeds from issuances of common stock................................ --- 11
------------------ ----------------
Net cash provided by (used in) financing activities.................... --- 11
------------------ ----------------
Net increase (decrease) in cash and cash equivalents................... (2,484,768) (3,256,055)

Cash and cash equivalents at beginning of the period................... 17,052,636 7,704,245
------------------ ----------------
Cash and cash equivalents at end of the period......................... $ 14,567,868 $ 4,448,190
================== ================

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

Page 5 of 17

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

THREE-MONTH PERIODS
ENDED DECEMBER 31,
--------------------------------
1999 1998
---- ----

Net income (loss)......................................................... $ (1,431,640) $ (2,610,170)
------------------ ---------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:

Accretion of U.S. Treasury Notes discount................................. --- (11,519)
Decrease (increase) in accounts receivable................................ 506,517 386,877
(Increase) decrease in inventories........................................ --- 78,318
(Increase) decrease in prepaid expenses and other assets.................. 45,771 (144,591)
Depreciation and amortization............................................. 138,420 208,519
(Decrease) increase in accounts payable and accrued expenses.............. 2,863 97,097
(Decrease) in income taxes payable........................................ --- (1,300)
------------------ ---------------------
Total adjustments......................................................... 693,571 613,401
------------------ ---------------------
Net cash provided by (used in) operating activities....................... $ (738,069) $ (1,996,769)
================== =====================

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

Page 6 of 17

ADVANCED MAGNETICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

A. SUMMARY OF ACCOUNTING POLICIES

BUSINESS

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

The Company consolidated its majority-owned subsidiary, Kalisto
Biologicals Inc. ("Kalisto") until June 30, 1999 and all intercompany
transactions until that time have been eliminated. On July 1, 1999, the Company
reduced its ownership in Kalisto to 19.5% and accordingly has not consolidated
Kalisto from that date forward.

These financial statements are unaudited and in the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been recorded. Such adjustments consisted only of normal
recurring items. Certain amounts in the fiscal 1999 financial statements have
been reclassified to conform with the fiscal 2000 presentation.

Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The preparation of financial
statements, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The year-end balance sheet data were derived from audited
financial statements, but do not include disclosures required by generally
accepted accounting principles. These interim financial statements should be
read in conjunction with the Company's most recent Form 10-K and Annual Report
as of September 30, 1999.

B. MARKETABLE SECURITIES

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

DECEMBER 31, 1999 SEPTEMBER 30, 1999
----------------- ------------------
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------

Common stock................................ $ 6,919,981 $ 7,383,011 $ 5,175,906 $ 4,804,785
----------------- ------------------- ------------------- -------------------
Totals...................................... $ 6,919,981 $ 7,383,011 $ 5,175,906 $ 4,804,785
================= =================== =================== ===================

C. INCOME TAX

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

Page 7 of 17

D. EARNINGS (LOSS) PER SHARE

The weighted average common and common equivalent shares used in the
computation of basic and diluted earnings per share is presented below.
Aggregate options of 490,506 (weighted average exercise price of $8.90) and
430,320 (weighted average exercise price of $11.21) for the quarters ending
December 31, 1999 and December 31, 1998, respectively, have not been included in
the calculation of weighted average shares, since their effect would be
anti-dilutive, given the net loss in both periods.

DECEMBER 31
-----------
1999 1998
---- ----

Weighted average number of shares issued and outstanding............... 6,752,027 6,767,509
Common stock equivalents............................................... --- ---
------------- -------------
As adjusted............................................................ 6,752,027 6,767,509
============= =============

E. LEGAL PROCEEDINGS

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

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

Page 8 of 17

The Company filed suit on October 7, 1997 against Sanofi
Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA
(collectively, "Defendants") in the Superior Court of the Commonwealth of
Massachusetts. The action is entitled ADVANCED MAGNETICS, INC. V. SANOFI
PHARMACEUTICALS, INC. AND SANOFI SA, Civil Action No. 97-5222B. The Company
claims that the Defendants tortiously interfered with a license, supply and
marketing agreement (the "Agreement"), and seeks unspecified monetary damages.
In addition, the Company seeks a declaration that the Defendants do not have any
rights under the Agreement and that the Company has not breached the Agreement.
Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on
February 4, 1998 seeking compensatory damages of $11,500,000 and multiple
damages as a result of the Company's alleged breach of the Agreement. Sanofi
Pharmaceuticals, Inc. also filed a motion to dismiss the Company's tortious
interference claim, which the Court denied on July 3, 1998. On October 26, 1998,
the Company served a motion for partial summary judgment which, among other
things, requests judgment in its favor on all of Sanofi Pharmaceuticals, Inc.'s
counterclaims. On November 13, 1998 the Company filed an amended complaint
adding claims for unfair competition and breach of contract against the
Defendants. On November 23, 1998, Defendants answered the Company's amended
complaint, and Sanofi Pharmaceuticals, Inc. served a new set of counterclaims
seeking compensatory damages of $15,000,000 and multiple damages as a result of
the Company's alleged conduct. On December 18, 1998, the court held a hearing on
the Company's motion for partial summary judgment. On June 15, 1999, the court
granted partial summary judgement in favor of the Company and against the
Defendants, declared that the Company did not breach the Agreement, was not
unjustly enriched, and did not violate Mass. Gen. Laws ch. 93A, and dismissed
Sanofi Pharmaceuticals, Inc.'s counterclaims for breach of contract, unjust
enrichment, conversion, account annexed and violation of Mass. Gen. Laws ch.
93A. On October 29, 1999, the Company served a motion for partial summary
judgement which, among other things, requests judgement in its favor on Sanofi
Pharmaceuticals, Inc.'s remaining counterclaims against the Company and for
judgement in its favor on the Company's breach of contract claim against Sanofi
Pharmaceuticals, Inc. Also on October 29, 1999, Sanofi Pharmaceuticals, Inc.
served a motion for partial summary judgement which, among other things,
requests judgement in its favor on the Company's remaining claims. While the
final outcome of the remaining claims and counterclaims cannot be determined,
the Company will pursue its claims vigorously, and believes that Sanofi
Pharmaceuticals, Inc.'s remaining counterclaims are equally without merit and
intends to defend them vigorously. The Company may not be able to successfully
defend the counterclaims and the failure by the Company to prevail for any
reason could have an adverse effect on its future business, financial condition
or results of operations.

F. BUSINESS SEGMENTS:

During fiscal 1999, the Company adopted FASB Statement No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related Information".
This Statement changes the way public companies report information about
segments. Prior to the deconsolidation of Kalisto in July of 1999, the Company
had two business segments under the "management approach" as defined in SFAS
131, the original business and the majority-owned subsidiary.

Page 9 of 17

Information concerning the operations in these reportable segments is
as follows:

FIRST QUARTER ENDED
DECEMBER 31,
------------
1999 1998
---- ----

REVENUES:

Advanced Magnetics, Inc.............................. $ 410,086 $ 595,570
Kalisto Biologicals Inc.............................. --- 318,949
------------- ------------
Total............................................ $ 410,086 $ 914,519

DEPRECIATION EXPENSE:

Advanced Magnetics, Inc.............................. $ 138,420 $ 190,800
Kalisto Biologicals Inc.............................. --- 17,719
------------- ------------
Total............................................ $ 138,420 $ 208,519

NET INCOME (LOSS):

Advanced Magnetics, Inc.............................. $ (1,431,640) $ (2,311,718)
Kalisto Biologicals Inc.............................. --- (298,452)
------------- ------------
Total............................................ $ (1,431,640) $ (2,610,170)

DECEMBER 31, SEPTEMBER 30,
1999 1999
---- ----

SEGMENT ASSETS:

Advanced Magnetics, Inc.............................. $ 27,221,733 $ 27,816,359
Kalisto Biologicals Inc.............................. --- ---
------------- ------------
Total............................................ $ 27,221,733 $ 27,816,359

G. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued Statement No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability,
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Adoption of this standard is not expected to
have a material impact on the financial position or results of operations of the
Company.

In December 1999, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition
in Financial Statements". SAB 101 summarizes some of the staff's interpretations
of the application of generally accepted accounting principles (GAAP) to revenue
recognition. Application of the accounting and disclosure requirements of SAB
101 is not expected to have a material impact on the financial position or the
results of operations of the Company.

H. COMMITMENTS AND CONTINGENCIES

The Company is a guarantor on a lease for office space for Kalisto in
the event Kalisto defaults on its obligation. The Company is currently assessing
Kalisto's ability to pay its obligation under the lease and the consequences to
the Company of any default by Kalisto. As of February 2000, the Company's
potential obligation relating to this guarantee cannot be predicted with
certainty. However, the ultimate liability of the Company, if any, in connection
with this guaranty, could have a material adverse impact on the statement of
operations in any one accounting period.

Page 10 of 17

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

THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS. ANY STATEMENTS
CONTAINED HEREIN THAT DO NOT DESCRIBE HISTORICAL FACTS ARE FORWARD LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE BASED ON CURRENT
EXPECTATIONS, BUT ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES. THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM CURRENT
EXPECTATIONS INCLUDE THE FOLLOWING: THE TIMING AND RESULT OF FDA ACTION, THE
ABILITY TO SUCCESSFULLY MARKET FERIDEX I.V.-Registered Trademark- OR
GASTROMARK-Registered Trademark- AND ANY FUTURE PRODUCTS THAT RECEIVE FDA
APPROVAL, THE COMPANY'S DEPENDENCE ON ITS CORPORATE PARTNERS, DELAYS IN
ARRANGEMENTS WITH CLINICAL INVESTIGATIONS, UNCERTAINTIES RELATING TO RESULTS OF
THE CLINICAL TRIALS OF THE COMPANY'S PRODUCT CANDIDATES, THE COMPANY'S ABILITY
TO OBTAIN FUTURE FINANCING, UNCERTAINTIES RELATING TO PATENTS AND PROPRIETARY
RIGHTS, THE ABILITY OF THE COMPANY TO COMPETE SUCCESSFULLY IN THE FUTURE AND THE
RISKS IDENTIFIED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS,
INCLUDING BUT NOT LIMITED TO ITS FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30,
1999.

OVERVIEW

Since its inception in November 1981, Advanced Magnetics, Inc.
("Advanced Magnetics" or the "Company") has focused its efforts on developing
applications of its core magnetic particle technology. This focus has led to the
development of magnetic resonance imaging (MRI) contrast agents. 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 products will depend, in
part, on the Company's ability to successfully develop, test, produce and market
its products; obtain necessary governmental approvals in a timely manner;
attract and maintain key employees; and successfully respond to technological
changes in its marketplace.

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

In October 1997, the Company acquired approximately 80.7% of the issued
and outstanding capital stock of Kalisto Biologicals Inc. ("Kalisto"). The
Company's results of operations and cash flows reflect the activities of Kalisto
for the period from the date of acquisition through June 30, 1999. On July 1,
1999, the Company reduced its ownership in Kalisto Biologicals to 19.5%.

In December 1999, the Company submitted a New Drug Application (NDA)
with the U.S. Food and Drug Administration (FDA) for Combidex-Registered
Trademark- Magnetic Resonance Imaging (MRI) contrast agent. The NDA covers two
indications. The principle indication is for the diagnosis of lymph node disease
to assist in directing biopsy and surgery as well as to aid in the staging of
metastatic lymph node involvement for a variety of cancers, including breast and
prostate cancer.

Page 11 of 17

YEAR 2000 READINESS DISCLOSURE STATEMENT

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

Under the auspices of the Audit Committee, the Company conducted and
completed an assessment of its exposure to potential disruptions caused by the
Year 2000 issue. In the first phase of its readiness investigation the Company
identified its Clinical Data Network (which tracks and analyzes the results of
product trials in support of FDA approvals) and its accounting system as
mission-critical components that required protection from Year 2000 related
disruption. The Company, in order to address Year 2000 concerns and as part of a
general systems upgrade, has replaced both of these systems. The Company has
obtained written confirmation that the new software applications are Year 2000
compliant. The Company's computer hardware platforms, on which these systems
run, have been confirmed as Year 2000 compliant by their manufacturers and the
Company completed testing of them in September 1999.

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

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

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

The Company obtained assurances from its significant raw material
suppliers that there would be no interruption of service as a result of the Year
2000 issue and, to the extent such assurances were not given, the Company
devised contingency plans to ameliorate the potential negative effects in the
event of the unavailability of materials.

A failure of any contingency plan developed by the Company may result
in a business interruption caused by one or more of the Company's third party
service providers or suppliers, and such a failure may have a material adverse
effect on the Company. In addition, the failure on the part of the accounting
systems of the Company's customers due to the Year 2000 issue could result in a
delay in the payment of invoices issued by the Company. A failure of the
accounting systems of a significant number of the Company's customers would have
a material adverse effect on the Company.

As of February 2000, the Company is not aware of any material problems
due to the Year 2000 issue. However, problems may still arise which could have a
material adverse impact on the Company. All expenses related to determining and
addressing Year 2000 readiness have been expensed as incurred and have amounted
to roughly $100,000 to date. If, however, compliance efforts of which the
Company is not currently aware are required, or if the cost of any required
updating or modification of the Company's IT systems exceeds the Company's
estimates, the Year 2000 issue could have a material adverse impact on the
Company.

Page 12 of 17

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

Page 13 of 17

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

REVENUES

Total revenues for the first fiscal quarter ended December 31, 1999
were $410,086 compared to $914,519 for the first fiscal quarter ended December
31, 1998. The decrease in revenues was primarily due to the absence of sales
from the Company's formerly consolidated subsidiary, Kalisto Biologicals Inc.
and a reduction in research and development services revenue provided by the
Company to third parties. Royalties for the fiscal quarter ended December 31,
1999 were $163,246 as compared to $157,892 for the fiscal quarter ended December
31, 1998. There was no gain or loss on the sale of securities in either quarter.

There were no product sales during the fiscal quarter ended December
31, 1999. Included in product sales during the first fiscal quarter ended
December 31, 1998 were $318,949 in sales by Kalisto.

Contract research and development services revenues were $10,995 for
the first fiscal quarter ended December 31, 1999 compared with $244,902 for the
first fiscal quarter ended December 31, 1998. Contract research and development
services revenues are reimbursements of expenditures for clinical trials. The
decrease reflects the completion of certain clinical trials.

Interest, dividends and gains on sales of securities resulted in
revenues of $235,845 in the fiscal quarter ended December 31, 1999 compared to
$192,776 for the fiscal quarter ended December 31, 1998. There were no gains or
losses on the sale of securities in either quarter. Interest, dividends and net
gains on sales of securities consisted of the following:

FIRST QUARTER ENDED DECEMBER 31,
--------------------------------
1999 1998
---- ----

Interest income $ 212,220 $ 181,076
Dividend income 23,625 11,700
Net gains on sales of securities --- ---
------------------ -----------------
Total $ 235,845 $ 192,776
------------------ -----------------

COSTS AND EXPENSES

Due to the absence of product sales, the Company incurred no costs for
products sold in the first fiscal quarter ended December 31, 1999. Included in
product sales for the quarter ended December 31, 1998 were cost of sales of
$112,181 from Kalisto. A cost of $3,195 was incurred on contract research and
development for the first fiscal quarter ended December 31, 1999, while no costs
were incurred in the quarter ended December 31, 1998.

Research and development expenses decreased $1,123,689 to $1,367,062
for the first fiscal quarter ended December 31, 1999 as compared to the same
period in the prior fiscal year. This decrease arises from reduced activity on
clinical trials associated with Combidex-Registered Trademark- that occurred
during the quarter ended December 31, 1998 and the exclusion of Kalisto research
and development. Selling, general and administrative expenses were $471,469 for
first fiscal quarter ended December 31, 1999 compared to $921,757 for the first
fiscal quarter ended December 31, 1998. The decrease of $450,288 was mostly due
to the exclusion of $351,464 in Kalisto costs for the three month period ended
December 31,1998 that are no longer consolidated. The reduced levels of
expenditures are expected to continue for the foreseeable future.

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INCOME TAXES

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

EARNINGS

For the reasons stated above, there was a net loss of $(1,431,640) or
$(0.21) per share for the quarter ended December 31, 1999 compared to a net loss
of $(2,610,170) or $(0.39) per share for the quarter ended December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1999, the Company's cash and cash equivalents totaled
$14,567,868 compared to $17,052,636 at September 30, 1999. In addition, the
Company had marketable securities of $7,383,011 at December 31, 1999 compared to
$4,804,785 on September 30, 1999. Net cash used in operating activities was
$738,069 in the three-month period ended December 31, 1999 compared to net cash
used in operating activities of $1,996,769 in the three-month period ended
December 31, 1998. Cash used in investing activities was $1,746,699 for the
three-month period ended December 31, 1999 compared to $1,259,297 provided by
investing activities in the three-month period ended December 31, 1998. Cash
used in investing activities in the three-month period ended December 31, 1999
included the purchase of marketable securities of $1,744,075. There were no
funds generated by the sale of marketable securities during that period. There
was no cash used in or provided by financing activities in the three-month
period ended December 31, 1999, compared to $11 provided by financing activities
in the three-month period ended December 31, 1998. 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, from time to time, at prevailing market prices.
This authorization was extended in November 1997. There were no funds used in
the purchase of the Company's common stock during the three-month periods ended
December 31, 1999 and December 31, 1998.

Capital expenditures in the three-month period ended December 31, 1999
were $2,625 compared to $176,515 in the three-month period ended December 31,
1998. The capital expenditures in the quarter ended December 31, 1998 reflected
upgrades to existing property, plant and equipment. Future expenditures should
continue at the reduced 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. However, such funding may not be available on terms acceptable to
the Company, if at all.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Page 15 of 17

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change to the information concerning the
Company's market risk sensitive instruments as set forth in the Company's 10-K
for the period ended September 30, 1999.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material changes to the information concerning the
Company's legal proceedings as set forth in the Company's Form 10-K for the
period ended September 30, 1999.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit 27.1 Financial Data Schedule (EDGAR filing only)

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

Page 16 of 17

SIGNATURES

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

ADVANCED MAGNETICS, INC.

Date February 4, 2000 By /s/ Jerome Goldstein
------------------ -----------------------------------
Jerome Goldstein, Chief Executive
Officer, Treasurer and Chairman of
the Board of Directors

Date February 4, 2000 By /s/ James A. Matheson
------------------ -----------------------------------
James A. Matheson, Vice President
and Principal Accounting Officer

Page 17 of 17